On March 14, 2018, the Securities and Exchange Commission charged Silicon Valley-based private company Theranos Inc., its found and CEO Elizabeth Holmes and former president Ramesh “Sunny” Balwani with raising over $700 million from investors through a years-long fraud. The defendants were accused of exaggerating or making false statements about the company’s technology, business and financial performance. Theranos and Holmes have agreed to resolve the charges against them. Holmes has agreed to give up majority voting control over the company and a reduction of her equity.
The SEC’s complaint claims that Theranos, Holmes and Balwani made several false and misleading statements in investor presentations, product demonstrations and media articles. These statements ultimately deceived investors into believe that the company’s key product, a portable blood analyzer, could perform comprehensive blood tests from finger drops of blood. The SEC’s complaint claims that the analyzer could complete only a small number of tests.
The complaint claims that the company conducted the vast majority of patient tests on modified and industry-standard commercial analyzers manufactured by others. The complaints also charge that Theranos, Holmes and Balwani claimed that the company’s products were deployed by the United States Department of Defense on the battlefield in Afghanistan and on medevac helicopters. They also claimed that the company would generate more than $100 million in revenue in 2014.
In reality, the company’s technology was never deployed by the United States Department of Defendant and generate a little over $100,000 in revenue from operations in 2014. As a part of the agreement to settle the charges, Holmes has agreed to pay a $500,000 penalty, be barred from serving as an officer or director of a public company for ten years, return the remaining 18.9 million shares obtained during the fraud, and give up voting control of Theranos.
Due to the company’s liquidation preference, if Theranos is acquired or liquidated, Holmes would not profit until more than $750 million is returned to defrauded investors and other preferred shareholders. The settlements are subject to court approval. Theranos and Holmes neither admitted nor denied the allegations set forth in the SEC’s complaint. The SEC intends to litigate its claims again Balwani in federal court. Additional details have been made available here.