The U.S. Securities and Exchange Commission (SEC) has finally charged Silicon Valley-based private company Theranos, along with founder and CEO Elizabeth Holmes and former President Ramesh “Sunny” Balwani, with a massive fraud.
The agency alleges that Theranos raised over $700 million from investors through an elaborate, years-long fraud in which it exaggerated or made false statements about the company’s technology, business and financial performance.
Theranos and Holmes have agreed to resolve the charges against them. In addition to a penalty, Holmes has agreed to give up majority voting control over the company, as well as to a reduction of her equity which, combined with shares she previously returned, materially reduces her equity stake.
According to the SEC, the complaints allege that Theranos, Holmes and Balwani made numerous false and misleading statements in investor presentations, product demonstrations and media articles by which they deceived investors into believing that its key product, a portable blood analyzer, could conduct comprehensive blood tests from finger drops of blood, revolutionizing the blood testing industry. In truth, according to the SEC’s complaint, Theranos’ proprietary analyzer could complete only a small number of tests, and the company conducted the vast majority of patient tests on modified and industry-standard commercial analyzers manufactured by others.
But it gets worse. The complaints further charge that Theranos, Holmes and Balwani claimed that Theranos products were deployed by the U.S. Department of Defense on the battlefield in Afghanistan and on medevac helicopters and that the company would generate more than $100 million in revenue in 2014. In fact, Theranos’ technology was never deployed by the Defense Department and generated a little more than $100,000 in revenue from operations in 2014.
Stephanie Avakian, co-director of the SEC’s Enforcement Division, commented:
As a result of Holmes’ alleged fraudulent conduct, she is being stripped of control of the company she founded, is returning millions of shares to Theranos, and is barred from serving as an officer or director of a public company for 10 years. 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.
Theranos and Holmes have agreed to settle the fraud charges. Holmes agreed to pay a $500,000 penalty, be barred from serving as an officer or director of a public company for 10 years, return the remaining 18.9 million shares that she obtained during the fraud, and relinquish her voting control of Theranos by converting her super-majority Theranos Class B Common shares to Class A Common shares. Due to the company’s liquidation preference, if Theranos is acquired or is otherwise liquidated, Holmes would not profit from her ownership until – assuming redemption of certain warrants – over $750 million is returned to defrauded investors and other preferred shareholders.