Theranos founder Elizabeth Holmes charged with massive, ‘years-long fraud’

Years after it was reported that the SEC was looking into improprieties at the once high-flying blood-testing company Theranos, its founder, Elizabeth Holmes, and the company’s former president, Ramesh “Sunny” Balwani, have been formally charged with massive fraud by the agency.

The charge, more precisely: that the two raised more than $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.”

Theranos and Holmes have agreed to resolve the charges against them, says the SEC, though neither admitted nor denied the allegations in the SEC’s complaint.

For her part, Holmes has agreed to: pay a $500,000 penalty; be barred from serving as an officer or director of a public company for 10 years; return the remaining 18.9 million shares that she obtained during the fraud; and relinquish her voting control of Theranos by converting her super-majority Theranos Class B Common shares to Class A Common shares. This way, if Theranos is acquired or otherwise liquidated, Holmes won’t profit until more than $750 million is first returned to Theranos’s shareholders.

As for Balwani, the SEC says it will litigate its claims against him in federal district court.

Theranos first came under scrutiny in October 2015, when the two-time Pulitzer-prize winning WSJ journalist John Carreyrou published an explosive investigative piece, suggesting that the company — then valued by investors at a stunning $9 billion — had greatly exaggerated its abilities to quickly process an expansive range of laboratory tests from a few drops of blood.

In reality, former employees told Carreyrou, the lab instrument Theranos had developed handled just a small fraction of the tests sold to consumers, with the rest being done with traditional machines from companies like Siemens. (Famed attorney David Boies, who represented Theranos at the time, acknowledged to the WSJ that Theranos wasn’t using its device for all the tests it offered, calling the transition a “journey.”)

Employees were also “leery” about the accuracy of Theranos’s machines, said the report.

They were right to be, as it turns out. According to former employee Tyler Schultz — a grandson of former Secretary of State George Schultz, who was among Theranos’s earliest board members — not only did Theranos’s machines often fail the company’s quality-control standards, but Balwani, then president, pressured employees to run blood tests on the machines anyway.

Schultz decided to take action, contacting New York state’s public-health lab to tell them Theranos was manipulating a process known as proficiency testing.

Blowing the whistle on Theranos came at a cost, Schultz later told the WSJ. Not only was he followed by private investigators but relations with his grandfather grew strained to the point that the two communicated via their attorneys. Still, his findings were later corroborated by the federal Centers for Medicare and Medicaid Services and by last year, Holmes was banned from owning or running a lab company for two years. Theranos also closed its last remaining blood-testing facility after it reportedly failed a regulatory inspection

The SEC complaint appears to follow this string of events, alleging that Theranos, Holmes and Balwani made “numerous false and misleading statements in investor presentations, product demonstrations, and media articles” that deceived investors in the process.

Theranos’s press account wasn’t receiving inbound inquiries this morning. But the company — which has been marketing a “miniLab” device that it claims can carry out an array of tests and which managed to secure a $100 million loan last December from Fortress Investment Group (owned by SoftBank) — published a statement a bit ago.

Somewhat remarkable for its blandness, it says simply that: Theranos “is pleased to be bringing this matter to a close and looks forward to advancing its technology.”

Meanwhile, Balwani’s attorneys have separately sent out a statement to media outlets, defending Balwani’s role in the company and calling the SEC’s enforcement action “unwarranted.”

The statement additionally notes that Balwani — who “took on significant financial risk” and “never benefited financially from his work at the company” despite investing “millions of dollars of his own cash in the company” — is a named inventor on 154 of the more than 1,000 patents belonging to Theranos, which he still “believes have great value and potential.”

That’s an “unusually significant contribution for a company officer,” it reads.