SEC fines Theranos founder Holmes for ‘massive fraud’
Theranos founder Elizabeth Holmes, whose black turtlenecks and rapid ascent to paper billionaire in Silicon Valley once prompted comparisons with Steve Jobs, was stripped Wednesday of control of her company and slapped with a $500,000 fine for “massive fraud.”
The Securities and Exchange Commission accused Holmes
and Ramesh “Sunny” Balwani, Theranos’ former president, of orchestrating a $700 million, yearslong fraud, and said they have agreed to resolve the charges against them.
Holmes was ordered to relinquish 18.9 million shares, which should ensure she will not profit from her ownership of the Newark- based company until $750 million is returned to investors and shareholders, according to the SEC’s news release.
Theranos noted that the settlement did not include any admission or denial of guilt by Holmes or the company.
Holmes, 34, founded the blood-testing startup as a 19-year- old Stanford University dropout, attracting big names to the company and its board. Its members once included former U.S. secretaries of state George Shultz and Henry Kissinger, former secretary of defense William Perry, current Secretary of Defense James Mattis and former Bechtel Group chairman Riley Bechtel.
Founded in 2003, Theranos reached a valuation of $9 billion before the Wall Street Journal in 2015 first revealed evidence that the company’s blood tests were not as effective as executives had claimed. The initial promise touted by Holmes and others was that a pinprick’s worth of blood would be enough for multiple blood tests. But the Journal alleged that Theranos was using its own technology on just a fraction of the blood tests it offered at Walgreens, which later sued over its $140 million investment. Theranos subsequently settled that case and has reached agreements with other investors.
According to the SEC charges, “At all times … Holmes, Balwani, and Theranos were aware that, in its clinical laboratory, Theranos’ proprietary analyzer performed only approximately 12 tests of the over 200 tests on Theranos’ published patient testing menu.”
Holmes, once a media darling praised for being the youngest self- made billionaire, has had a long tumble from grace. The allegations and subsequent federal investigations into the company prompted a stunning move by Forbes in June 2016: It slashed its estimate of Holmes’ net worth from$4.5 billion the prior year to zero.
A month later, Holmes was banned by federal health regulators from operating a blood-testing lab for two years. Now, under the SEC settlement, she is forbidden from serving as an officer or director of a public company for the next decade.
Balwani, 52, who left Theranos in May 2016, still faces civil securities-fraud charges that the SEC said will be heard in federal district court in the Northern District of California.
Theranos, founded in Palo Alto in 2003 but now based in Newark, appeared eager to move on from the debacle.
“The company is pleased to be bringing this matter to a close and looks forward to advancing its technology,” a Theranos spokeswoman said in an email Wednesday.
But the SEC offered a warning with Wednesday’s announcement.
“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.”
Holmes’ family friend and famed investor Tim Draper, along with media mogul Rupert Murdoch, were among Theranos’ backers. Draper, who continued to defend Holmes as recently as last year and said there was a conspiracy against her, did not return this news organization’s request for comment.
Shultz’s grandson, who worked at Theranos for less than a year, became a whistleblower and a source for the Journal’s reporting about problems with the company’s technology.
There were other skeptics from the beginning, including Phyllis Gardner, a professor of medicine at Stanford University, one of the experts Holmes used to run ideas by. Gardner recalled Wednesday that Holmes came to her with a couple of different proposals because of Gardner’s expertise in drug delivery.
“When I told her it wouldn’t work, she didn’t blink an eye,” Gardner said. “It rolled off her back. Hubris is the word I’ve always thought about her.”
Gardner — who said she sent Holmes to other colleagues in Silicon Valley, some of whom she described as “enamored” — said she was not surprised by the charges.
“When you look at (prescribing certain drugs), the margin of safety is narrow,” Gardner said. “It’s very dangerous to give out results that are not accurate.”
In October 2016, Holmes said the company had closed its clinical labs and wellness centers, affecting 340 employees in California, Arizona and Pennsylvania. Last year, the company laid off 155 more people, leaving about 220 workers, according to various reports.
Theranos has refocused its attention on its original product, the miniLab. On the company’s website, it is being marketed as a microwave-sized device capable of running diagnostic testing “outside of a traditional lab setting.” It has not been approved by the Food and Drug Administration.