Business

Theranos And CEO Elizabeth Holmes Committed ‘Massive Fraud,’ SEC Alleges

By Samantha Masunaga And Melody Petersen
Los Angeles Times

WWR Article Summary (tl;dr) On Wednesday, the embattled Newark, Calif., company and founder Elizabeth Holmes agreed to settle the SEC’s charges, stemming from what the agency called exaggerated or false statements about Theranos’ business, technology and financial performance.

Los Angeles Times

Four years ago, the Silicon Valley firm Theranos Inc. was valued at $9 billion and its founder and Chief Executive Elizabeth Holmes was hailed as a potentially revolutionary force in the blood-testing industry.

In fact, the U.S. Securities and Exchange Commission says now, the company that wowed a star-studded cast of investors and board members was conducting a “massive fraud” in which its proprietary technology never worked as advertised.

On Wednesday, the embattled Newark, Calif., company and Holmes agreed to settle the SEC’s charges, stemming from what the agency called exaggerated or false statements about Theranos’ business, technology and financial performance.

Holmes agreed to give up majority voting control over the company she founded in 2003 and will reduce her equity in Theranos, according to an SEC statement. She will pay a $500,000 penalty and return the remaining 18.9 million shares she obtained during the alleged fraud.

The settlements are still subject to court approval, and Theranos and Holmes, who remains CEO of the privately held company, did not admit or deny the allegations in the SEC complaint.

The SEC also charged Theranos’ former president, Ramesh “Sunny” Balwani in the case. The SEC said his case will be litigated in federal court in the Northern District of California.

“The company is pleased to be bringing this matter to a close and looks forward to advancing its technology,”
Theranos said in a statement on its website.

The agency’s complaint details an elaborate and years-long effort by Theranos, Holmes and Balwani to court investors, eventually raising more than $700 million, on a claim that the company had developed technology that could perform a multitude of comprehensive tests with just a few drops of blood from a patient’s finger.

Holmes and Balwani claimed the technology was “faster, cheaper and more accurate than existing blood testing laboratories,” according to the complaint, which would have allowed the company to upend an industry dominated by giants such as LabCorp and Quest Diagnostics.

Holmes would typically meet potential investors face-to-face at Theranos’ headquarters, which at the time was located in Palo Alto. There, she would describe her vision for the company and explain how her own fear of needles motivated her to develop technology that could perform blood tests on small samples, according to the complaint.

She talked of her desire to create cheaper, faster and more accurate laboratory tests that could lead to quicker diagnoses of serious conditions.

She would take potential investors to see Theranos’ proprietary blood analyzers, show them the desktop-computer-sized machines and bring in a phlebotomist to draw blood from investors’ fingers as a demonstration. The samples were either inserted into the machine or taken away for processing.

Although potential investors believed their blood was being tested on Theranos-developed analyzers, the company often actually tested their blood on third-party analyzers because it could not conduct all of the tests it offered prospective investors on its proprietary machines, according to the complaint.

According to the SEC, Theranos’ proprietary analyzer could only perform about 12 of the more than 200 tests listed on the company’s published patient testing menu. Theranos instead used third-party commercially available analyzers to process the rest of the tests.

Holmes, 34, founded Theranos after leaving Stanford University during her second year of college. During the company’s first five years, the team focused on developing a proprietary analyzer to test blood samples from finger pricks. But that first-generation machine could only process one sample at a time and was designed to perform just one test, according to the complaint. In 2009, Theranos was “on the verge of running out of money.”

Holmes and Balwani pivoted to developing a new version of that blood test analyzer that they hoped would eventually be able to perform a broader range of lab tests. That new analyzer was not yet commercially ready by 2010, but Holmes and Balwani decided to go ahead and pursue contracts with large national pharmacy and grocery chains.

The SEC complaint details discussions with a company listed in the filing as “Pharmacy A,” which would appear to be Walgreens Co. Holmes allegedly told pharmacy executives that Theranos had the ability to conduct a broad range and number of tests with its proprietary analyzer. She allegedly said the tests could be conducted in less than an hour, for a “reasonable price” and would be ready to start blood testing at Walgreens locations by the fourth quarter of 2010.

That year, “Pharmacy A” entered into a contract with Theranos to roll out its service at pharmacy stores. Holmes and Balwani allegedly asked Theranos engineers to modify third-party analyzers from commercial manufacturers in an attempt to offer a broader range of finger-prick blood tests. The complaint says Holmes and Theranos never told pharmacy officials that it was using third-party equipment to perform the “majority of the testing.”

The complaint also alleges that Holmes told investors that Theranos’ technology had been used by the Department of Defense in Afghanistan and on medical evacuation helicopters. In reality, the company’s technology was used in a Defense study of burn patients and not in the battlefield.

Meanwhile, the buzz around Theranos continued to grow. In 2014, Holmes told investors that Theranos was on track to generate more than $100 million in revenue. But the company recorded a little more than $100,000 that year, according to the SEC.

In 2015, Holmes was touted by Forbes as the youngest self-made female billionaire. Inc. magazine called her “The Next Steve Jobs,” a nod to the black turtleneck sweaters Holmes frequently wore.

That year, Theranos’ board included former Secretary of State Henry Kissinger, former Secretary of Defense William Perry, former Secretary of State George P. Shultz, former Sens. Sam Nunn and Bill Frist, and former Marine Corps General James N. Mattis, who is now President Trump’s Secretary of Defense.

The company garnered investments from such notable venture capital firms as Silicon Valley’s DFJ, as well as media mogul Rupert Murdoch, according to the Wall Street Journal. In 2014, the company was valued by venture capitalists at $9 billion after a funding round.

“She had a really good story of this technology that was going to be pretty revolutionary,” said Debbie Wang, senior equity analyst at Morningstar. “But I don’t think that any of the investors or any of the members of her board ever really dug into what is the basis of this science.”

The company’s downfall began with a series of stories in the Journal that showed how Theranos’ much-hyped technology was flawed. In one story, Schultz’s grandson, who worked at Theranos, describes how he tried to raise concerns about the company’s practices and attempted to convince his grandfather that something was wrong.

In May 2016, Theranos retracted the results of tens of thousands of blood tests that doctors had depended on to care for patients over the previous two years. A month later, Walgreens said it had terminated its relationship with Theranos and would close all of the blood-testing sites in its pharmacies.

And that July, after finding a number of violations at Theranos’ lab, federal regulators banned Holmes from owning or running a medical lab for two years. By October, Theranos said it was shutting down its labs and patient testing centers. The company removed the list of its blood-testing “wellness centers” from its website along with glowing reviews from patients.

Theranos has now reduced its board to just four people, who include none of those former military and political figures.

Wang of Morningstar said the SEC case would likely not have an effect on the existing testing industry because people there already had a “great deal of skepticism about the lack of data to support Holmes’ claims.

“What this changes mostly is it raises the awareness of the venture capital community that they really need to look under the hood before they make investments,” she said. “It’s got to be more than a story.”

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