The Securities and Exchange Commission has charged Elizabeth Holmes, founder and CEO of scandal-ridden startup Theranos, with “massive fraud.”
Along with former Theranos President Ramesh “Sunny” Balwani, Holmes has been charged with raising over $700 million from investors “through an elaborate, years-long fraud in which they exaggerated or made false statements about the company’s technology, business, and financial performance.”
SEC alleges that Theranos, Holmes, and Balwani deceived investors by making it appear as if they’d “successfully developed a commercially-ready portable blood analyzer that could perform a full range of laboratory tests from a small sample of blood,” according to the filing.
Not only did Holmes and Balwani make false statements to the media about their technology, they hosted misleading tech demonstrations and overstated “the extent of Theranos’ relationships with commercial partners and government entities, to whom they had also made misrepresentations.”
Theranos was once seen as a promising clinical lab startup, even inking a deal with Practice Fusion in 2015. Holmes could be seen in major magazines and was widely considered a top innovator.
But by March 2016, reports emerged over differing lab results from Quest and LabCorp that impacted patient care. And Wall Street Journal investigations over five years called into question the accuracy of Theranos’ tests.
While the company said it was addressing those deficient lab results and suspending testing, the SEC soon launched its own investigation into Theranos and a class action lawsuit was filed shortly after.
By July, Congress was demanding answers from Holmes, including how she intended to remedy those flawed test results.
Holmes settled with one of the startup’s largest investors Partner Fund Management in May 2017, giving away her shares to some of the “most significant shareholders” as part of the settlement.
As for the SEC filing, Holmes has agreed to resolve the charges against her and the company, and, in addition to a $500,000 fine, Holmes will give up majority voting control over Theranos.
Holmes has also been barred as serving as an officer or director of a public company for 10 years and must return the remaining 18.9 million shares she obtained during the fraud. Further, if Theranos is acquired or liquidated, Holmes can’t profit from her ownership until she returns the $750 million to investors and other shareholders.
Holmes and Theranos did not admit or deny the SEC claims, according to officials. Balwani will face litigation by the SEC in federal district court in the Northern District of California.
“The Theranos story is an important lesson for Silicon Valley,” Jina Choi, SEC San Francisco Regional Office director said in a statement. “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.”
Steven Peikin, SEC Enforcement Division’s co-director added that “the charges 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.”
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