Blood, fraud and money led to Theranos CEO’s fall from grace

Elizabeth Holmes raised hundreds of millions of dollars from investors on the promise that her medical-testing startup Theranos Inc. would change medicine with a single drop of blood. On Wednesday, securities regulators called her a fraud and forced her to give up the company she built.

The lawsuit and settlement announced Wednesday by the U.S. Securities and Exchange Commission detailed how Holmes and her chief deputy lied for years about their technology, snookered the media, and used the publicity to get investors to hand more than $700 million to keep the closely held company afloat.

As part of the settlement, Holmes will pay a $500,000 fine, surrender 19 million shares and is barred from being an officer or director of a public company for 10 years.

Theranos founder Elizabeth Holmes
Billionaire Elizabeth Holmes, founder and chief executive officer of Theranos Inc., reacts during a Bloomberg Television interview at the Vanity Fair 2015 New Establishment Summit in San Francisco, California, U.S., on Tuesday, Oct. 6, 2015. The summit assembles titans of technology, politics, business, and media for inventive programming and inspiring conversations around the ideas and innovations shaping the future. Photographer: Bloomberg/Bloomberg

“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.”

Theranos said in a statement that it was “pleased to be bringing this matter to a close and looks forward to advancing its technology.” The company said it cooperated with the SEC’s investigation.

Rise to Fame

Holmes began to rise to national attention in 2013 when she claimed that Theranos had developed a medical technology that could do what seemed impossible: Its secret machines could run thousands of medical tests using the blood from a tiny finger-prick, and do so quickly and cheaply. Glowing magazine profiles followed, and she talked about making lives better for patients around the world, as well as disrupting a multibilion-dollar industry dominated by giants like Laboratory Corp. of America Holdings and Quest Diagnostics Inc.

Behind the scenes, things were very different.

Holmes had claimed her machines could process 90 percent of the tests performed by standard lab equipment. Those statements won the company an agreement with a national pharmacy chain in 2010 even though the technology was not yet “commercially ready,” according to the SEC. The SEC refers to the pharmacy chain as “Pharmacy A.” In 2013,

Theranos publicly announced a partnership with the drugstore chain Walgreens, which later sued Theranos. The companies eventually settled.

As the rollout with “Pharmacy A” neared, according to the SEC, Holmes told the company’s engineers to modify standard blood-testing machines to run Theranos’s tests.

She hid that change from the pharmacy executives, conducting demonstrations using Theranos’s machines and leading them on company lab tours without revealing the company was using third-party technology. The pharmacy gave Theranos a $100 million “innovation fee” to help with the expansion.

More Money

Around the same time, Holmes was using the company’s glowing profile in the media to raise more money. According to the SEC’s complaint, Holmes and former president Ramesh “Sunny” Balwani knowingly made repeated false or misleading statements to investors about the company’s products, its business relationships, and its prospects for long-term growth.

The SEC said that the company gave investors binders full of background materials including a slide presentation, financial projections and clippings from favorable media reports in publications including The Wall Street Journal, Wired, and Fortune. The Wall Street Journal later reported on the serious doubts about the company’s claims.

Theranos said in those materials that it expected to generate $100 million in revenue in 2014, though it ultimately had sales that year of only about $100,000, according to the SEC complaint. The company told investors that by 2015 it would bring in revenue of $1 billion, the SEC said.

False Claims

The binders also included purported endorsements from drug companies -- but that weren’t in fact written by those companies, according to the complaint. Theranos also misrepresented its dealings with the U.S. Department of Defense, the SEC said, falsely telling investors that Theranos technology had been used by the U.S. military on the battlefield in Afghanistan and in medevac helicopters.

Balwani, the Theranos president, still faces an SEC lawsuit, which is pending in federal court in California. Bloomberg wasn’t able to reach Balwani for comment.

Theranos was under criminal investigation by California prosecutors as of two years ago. The status of the criminal investigation is unclear. Abraham Simmons, a spokesman for the U.S. Attorney’s office in San Francisco, declined to comment.

Theranos spokeswoman Tali Mackay declined to comment on any criminal probes facing the company.

Retracting Tests

The company eventually had to retract or correct the results of tens of thousand of medical tests. It was sanctioned by regulators at the Centers for Medicare and Medicaid Services, which banned Holmes from running a lab company for two years. The company let go many of its employees and shut down its consumer-testing operations, and said it would focus on developing its technology.

By the end of 2017, the company was on the “verge of bankruptcy,” according to the SEC. It has since obtained a term loan that will keep it afloat for about a year, the SEC said.

Steven Peikin, the co-director of the SEC’s enforcement division, said the company avoided paying any penalties in part because the misconduct was perpetrated by Holmes and Balwani. A corporate penalty would harm investors who had already been defrauded, he said.

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