Theranos, SEC settle case
officer or director of a public company for 10 years. She will return 18.9 million shares of Theranos stock and cede super-voting rights on her remaining shares.
In a statement, Theranos directors said the company “is pleased to be bringing this matter to a close and looks forward to advancing its technology.” The company is now focusing on development of its MiniLab, a compact testing device.
Neither Holmes nor Theranos admitted wrongdoing.
The fraud claims against Balwani, who did not agree to a settlement of charges, will be litigated in federal court in the Northern District of California.
As of late 2017, Theranos was on the verge of bankruptcy but secured a loan that would allow it to continue developing its blood testing product MiniLab for one year, according to the complaint against Holmes. Theranos reportedly raised $100 million from Fortress Investment Group in December. If Theranos is acquired or liquidated, Holmes would not profit from the transaction until $750 million is returned to defrauded investors and other shareholders. And before shareholders see anything, any loans must be repaid.
In Silicon Valley, where startups and their lofty claims of disruptive technology often operate outside the purview of regulators, the penalties against Theranos, a privately held company, are rare.
“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. “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.”
Still, the terms of the settlement struck some securities fraud experts as lenient. The 10-year ban on Holmes serving as a director of a public company falls far short of the lifetime ban that some defendants in fraud cases face, said Mark Fickes, a partner at the San Francisco law firm Cannata, O’Toole, Fickes & Almazan, who previously litigated securities fraud cases as an SEC lawyer. The SEC has sought permanent bans “for a lot less,” he said.
“$500,000 in light of an alleged $700 million fraud is extraordinary,” Fickes said. “It strikes me as a slap on the wrist. It’s common practice for fraud cases to draw a lifetime officer or director bar, particularly of this magnitude.”