Theranos and Elizabeth Holmes Charged With 'Massive Fraud' by SEC

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Elizabeth Holmes in 2015. She and former Theranos COO Ramesh "Sunny" Balwani have been indicted on fraud charges. (Clinton Global Initiative)

It started as a massive success story — a wunderkind female college dropout disrupting the blood-testing industry and empowering patients to take charge of their own health.

It ended as an almost archetypal cautionary tale about Silicon Valley hubris and its incompatibility with the slow developmental cycles of biomedicine.

The Securities and Exchange Commission today charged Bay Area-based Theranos, its founder and CEO Elizabeth Holmes, and former president Sunny Balwani with "massive fraud," in the words of the SEC.

Theranos' trangressions included "raising 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," according to the federal agency.

Holmes has agreed to give up her majority voting control of the company and to a reduction in her equity, the SEC said. Holmes also agreed to pay a $500,000 penalty and is now barred from serving as an officer or director of a public company for 10 years. As part of the settlement, both she and the company neither admitted nor denied wrongdoing.


Bulwani, apparently, has not settled. The SEC said it will litigate the charges against him in Northern California federal district court. Balwani's attorney told CNBC that the SEC action was "unwarranted," and that Balwani "accurately represented Theranos to investors to the best of his ability," taking on "significant financial risk."

Theranos still faces a criminal investigation by the U.S. Attorney's Office in San Francisco.

Hundreds of Blood Tests From a Few Drops of Blood

The crux of the charges against Theranos are that it made "numerous false and misleading statements" to investors that it had found a way to conduct hundreds of blood tests from just a few drops of blood, which would have revolutionized the blood-testing industry. But in reality, according to the SEC, Theranos could only perform a small number of tests this way, with the vast majority completed on standard commercial equipment.

The SEC also charges Theranos with claiming its technology was used by the military in Afghanistan, and that it would take in 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 in 2014," the SEC said.

Theranos had been flying high that year, with Forbes valuing the company at $9 billion, and Holmes stake worth half that. Holmes had also attracted glowing media attention from the tech and business press.

But the story changed abruptly with the publication of a Wall Street Journal investigation in 2015. Reporter John Carreyrou alleged that the company had failed to report tests that showed its proprietary blood-testing equipment may not be accurate, and that it was not using its own technology for most tests, anyway.

Theranos responded by stating the Journal's reporting was inaccurate. "First they think you're crazy.  Then they fight you. And then all of a sudden you change the world," was Holmes' retort on Jim Cramer's CNBC show.

But the Journal's investigation proved to be only the start of Theranos' woes.  Soon, the federal government charged that deficiencies at the company's Newark, California lab put patients in "immediate jeopardy," likely to cause "serious injury or harm, or death." The government said that Theranos' own  quality control tests had showed alarming rates of failure. The complaint led to Holmes' banishment from owning or operating a lab for two years.

Theranos also had to correct tens of thousands of blood tests. A high-profile alliance with Walgreens  which put blood-testing centers in dozens of stores, collapsed.

The company exited the consumer blood-testing business, lawsuits and more investigations ensued. and Theranos has been treading water ever since.

In 2016, Theranos tried to remake itself as the manufacturer of a portable device that could process small volumes of blood remotely and send the data back to a centralized location.

But the unveiling of the device, in front of a couple of thousand skeptical laboratory scientists, was mostly a dud, with some expressing the opinion that it was nothing new.

The company's "Newsroom" page pretty much tells the story at this point. Lots of press releases about reaching settlements with various entities — the SEC, the Centers for Medicare  & Medicaid Services, Walgreens, the Arizona attorney general — and nary a word about any product.