Security & Fraud

SEC Charges Theranos, Founder And Former President With $700M In Fraud

The Securities and Exchange Commission (SEC) announced news on Wednesday (March 14) that it charged Theranos, the Silicon Valley blood-testing technology company, its Founder and CEO Elizabeth Holmes and its former President Ramesh “Sunny” Balwani with providing false information to raise more than $700 million from investors.

In a press release, the SEC said the company and its top executives engaged in years-long fraud in which they exaggerated or made false statements about the business’ technology and financial performance. As part of a settlement, Holmes agreed to pay a penalty and to give up majority voting control over the company, as well as to reduce her equity — which, combined with shares she previously returned, will lower her equity stake by a material amount.

According to the SEC, the complaints contend that the company, Holmes and Balwani made several false and misleading statements at investor conferences, product demos and in media interviews, tricking investors into thinking its portable blood analyzer, the company’s key product, could conduct a comprehensive analysis of blood just from the drops collected from a user’s finger — a claim, which, if true, would revolutionize the blood-testing industry. However, the reality, according to the SEC, was that the company’s blood analyzer technology could only do a small number of tests.

What’s more, the SEC contends Theranos conducted most of its patient tests with modified and industry-standard commercial analyzers that weren’t made by the company. The executives also falsely claimed the U.S. Department of Defense used its product on the battlefields of Afghanistan and on MedEvac helicopters, and that the company collected $100 million in revenue back in 2014. The product was never used by the Department of Defense, and it actually only had amrevenue of a little more than $100,000 in 2014.

“Investors are entitled to nothing less than complete truth and candor from companies and their executives,” said Steven Peikin, co-director of the SEC’s Enforcement Division. “The charges against Theranos, Holmes and Balwani make clear that there is no exemption from the anti-fraud provisions of the federal securities laws simply because a company is non-public, development-stage or the subject of exuberant media attention.”

Under the settlement, the SEC said Holmes is paying a $500,000 penalty, is barred from serving as an officer or director of a public company for 10 years, has to return the remaining 18.9 million shares that she obtained during the fraud and must relinquish her voting control of the company by converting her super-majority Theranos Class B Common shares to Class A Common shares. If the company is bought or liquidated, Holmes would not profit from her ownership until more than $750 million is returned to defrauded investors. The settlement still needs the court’s approval, noted the SEC.

“As a result of Holmes’ alleged fraudulent conduct, she is being stripped of control of the company she founded, is returning millions of shares to Theranos and is barred from serving as an officer or director of a public company for 10 years,” said Stephanie Avakian, co-director of the SEC’s Enforcement Division in the same press release. “This package of remedies exemplifies our efforts to impose tailored and meaningful sanctions that directly address the unlawful behavior charged and best remedies the harm done to shareholders.”

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