The holiday miracle that saved Theranos from total despair last December (in the form of a round of debt financing) has run its course. On Wednesday, March 14, the blood testing startup’s disgraced founder and CEO, Elizabeth Holmes, was charged by the SEC with committing a “massive fraud.” The former president of the company, Ramesh “Sunny” Balwani, was also charged. As per an SEC announcement, the two executives engaged in an “elaborate, years-long fraud in which they exaggerated or made false statements about the company’s technology, business, and financial performance.”
Both the company and its former CEO will settle the charges — Holmes will pay a $500,000 fine, and will give up majority voting control, as well as her equity stake. Moreover, the one-time VC darling will be unable to serve as an officer or director of a public company for the next decade. And even if Theranos is acquired or liquidated, Holmes will not have access to any profits until more than $750 million is repaid to defrauded investors and preferred shareholders.
“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.”
Just a few months ago, it seemed as though the one-time VC darling previously valued at around $9 billion had finally caught a break. The blood-testing startup that was once heralded as the future of health tech had unraveled under a string of controversies and investigations surrounding its supposedly proprietary techniques (which turned out to be anything but). But late last year, the company managed to secure $100 million in debt financing.
The money represented a much-needed lifeline for Theranos. “Based on our present projections, we believe we will have sufficient liquidity through 2018,” Holmes wrote in an investor letter.
The cash influx came just in time, as Theranos is watching $4.6 million go out the door. The payout came as a result of a settlement reached with Arizona attorney general Mark Brnovich earlier in 2017. Any Arizonan who used Theranos will receive a complete refund, even if their tests proved to be accurate. While the average refund will be around $61, at least one individual will receive more than $3,000 in the settlement.
According to Brnovich, Theranos’ ads “misrepresented, omitted, and concealed” information about the accuracy of its techniques, as well as the nature of the techniques themselves. In addition to the refunds, Theranos has been banned from owning or operating any lab in Arizona for the next two years.
“Our office is proactive and aggressive in protecting Arizona consumers and these refund checks are proof that we are going to go after companies that violate Arizona consumer protection laws,” Brnovich said in a statement.
Theranos, of course, denied any unlawful activity, and noted that just 10 percent of its thousands of blood tests sold between 2013 and 2016 were ultimately voided. Regardless, the company has had a very difficult time recovering from its multiple setbacks over the last several years.
At the beginning of 2017, Theranos fired over 40 percent of its workforce, leaving the company at just over 200 people. And now that its CEO and president have been charged with fraud, it’s hard to see a clear path forward for the company.
Update: Theranos founder and CEO Elizabeth Holmes was charged with fraud.
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