SEC charges Theranos executives with fraud, CEO Elizabeth Holmes stripped of control

Theranos CEO Elizabeth Holmes has been stripped of her control over the company after being charged with fraud by the SEC. (Glenn Fawcett)(DoD Photo By Glenn Fawcett)

Following the very public rise and fall of her blood testing technology, Theranos chief executive Elizabeth Holmes has been stripped of control over the company after being charged for an “elaborate, years-long fraud" to deceive investors. 

Holmes, who founded Theranos in 2003, was charged by the Securities and Exchange Commission (SEC) on Wednesday along with the company’s former president Ramesh “Sunny” Balwani. Holmes has agreed to resolve the charges by relinquishing control of the company, paying a $500,000 fine and returning 18.9 million shares, according to the SEC. She is also barred from serving as an officer or director for any public company for the next 10 years.

“The Theranos story is an important lesson for Silicon Valley,” Jina Choi, director of the SEC’s San Francisco Regional Office, said in a statement Wednesday. “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.”

The SEC laid out the fraud charges in a complaint (PDF) filed in the U.S. District Court in Northern California. Theranos made its name touting blood processing technology that could conduct hundreds of tests in a less than an hour with a single finger prick. After the company’s launch and a flood of media attention, Holmes and Balwani helped secure over $700 million from investors over the course of two funding rounds between 2013 and 2015.

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Since then, the company has become a cautionary tale for healthcare investors. According to the SEC's complaint, Holmes failed to tell investors that much of the blood testing analysis was conducted by third parties. Prosecutors alleged she also made misleading statements about the company’s contracts with the Department of Defense, exaggerated partnerships with a pharmacy and grocery store, and told investors that Theranos didn’t require approval from the Food and Drug Administration despite being informed by officials the product required the agency’s approval.

The court document indicates Holmes grossly exaggerated the company’s revenue stream, predicting it would crack $100 million in 2014. The company’s actual revenue was slightly over $100,000. By 2016, the company was getting pushback from the Centers for Medicare & Medicaid Services for practices that “pose immediate jeopardy to patient health and safety,” and the agency was considering a two-year ban for Holmes.

In a separate complaint (PDF), the SEC also accused Balwani of participating in the fraud scheme. Prosecutors plan to litigate those claims in court.

In October 2016, Holmes announced in an open letter to stakeholders that the company was closing its clinical labs and wellness centers and laying off 340 workers to focus its energy on commercializing its blood testing technology.