The US Securities and Exchange Commission today charged controversial blood-testing developer Theranos, founder & CEO Elizabeth Holmes and former prez Ramesh Balwani with “massive fraud” – charges which Theranos and Holmes have agreed to resolve, according to the SEC.
Charges include claims that the company raised more than $700 million from investors in “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 SEC post.
To resolve the charges, Holmes has agreed to certain conditions, including paying $500,000, giving up her majority voting control of the company and taking a reduction in equity in Theranos, which the SEC said alongside shares previously returned “materially reduces her equity stake.”
“As a result of Holmes’ alleged fraudulent conduct, she is being stripped of control of the company she founded, is returning millions of shares to Theranos, and is barred from serving as an officer or director of a public company for 10 years. This package of remedies exemplifies our efforts to impose tailored and meaningful sanctions that directly address the unlawful behavior charged and best remedies the harm done to shareholders,” SEC Enforcement Division co-director Stephanie Avakian said in a press release.
The SEC alleges that Theranos, Holmes and Balwani intentionally misled investors to believe its portable blood analyzer could performed comprehensive blood tests from only a single drop of blood – a claim that if true, would have been disruptive to the diagnostics business as a whole.
“In truth, according to the SEC’s complaint, Theranos’ proprietary analyzer could complete only a small number of tests, and the company conducted the vast majority of patient tests on modified and industry-standard commercial analyzers manufactured by others,” the SEC wrote.
The SEC goes on to further charge that Holmes, Balwani and Theranos claimed its products were deployed by the US Department of Defense when such deployment never occurred, and that the company made $100 million in revenue in 2014 despite only generating slightly more than $100,000.
“Investors are entitled to nothing less than complete truth and candor from companies and their executives. 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,” SEC Enforcement Division co-direcotr Steven Peikin said in a prepared statement.
Both Theranos and Holmes agreed to settle the fraud charges, the SEC said. As part of the settlement, and due to the company’s liquidation preference, Holmes will not see profit from her ownership until over $750 million is returned to defrauded investors and other preferred shareholders, the SEC added.
Theranos and Holmes neither admitted or denied the allegations in the SEC’s complaint, and Balwani will face litigation in the Northern District of California from the SEC related to its claims against him.
“The Theranos story is an important lesson for Silicon Valley. 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,” SEC San Francisco Regional Office director Jina Choi said in prepared remarks.
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