Elizabeth Holmes, founder of Theranos, charged with "massive" fraud
Theranos founder and CEO Elizabeth Holmes defrauded investors in raising more than $700 million in funding for her blood-testing startup, the U.S. Securities and Exchange Commission said on Wednesday.
Holmes agreed to pay a $500,000 fine, give up control of her company and be banned from serving as an officer of a public company for a decade to settle the SEC's claims that she and Ramesh "Sunny" Balwani, Theranos' former president, perpetuated a years-long fraud with fabricated claims about a portable blood analyzer.
Unlike Holmes, Balwani did not reach a settlement with the SEC, and the regulator's case against him is pending in federal court in California.
Holmes, Balwani and Theranos took hundreds of millions in dollars from late 2013 to 2015 from investors led to believe the company had successfully developed a commercially viable portable blood analyzer that could run a range of laboratory tests from a small blood sample, according to the court filing.
Holmes garnered attention, and billions of dollars in venture capital funding, for making brash claims about her company's blood tests, stating that a single drop of blood could be used to run dozens of diagnostic tests. In truth, the product could complete only a small number of tests, and Theranos conducted the vast majority of patient tests using analyzers made by other companies, the SEC said.
Theranos, Holmes and Balwani falsely claimed the company's products were deployed by the U.S. Department of Defense on the battlefield in Afghanistan and that the company would generate more than $100 million in revenue in 2014, according to the SEC complaint. In fact, the company produced a little more than $100,000 in revenue in 2014, and its technology was not used by the military, the agency said.
The claims by Holmes began coming apart after a series of articles by Wall Street Journal investigative reporter John Carreyrou cast doubt about the technology. Theranos acknowledged in April 2016 that it was under investigation by multiple regulators and agencies.
"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," Steven Peikin, co-director of the SEC's enforcement division, said in a statement announcing the settlement and lawsuit.
The 34-year-old Holmes started Theranos, described in the filing as "a California company that aimed to revolutionize the diagnostics industry" in 2003, after leaving college in her second year.
Balwani, 54, joined as president and chief operating officer in 2009 after Holmes asked him to guarantee a line of credit for the company, which was running out of money. Up until his departure in 2016, Balwani and Holmes were the sole senior managing executives.
"The company is pleased to be bringing this matter to a close and looks forward to advancing its technology," Theranos said in a statement after the SEC announced the settlement.