The US Securities and Exchange Commission has filed fraud charges against Theranos Inc., its CEO and founder Elizabeth Holmes, and its ex-President Ramesh Balwani. The regulator contends that they engaged in a years-long fraud that raised over $700M from investors.
According to the SEC’s complaint, the three of them made statements that were false, exaggerated, and/or misleading regarding the company’s business, finances, and technology. They purportedly did this in presentations to investors, media articles, and product demos.
Because of these erroneous, deceptive, and inflated statements, investors thought that Theranos’s main product, which is a portable blood analyzer, could perform comprehensive blood tests with minute blood samples. Also, Theranos claimed that the company had the technologies needed to transport a finger stick sample of blood, place the sample in a specialized device that would go into an analyzer, and the analyzer could determine the results. The findings could then be sent to the care provider or patient. Theranos’ technology was supposedly able to offer cheaper, speedier, and more accurate results than any other blood testing labs—not to mention that it was portable.
In reality, contends the regulator, the analyzer could only fulfill a “small number of tests.” Meantime, Theranos performed most of its patient tests using commercial analyzers made by others that fulfilled industry standards and had been modified. The SEC claims that while there were more than 200 kinds of blood tests listed on the patient testing menu, the proprietary analyzer had only conducted 12 of them.
An example that the SEC cites in its press release of inaccurate claims made by Theranos, its CEO, and ex-president, is that the US Department of Defense had sent the company’s products to an Afghanistani battlefield using medevac helicopters and that this resulted in over $100M in revenue. In reality, said the Commission, the government didn’t get these products and Theranos only made slightly more than $100K in revenue that year.
Theranos and Holmes are settling the SEC charges but without denying or admitting to them. Holmes will, however, pay $500K, is barred from serving as a public company director or officer for a decade, and must give back the 18.9M shares she acquired during the alleged fraud. She also has to surrender her voting shares of Theranos.
Now, her shares will become Class A Common shares. If the company is liquidated or acquired, Holmes wouldn’t be able to make money as an owner until investors that were defrauded and preferred shareholders get back their over $750M.
Meantime, the SEC’s case against Balwani continues in federal district court. The regulator wants to enjoin him from violating securities laws in the future, make him pay a civil penalty and “appropriate” relief, as well as bar him from serving as a director or officer of a publicly-listed company.
Theranos Faces More Litigation and a Criminal Probe
The Wall Street Journal reports that a lot of Theranos investors, which include some incredibly high net worth individuals and well-known investors, have lost almost the full value of their investments. For example, News Corp chairman Rupert Murdoch reportedly lost over $100M.
Already Theranos has settled lawsuits brought by a hedge fund investor and Walgreens, which introduced Theranos lab-testing centers in dozens of its drugstores and planned to do so in many more of its shops.
A few years back, the Centers for Medicare and Medicaid Services found that mishandling by Theranos of certain blood test and placed some patients in “immediate jeopardy.” The company is still undergoing a criminal probe by US prosecutors.
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Royal Bank of Scotland Settles NY’s RMBS Fraud Case for $500M, Institutional Investor Securities Blog, March 9, 2018
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