Diagnostics

Theranos founder gives up control of company in settlement of SEC’s massive fraud charges (Updated)

The SEC is also pursuing civil fraud charges against Ramesh “Sunny” Balwani, Theranos’s former president and chief operating officer.

 

Elizabeth Holmes (L) and Alan Murray speak at the Fortune Global Forum on Nov. 2, 2015 in San Francisco.

Elizabeth Holmes, Theranos founder, and Alan Murray at the Fortune Global Forum on Nov. 2, 2015. (Photo by Kimberly White/Getty Images)

Elizabeth Holmes, who made blood-testing company Theranos a household name for all the wrong reasons, has agreed to a settlement with the Securities and Exchange Commission over civil-fraud charges, according to The Wall Street Journal. The settlement is the latest development for a company that has unintentionally provided numerous lessons for life science entrepreneurs and investors such as board selection, clinical validation, due diligence, and hype.

Holmes agreed to a $500,000 fine, a 10-year ban from serving as an officer or a director of a company, and surrendered voting control of the company she founded in 2003.

The SEC is also pursuing civil fraud charges against Ramesh “Sunny” Balwani, Theranos’s former president and chief operating officer.

The SEC complaint highlighted what it referred to as an “elaborate, years-long fraud”, including its so-called work for the U.S. Department of Defense.

The complaints further charge that Theranos, Holmes, and Balwani claimed that Theranos’ products were deployed by the U.S. Department of Defense on the battlefield in Afghanistan and on medevac helicopters and that the company would generate more than $100 million in revenue in 2014.  In truth, Theranos’ technology was never deployed by the U.S. Department of Defense and generated a little more than $100,000 in revenue from operations in 2014.

Steven Peikin, Co-Director of the SEC’s Enforcement Division added in the 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 has spent the past year either settling lawsuits or fending off new ones from groups such as Walgreens, with whom it had once partnered, investors, and the state of Arizona.

Theranos failed to bring to fruition a device that could accurately measure the hundreds (or even dozens) of analytes it claimed in a fingertip’s worth of blood, the SEC complaint and others noted.

Last year, the diagnostics business reached a settlement with Arizona, which the states’s Attorney General Mark Brnovich announced last year. As part of the settlement, Theranos pledged to not own or operate a CLIA-licensed laboratory in Arizona until March 28, 2019. The business also settled with the Centers for Medicare & Medicaid Services (CMS) and pledged that it would not own or operate a clinical laboratory within the next two years.

Despite all the common sense reasons that should prevent it, Theranos has been trying to transform its business around its miniLab testing platform. Holmes used a speaking opportunity at the American Association for Clinical Chemistry Annual Scientific Meeting that was supposedly going to address the company’s critics to launch the miniLab in 2016. In 2017, the company cut more than 40 percent of its workforce to focus on commercializing it. But given the SEC’s actions against Theranos, it would be tough to believe that the company can serve as anything more than a valuable case study in failure going forward.

The reaction to the SEC settlement on social media focused on comparisons between the treatment of Holmes and Martin Shkreli, who received a 7-year prison sentence for securities fraud last week

The online discussions about Holmes also drew attention to a line in the SEC announcement highlighting the fraud complaint and settlement against Theranos. The settlements with Theranos and Holmes are subject to court approval, but Theranos and Holmes neither admitted nor denied the allegations in the SEC’s complaint. The SEC also said it plans to litigate its claims against Balwani in federal district court in the Northern District of California.

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