SEC Spares Theranos Founder Elizabeth Holmes Jail In $700M Fraud Suit Settlement

by Ike Obudulu Posted on March 15th, 2018

Washington, D.C., USA: The U.S. Securities And Exchange Commission, SEC, on Wednesday announced a lawsuit and settlement which detailed how medical-testing startup Theranos Inc. founder Elizabeth Holmes and her chief deputy fraudulently raised $700 million from investors based on lies – orchestrated for years – about how their technology would change medicine by processing thousands of medical tests using the blood from a tiny finger-prick, and do so quickly and cheaply.

As part of the settlement, Holmes will give up the company, pay a $500,000 fine, surrender 19 million shares and is barred from being an officer or director of any publicly listed company for 10 years.

Steven Peikin, the co-director of the SEC’s enforcement division, said the company avoided paying any penalties in part because the misconduct was perpetrated by Holmes and Balwani. A corporate penalty would harm investors who had already been defrauded, he said.

“The Theranos story is an important lesson for Silicon Valley. Innovators who seek to revolutionize and disrupt an industry must tell investors the truth about what their technology can do today, not just what they hope it might do someday.” said Jina Choi, director of the SEC’s San Francisco Regional Office.

Theranos said in a statement that it was “pleased to be bringing this matter to a close and looks forward to advancing its technology.” The company said it cooperated with the SEC’s investigation.

Holmes came to national attention in 2013 when she claimed that Theranos had developed a medical technology that could could run thousands of medical tests using the blood from a tiny finger-prick, and do so quickly and cheaply. Glowing magazine profiles followed, and she talked about making lives better for patients around the world, as well as disrupting a multibilion-dollar industry dominated by giants like Laboratory Corp. of America Holdings and Quest Diagnostics Inc.

Holmes, a Stanford dropout once called the “next Steve Jobs”, had claimed her machines could process 90 percent of the tests performed by standard lab equipment. Those statements won the company an agreement with a national pharmacy chain in 2010 even though the technology was not yet “commercially ready,” according to the SEC. The SEC refers to the pharmacy chain as “Pharmacy A.”

In 2013, Theranos publicly announced a partnership with the drugstore chain Walgreens, which later sued Theranos. The companies eventually settled.

As the rollout with “Pharmacy A” neared, according to the SEC, Holmes told the company’s engineers to modify standard blood-testing machines to run Theranos’s tests.

She hid that change from the pharmacy executives, conducting demonstrations using Theranos’s machines and leading them on company lab tours without revealing the company was using third-party technology. The pharmacy gave Theranos a $100 million “innovation fee” to help with the expansion. Holmes was also using the company’s rising profile in the media to raise more money.

According to the SEC’s complaint, Holmes and former president Ramesh “Sunny” Balwani knowingly made repeated false or misleading statements to investors about the company’s products, its business relationships, and its prospects for long-term growth.

The SEC said that the company gave investors binders full of background materials including a slide presentation, financial projections and clippings from favorable media reports in publications including The Wall Street Journal, Wired, and Fortune. The Wall Street Journal later reported on the serious doubts about the company’s claims.

Theranos said in those materials that it expected to generate $100 million in revenue in 2014, though it ultimately had sales that year of only about $100,000, according to the SEC complaint. The company told investors that by 2015 it would bring in revenue of $1 billion, the SEC said.

The binders also included purported endorsements from drug companies — but that weren’t in fact written by those companies, according to the complaint. Theranos also misrepresented its dealings with the U.S. Department of Defense, the SEC said, falsely telling investors that Theranos technology had been used by the U.S. military on the battlefield in Afghanistan and in medevac helicopters.

Balwani, the Theranos president, still faces an SEC lawsuit, which is pending in federal court in California.

Theranos has been under criminal investigation by California prosecutors as of two years ago. The status of the criminal investigation is unclear.

The company eventually had to retract or correct the results of tens of thousand of medical tests. It was sanctioned by regulators at the Centers for Medicare and Medicaid Services, which banned Holmes from running a lab company for two years. The company let go many of its employees and shut down its consumer-testing operations, and said it would focus on developing its technology.

By the end of 2017, the company was on the “verge of bankruptcy,” according to the SEC. It has since obtained a term loan that will keep it afloat for about a year, the SEC said.

Author

Ike Obudulu

Ike Obudulu

Versatile Certified Fraud Examiner, Chartered Accountant, Certified Internal Auditor with an MBA in Finance And Investments who has both worked for and consulted with some of the world's largest companies on main street and wall street in over 20 countries, Ike brings his extensive reporting and investigations experience to bear on his role as Chief Editor.
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