Elizabeth Holmes, founder and CEO of blood-testing startup Theranos, was indicted by a federal grand jury with committing massive fraud on Friday, June 15. Former president Ramesh “Sunny” Balwani was also charged. Per the indictment, the two execs “used advertisements and solicitations to encourage and induce doctors and patients to use Theranos’s blood testing laboratory services, even though the defendants knew Theranos was not capable of consistently producing accurate and reliable results for certain blood tests.”
The pair surrendered to the FBI on Friday in California and were subsequently released on $500,000 bail each and forced to surrender their passports. Both will face up to two decades in prison if convicted. Holmes resigned as CEO of Theranos on Friday, June 15, though the former VC darling is still serving as chair of the board.
Alex Tse, acting United States Attorney for the Northern District of California, noted that the former Theranos executives “not only defrauded investors” but “more egregiously … misled doctors and patients about the reliability of medical tests that endangered health and lives.”
Lawyers for Balwani are still fighting back, however. As attorney Jeffrey Coopersmith said, “In over 28 years of practicing law, as both a federal prosecutor and a defense attorney, I have never seen a case like this one, where the government brings a criminal prosecution against a defendant who obtained no financial benefit and lost millions of dollars of his own money.”
He added, “Mr. Balwani committed no crimes. He did not defraud Theranos investors, who were among the most sophisticated in the world. He did not defraud consumers but instead worked tirelessly to empower them with access to their own health information. Mr. Balwani is innocent and looks forward to clearing his name at trial.”
Holmes’ lawyers have not commented following the arraignment.
This latest development comes a few months after Holmes was forced to pay a $500,000 fine, and gave 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 — which was 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.
Updated on June 16: Added news that Elizabeth Holmes and Sunny Balwani have surrendered to the FBI.
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