On Wednesday, the U.S. Securities and Exchange Commission charged Theranos founder and CEO Elizabeth Holmes and former president and chief operating officer Ramesh “Sunny” Balwani with “massive fraud.”
Theranos, a blood testing company, claimed that it could perform a wide-range of laboratory tests using just a finger prick’s worth of blood. The company was founded in 2003 by then-19-year-old Holmes, a Stanford dropout who was once seen as a Silicon Valley wunderkind.
The claims, if true, would have been revolutionary. Investors poured money into Theranos. The company was once valued at $9 billion.
The SEC settled with Theranos and Holmes, who did not deny or admit the allegations. In the settlement, which is subject to court approval, she will pay a “$500,000 penalty, be barred from serving as an officer or director of a public company for 10 years, return the remaining 18.9 million shares that she obtained during the fraud, and relinquish her voting control of Theranos by converting her super-majority Theranos Class B Common shares to Class A Common shares,” according to the SEC complaint.
The commission is pursuing charges against Balwani, who left the company in 2016, in federal district court in Northern California.
Why were Theranos, Holmes and Balwani charged?
“The Securities and Exchange Commission on Wednesday charged Silicon Valley-based private company Theranos Inc., its founder and CEO Elizabeth Holmes and its former president Ramesh ‘Sunny’ Balwani with raising more than $700 million from investors through an elaborate, years-long fraud in which they allegedly exaggerated or made false statements about the company’s technology, business, and financial performance,” according to the SEC complaint.
The SEC alleges that Theranos made misleading media statements, investor presentations and more claiming that its blood testing technology (a machine known as the Edison) could perform far more laboratory tests than it really could. In reality, investors said, the company used traditional testing methods and machines built by other companies.
Additionally, the complaint charged that the company claimed its technology was used by the U.S. Department of Defense on the ground in Afghanistan. A presentation also boasted that Theranos was expected to “generate more than $100 million in revenue in 2014.”
The DOD never used Theranos, the complaint states, and the 2014 revenue was actually around $100,000.
Theranos gave the following statement to Forbes regarding the SEC charges: “The Company is pleased to be bringing this matter to a close and looks forward to advancing its technology.”
What’s the background in all of this?
The SEC spent over two years investigating the company after a 2015 Wall Street Journal story called the Theranos technology into question.
Reporter John Carreyrou, troubled by the company’s secrecy in a New Yorker article, investigated the company’s claims. His reporting alleged that the company was not using its signature technology to do the majority of the tests that it advertised — but was using traditional machines. Former employees who spoke to Carreyrou also reportedly worried about the accuracy of the signature technology, the Edison.
In 2016, after an investigation the company’s Newark, California lab, the Centers for Medicare & Medicaid Services (CMS) issued a notice saying that “it was determined that the deficient practices of the laboratory pose immediate jeopardy to patient health and safety.”
In 2016, the company told regulators that it voided two years worth of tests, according the Wall Street Journal.
The Centers for Medicare & Medicaid revoked the company’s license to run the lab, and placed sanctions on Holmes forbidding her from owning or operating a lab for two years.
Theranos settled with the Centers for Medicare & Medicaid, in 2017. Theranos agreed to stay out of the blood testing business for two years in exchange for a smaller monetary penalty ($30,000) and the withdrawing of Centers for Medicare & Medicaid “revocation of the Theranos’ CLIA operating certificates,” according to Reuters.
In 2017, the company settled with Walgreens, which once partnered with the lab. It also settled a suit with a former backer, the hedge fund Partner Fund Management, which had invested millions in the company in 2014.