Theranos founder Elizabeth Holmes charged with fraud

Theranos, the once-promising company that set out to innovate blood testing, is continuing its downward spiral.

The Securities and Exchange Commission charged Theranos, its founder and CEO Elizabeth Holmes and former President Ramesh "Sunny" Balwani with fraud on Wednesday in relation to false promises surrounding a portable blood analyzer. The SEC says they exaggerated or made false claims about the company's technology, business and financial performance.

According to the suit, Theranos, Holmes and Balwani deceived investors into believing the portable blood analyzer could conduct comprehensive blood tests from drops of blood. In reality, the SEC says, the analyzer could only complete a small number of tests, and the company "conducted the vast majority of patient tests on modified and industry-standard commercial analyzers manufactured by others."

In addition, the charges state that Theranos, Holmes and Balwani lied when they claimed Theranos' products were deployed by the US Department of Defense in Afghanistan. The SEC's complaints also allege that claims the company would generate more than $100 million in revenue in 2014 were false, as it generated a little more than $100,000. 

"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, in a statement. "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."

Theranos and Holmes agreed to resolve the charges against them. Holmes will pay a $500,000 penalty, return the 18.9 million remaining shares she obtained and give up majority voting control over the company. She will also be prohibited from serving as an officer or director of a public company for 10 years. In the event Theranos is acquired or liquidated, she won't profit until more than $750 million is returned to defrauded investors and preferred shareholders. The settlements will need court approval.

Theranos and Holmes didn't admit to or deny the SEC's allegations. The SEC will litigate claims against Balwani in federal district court in the Northern District of California. 

Theranos' independent directors said in a statement, "The company is pleased to be bringing this matter to a close and looks forward to advancing its technology." 

Once valued at $9 billion, Theranos has faced increased scrutiny, along with civil and criminal investigations, since a Wall Street Journal report in October 2015 suggested its blood-testing devices were flawed. In June of 2016, Walgreens cut ties with Theranos, closing all the startup's blood-draw sites in its stores. Later that year, the federal Centers for Medicare & Medicaid Services banned Holmes from operating a lab for two years and revoked the license for Theranos' lab in California. And in May, the company settled a pair of lawsuits from an investor claiming the company misled it to gain a nearly $100 million investment. 

"The Theranos story is an important lesson for Silicon Valley," said Jina Choi, director of the SEC's San Francisco Regional Office, 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."

First published March 14 at 9:54 a.m. PT.
Update, 10:51 a.m. PT: Adds more details surrounding the lawsuit.

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