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From $5 Billion To Zero, CEO Of Theranos Charged With Massive Fraud

Both the CEO and President of Theranos, a once promising tech and medical startup that raised billions in venture capital, are now facing fraud charges.

“You are one of five visionary tech entrepreneurs who are changing the world.” This was the New York Times description of Theranos CEO Elizabeth Holmes, who was charged with massive fraud yesterday by the SEC.

Just two short years ago, startup Theranos and its founder and CEO Elizabeth Holmes were the darlings of Silicon Valley. The blood testing company was wildly successful with its unicorn status. In the venture capital world, a “unicorn startup” reaches a $1 billion market value. And Theranos sure did.

Holmes herself was touted as somewhat of a unicorn as well. She was praised for being a rebel, dropping out of Stanford to start the company in 2003. Her product was hailed as a med tech disruptor because it offered a cheaper and better alternative to blood tests that have traditionally been used in medicine for decades.

Theranos CEO Elizabeth Holmes

Elizabeth Holmes, Theranos CEO, at Tech Crunch. CC: Flickr, LicenseAttribution Some rights reserved by TechCrunch

SEC describes Theranos as an “elaborate, years-long fraud”.

Holmes and Theranos promised cancer and diabetes tests with just a few drops of blood rather than a whole vial. Unfortunately, both unicorns are definitely part of a fairy tale. The product was a fraud. In fact, the Securities and Exchange Commission (SEC) described Theranos as an “elaborate, years-long fraud” and described Holmes’ actions as “deceiving investors into believing that its key product — a portable blood analyzer — could conduct comprehensive blood tests from finger drops of blood.”

Holmes had a great elevator pitch and secured impressive deals for Theranos. She called her technology device a TSPU or miniLab.  Holmes and company president Ramesh “Sunny” Balwani went on a national roadshow talking about how great the hardware was. Holmes talked Walgreens into a partnership; the pharmacy giant was going to exclusively offer the tests at their stores. Theranos even secured a contract with the Department of Defense. All of this hype got them not only the $1 billion unicorn status, but actually an astonishing $9 billion valuation. Forbes named Holmes as one of America’s richest women. With a 50 percent ownership of Theranos, she was worth nearly $5 billion.

Trouble begins for Theranos in 2015.

The first sign of trouble came when she told Walgreens that the miniLab was not going to be ready by their agreed upon rollout date. Then, Wall Street Journal reporter John Carreyou wrote a scathing front page, above-the-fold article in 2015, stating their product didn’t work. Carreyou also accused Holmes and Balwani of lying about product claims. He says they used traditional blood testing equipment instead of their own revolutionary products. Oops.

The U.S. Food and Drug Administration (FDA) then came forward with its own report full of concerns about Theranos. Later, the FDA revoked the company’s certification because they were using uncleared medical devices, and banned Theranos for two years from running any blood lab.

It was all downhill from there. Pretty soon, Forbes removed Holmes from their “rich women” list, changing her net worth from $4.5 billion to zero.

SEC formally charges Elizabeth Holmes and Ramesh Balwani with massive fraud.

Yesterday, the situation officially reached rock bottom. The SEC formally charged Holmes, as well as Balwani, with “massive fraud” that involved a sum of over $700 million. Holmes settled with the SEC. As part of the settlement Holmes can no longer have a role at Theranos. Holmes must pay a $500,000 fine and is banned for 10 years from serving in any executive capacity in a public company. Holmes has never admitted or denied any of the SEC’s allegations.

The SEC is pursuing further action against Balwani; they plan to take his case to federal court in San Francisco.

Holmes only has to worry now about paying the half million dollars. As for Walgreens, their $140 million breach-of-contract lawsuit against her was settled out-of-court last summer for an undisclosed amount.

Holmes will have to find another job, too, albeit several rungs down on the corporate ladder. But all things considered, she is lucky to have avoided serving any jail time.

Elizabeth Holmes escapes jail time unlike Martin Shkreli, another pharmaceutical executive charged with fraud.

Turing Pharmaceuticals executive Martin Shkreli wasn’t so lucky. Last week, he was sentenced to seven years in federal prison for defrauding investors out of $10 million—mere chump change when compared to Theranos. The very cocky Shkreli is famously known as the guy who jacked up the price of Daraprim, an HIV drug, from around $13 per pill to $750 per pill. His smug testimony to Congressional committees, in which he arrogantly smirked each time he invoked the fifth amendment, seems to have come back to haunt the 34-year-old whiz kid. Shkreli wept openly in court as the judge read his sentence. He pleaded for leniency, but the judge sentenced him to nearly a decade in prison.

Shkreli was lucky too, though, as he originally faced four decades in prison for his securities fraud, which federal regulators say amounted to a Ponzi scheme of epic proportions. Furthermore, he does get credit for the six months of jail time he has already served in Brooklyn while awaiting trial.

As for what will befall Holmes’ partner, Ramesh Balwani, we will wait and see.



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Jacqueline Havelka

Jacqueline is a rocket scientist turned writer. She covers health, science and tech news for Citizen Truth. In her first career, she managed experiments & data on the Space Station & Shuttle.

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