From $5 Billion To Zero, CEO Of Theranos Charged With Massive Fraud (UPDATE)
“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 by the Securities and Exchange Commission (SEC).
In an update to CT’s original story, a federal grand jury indicted Holmes on Friday, June 15 on charges of defrauding basically everyone — doctors, patients and investors. Holmes had previously settled with the SEC by agreeing to pay a cool half million dollar penalty and also agreeing to a 10-year absence of serving a director role in any public company.
Friday’s indictment completes the Theranos fall from grace. 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. Theranos did just that — and quickly.
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.
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.”
You’ve got to hand it to her — Holmes had a great elevator pitch. 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 even talked Walgreens into a partnership; the pharmacy giant was going to exclusively offer the tests at their stores. Heck, Theranos even had 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 even named Holmes as one of America’s richest women. With a 50 percent ownership of Theranos, she was worth nearly $5 billion.
On the surface, everything looked great. Holmes was regularly featured on magazine covers, and her corporate board was chock full of military leaders and elder statesmen. Incredibly, all of this occurred before anyone really started asking probing questions about how Theranos’ technology actually worked.
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. Several other federal agencies investigated Theranos, as did the Wall Street Journal.
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.
The situation seemingly reached rock bottom when 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, who said that 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.
Before Friday, Holmes’ only worry was payback of the half million dollars. She didn’t even have to worry about Walgreens; their $140 million breach-of-contract lawsuit was settled out-of-court during the summer of 2017 for an undisclosed amount. Holmes considered herself lucky because she escaped going to prison.
Many were amazed at Holmes’ good fortune, given that her peers, like Turing Pharmaceuticals executive Martin Shkreli, were not so lucky. Turing 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 simply sentenced him to nearly a decade in prison. She did hand him a box of tissues — that was nice.
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. The feds even gave Shkreli credit for the six months of jail time he had already served in Brooklyn while awaiting his trial.
On Friday, Holmes’ fate took a turn for the worst as she surrendered to the FBI along with partner Balwani. The FBI confiscated their passports, and they were each released on $500,000 bail.
The formal indictment reads: “The two executives used advertisements and solicitations to encourage and induce doctors and patients to use Theranos’ blood testing laboratory services, even though the defendants knew their technology was not capable of consistently producing accurate and reliable results for certain blood tests.” U.S. Attorneys in northern California went a step further, stating that the pair endangered lives. The two even ran sham demonstrations and created misleading marketing material.
While Holmes’ lawyers have not commented, Balwani’s lawyers have been a constant voice of outrage and professed innocence on behalf of their high-profile client. Attorney Jeffrey Coopersmith said, “In over 28 years of practicing law, as both a federal prosecutor and a defense attorney, I have never seen a case like this one, where the government brings a criminal prosecution against a defendant who obtained no financial benefit and lost millions of dollars of his own money.” Coopersmith is insistent that Balwani has not committed any crime, nor did he defraud Theranos investors, who Coopersmith described as “among the most sophisticated in the world.”
The SEC countered Coopersmith’s statement by saying that “investors are entitled to nothing less than complete truth and candor from companies and their executives, and 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.”
As if that is not enough, federal authorities allege that the pair actually cooked up a second fraud because patients’ insurance companies paid for blood tests deemed accurate and reliable. Indeed, Holmes ran Theranos under a veil of extreme secrecy, justified as protection of proprietary technology.
The darling of Wall Street could face 20 years in prison if found guilty of the fraud charges.