The Securities and Exchange Commission has charged Theranos CEO and founder Elizabeth Holmes with “elaborate, years-long” fraud.
The SEC accused Holmes and former Theranos President Ramesh Balwani with fraudulently raising more than $700 million from investors by exaggerating or making false statements about the company’s technology, business, and financial performance.
Theranos and Holmes agreed to settle the fraud charges against them, though they have neither admitted nor denied the allegations, and the agreement must be approved by a court, the agency said Wednesday. The case is being litigated in federal district court in the Northern District of California.
Holmes agreed to give up her majority voting control of the company and to reduce her equity stake. She also agreed to pay a $500,000 penalty and to be barred from serving as an officer or director of a public company for a decade. She must return the remaining 18.9 million shares she obtained during the fraud and relinquish her voting control of the company.
If Theranos should be bought or liquidated, Holmes would not be allowed to profit from her ownership until more than $750 million is returned to defrauded investors and other shareholders.
“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,” said Stephanie Avakian, co-director of the SEC’s Enforcement Division.
Theranos had a product known as a portable blood analyzer that Holmes and Balwani said could run complex blood tests using just a finger drop of blood. The reality, according to the SEC, was that the product could run only a small number of tests, and Theranos ran additional tests on devices made by other manufacturers.
Holmes and Balwani also said that the products had been deployed by the Defense Department on battlefields in Afghanistan and that the company would generate $100 million in revenue in 2014. The DOD deployment had not occurred and revenue in 2014 totaled $100,000, according to the SEC complaint.
“Investors are entitled to nothing less than complete truth and candor from companies and their executives,” said Steven Peikin, co-director of the SEC’s Enforcement Division. “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.”
Jina Choi, director of the SEC’s San Francisco Regional Office, called the Theranos case a “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,” she said.
