Once upon a time Elizabeth Holmes was poised to change medtech forever. At 19, Holmes left Stanford University to start a lab-testing company with the goal of providing consumers access to cheap, fast, and high-quality diagnostic tests that used just a drop of blood from a fingerstick. Former Vice President Joe Biden called Theranos the "laboratory of the future."
Unfortunately for a lot of Theranos investors, the company's technology was not as good as Holmes and other company executives made it out to be, and in 2016 the Palo Alto, CA-based company's prospects quickly began to unravel.
Today, the company's story serves as an important lesson for other innovators, as the SEC on Wednesday charged the company, Holmes, and former president Ramesh "Sunny" Balwani with raising more than $700 million from investors through an elaborate, years-long fraud in which they 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, the SEC noted, and Holmes agreed to give up majority voting control over the company. She also agreed to a reduction of her equity which, combined with shares she previously returned, materially reduces her equity stake, the agency said.
Theranos, Holmes, and Balwani are accused of making numerous false and misleading statements in investor presentations, product demonstrations, and media articles. The complaints allege that they deceived investors into believing that the company's key product, a portable blood analyzer, could conduct comprehensive blood tests from fingerstick drops of blood, which would have potentially revolutionized the blood testing industry. In truth, according to the SEC's complaint, Theranos's 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.
The complaints further charge that Theranos, Holmes, and Balwani claimed that the company's products were deployed by the U.S. Department of Defense on the battlefield in Afghanistan and on medevac helicopters and that Theranos would generate more than $100 million in revenue in 2014. In truth, the technology was never deployed by the U.S. Department of Defense and generated a little more than $100,000 in revenue from operations in 2014, the agency said.
“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.”
Theranos and Holmes have agreed to settle the fraud charges levied against them. 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 – more than $750 million is returned to defrauded investors and other preferred shareholders. The settlements with Theranos and Holmes are subject to court approval, SEC noted, and neither the company nor its founder has admitted nor denied the allegations in the agency's complaint.
Stephanie Avakian, also a co-director of the SEC's enforcement division, said the package of remedies that Holmes has agreed to exemplifies the agency's efforts to impose "tailored and meaningful sanctions that directly address the unlawful behavior charged and best remedies the harm done to shareholders."
“The company is pleased to be bringing this matter to a close and looks forward to advancing its technology," the company's independent directors said in a statement.
Theranos also noted in a separate release that both it and Holmes fully cooperated with the SEC throughout its investigation.
The SEC plans to litigate its claims against Balwani in federal district court in the Northern District of California.
“The Theranos story is an important lesson for Silicon Valley,” said Jina Choi, director of the SEC’s San Francisco Regional Office. “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.”