SEC charges Theranos CEO with ‘massive fraud’

Elizabeth Holmes, founder and CEO of the embattled blood testing startup company Theranos, has been charged with “massive fraud,” the Securities and Exchange Commission announced Wednesday.

The SEC alleged that Holmes and the company’s former President Ramesh “Sunny” Balwani 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.”

The agency said Theranos and Holmes have agreed to settle the fraud charges. Holmes agreed to pay a $500,000 penalty and relinquish control of the company. She will be barred from serving as an officer or director of any public company for 10 years.

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Theranos, initially seen as a Silicon Valley darling, received attention in the media for Holmes’s story of having left Stanford to start the company at 19 years old.

The company burst onto the scene by promising to revolutionize the blood testing industry. According to charging documents, “investors believed … that Theranos had successfully developed a proprietary analyzer that could conduct the full range of laboratory testing from a small sample of blood.”

But the reputation of the company and its CEO came crashing down after a series of Wall Street Journal reports in 2015 that Theranos may have significantly oversold and underdelivered on its promises.

In April 2016, federal investigators launched an investigation into Theranos. By July, Holmes had been banned from blood testing for two years.

“They deceived investors by, among other things, making false and misleading statements to the media, hosting misleading technology demonstrations, and overstating  the extent of Theranos’ relationships with commercial partners and government entities, to whom they had also made misrepresentations,” the SEC charged.

The SEC alleged the company’s analyzer could complete only a small number of tests, and Theranos conducted the vast majority of patient tests on a modified commercial analyzer manufactured by other companies.

According to the SEC, Theranos, Holmes and Balwani claimed that the company’s 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, the SEC said Theranos’s technology was never deployed by the Defense Department and generated a little more than $100,000 in revenue from operations in 2014. According to a Washington Post investigation, Gen. James Mattis personally pushed for its use in the field while he was in charge of U.S. Central Command.

After he retired from the military, Mattis joined the company’s board. He resigned when President Trump nominated him for secretary of Defense, the Post reported.  

Holmes was once estimated to be worth $4.5 billion, but in 2016 Forbes stripped her of the billionaire title and lowered its estimate of her net worth to zero.

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

Updated: 1:45 p.m.