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SEC charges Theranos CEO Holmes with ‘years long fraud’

 The U.S. Securities and Exchange Commission recently charged Theranos CEO Elizabeth Holmes and the company’s former President Ramesh Balwani with an “elaborate, years-long fraud in which they exaggerated or made false statements about the company’s technology, business, and financial performance,” according to Wired. To resolve the claims against her, Holmes has agreed to give up much of her equity and voting power in Theranos, accept a 10-year ban on working at public companies and pay a $500,000 penalty. 

 As a 19-year-old Stanford University dropout, Holmes founded Theranos in 2003. Theranos, which is a health-focused startup based in Silicon Valley, was once valued at approximately $9 billion. At the time, the company was considered by potential investors as an upcoming disruptor of the healthcare industry and the technology world’s solution to the United States’ outdated, expensive healthcare system.

 Theranos’ goal was to create cheaper, more efficient alternatives to traditional healthcare tests. To this end, it promised a revolutionary technology that could be cheaply done at a drugstore and detect a wide range of illnesses. The company’s proprietary “nanotainer” devices were claimed to conduct various lab tests from a few drops of blood, evading the pain and inconvenience associated with standard blood tests. 

 Holmes soon became a public figure, appearing on magazine covers and richest-women worldwide lists. Her strict attire of black turtlenecks earned her comparisons to the late Steve Jobs, and her self-made billionaire status likened her to Facebook’s Mark Zuckerberg and SpaceX’s Elon Musk. 

 Holmes’ commanding presence and widespread popularity as a female CEO in an industry currently bereft of female workers even led some to claims that her success would herald greater empowerment of women in tech. 

 In 2013, Walgreens signed a partnership with Theranos to place “wellness centers” using the company’s technology in some of its drugstores. Impressed with Theranos’ promise and leadership, various prominent venture capitalists also signed on. 

 The company’s board of directors consisted of eminent people, such as the former Secretaries of State George P. Shultz and Henry A. Kissinger, as well as two former U.S. senators, according to The New York Times.

 A series of articles in The Wall Street Journal cast doubt on whether Theranos’ technology actually worked, which led to various investigations into the company’s claims. It was revealed that Holmes duped her investors by either outright lying or producing falsified information regarding Theranos.

 The SEC’s complaint claims that Holmes and Theranos made a deliberate effort to exaggerate the applicability of the company’s technology, while many of the tests being conducted were done with conventional medical equipment manufactured by other companies. For example, Theranos demonstrated its product directly to some of its investors, pricking their fingers with a finger stick and placing it in one of the company’s nanotainers.

 The complaint states that, the company “often actually tested their blood on third-party analyzers, because Theranos could not conduct all of the tests it offered prospective investors on its proprietary analyzers.” Other investors received binders of information that contained reports seemingly written by pharmaceutical companies who worked with Theranos, but were actually written by Theranos itself. 

 The SEC states that in 2010, Holmes showed Walgreens executives written evidence that Theranos would be able to run any blood test on its machines by the end of that year, using blood taken from finger pricks rather than needles.

 By 2013, when the Theranos miniLab was supposed to be implemented in Walgreens drugstores, the technology was still not ready. At its height, the SEC claims that the miniLab could perform about 12 tests, instead of the 90 percent Holmes claimed it could do. 

 At one point, Walgreens executives were concerned whether Theranos would need the Food and Drug Administration’s approval of its products. Another testing company, 23andMe, was heavily scrutinized by the FDA, and was ordered to prohibit all of its genetic testing activity in 2013 until it was eventually allowed to offer products to consumers. 

 Holmes repeatedly claimed that Theranos did not need the FDA’s approval, but would try to get it in support of regulation. In 2014, the FDA told Theranos that the company’s tests required the administration’s approval, but Theranos hid this fact from the public. Holmes also claimed that the U.S. Department of Defense was using Theranos’ technology in tests when it was not. 

 Theranos also heavily exaggerated its revenue by a factor of 1,000. The company told investors in 2014 that it had generated or would generate over $100 million in revenue, when it had actually generated only $100,000 that year. 

 Rather than deliver on the technological marvel that it promised, Theranos deceived its investors. In this way, Holmes raised $700 million without having to provide financial statements when audited by an independent public accounting firm. 

 Public companies require auditing and face detailed analysis of their businesses. No matter how prestigious or acclaimed, private companies like Theranos still carry a great amount of risk for potential investors, because they are not subject to the same standards as a public company.

March 26, 2018

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Jahvon Meadows


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