Theranos Sued On Allegations Of Misleading Tests, Financial Data

Amid the shoes falling for Theranos, might the latest news be a boot?

The Wall Street Journal reported last week that one of the company’s investors filed suit, alleging that the company misled directors about its testing procedures, deceived investors about financial outlooks and also set up “shell” operations in order to secretly buy laboratory equipment.

The filings alleged the company misled investors in part by running blood tests on equipment that was in fact composed of commercial devices while stating that it was the company’s own technology. In these allegations, the company established a shell named Protegic to buy devices like those sold by Siemens and then use them, in modified form, to run lab tests (the allegations on the machines had come years ago, as reminded in a PYMNTS piece on groupthink and some of the red flags being put up by the company’s progress).   

Those allegations come from nearly two dozen former Theranos workers, ranging from employees to directors, who were in turn deposed by a law firm hired by Partner Fund Management LP. Partner Fund is a hedge fund that is suing the once-hot Silicon Valley health care tech firm in the wake of a $96 million investment stemming from 2014. 

As had been reported last month, the company has plans in the works to offer investors shares, or additional equity, if they promise not to sue Theranos. And in response to the latest suit, the firm termed the Partner Fund filing “one-sided,” stating that it “completely distorts Theranos’ practices.” Partner Fund is also suing to block those equity awards, as such deals would, the firm alleged, gain priority in the event of a bankruptcy filing (and ahead of the hedge fund recovering anything on its own investments).

As for financial projections, the company had told investors that it would see as much as $1 billion in gross profit in 2015, far more than the $100 million across that line item that had been realized that year, according to Partner Fund.