Coverage: SEC charges Theranos CEO with fraud

Elizabeth Holmes, founder and chief executive of the blood-testing company Theranos, has been charged by the Securities and Exchange Commission with an “elaborate, years-long fraud,” the SEC said on Wednesday.

Carolyn Y. Johnson of the Washington Post had the story:

Holmes agreed to a $500,000 penalty and a 10-year ban on serving as an officer or director of a public company to settle the charges, but she did not admit or deny the allegations.

Jeffrey Coopersmith, an attorney for Davis Wright Tremaine, said in a statement that Balwani “accurately represented Theranos to investors to the best of his ability.”

Holmes is relinquishing shares and ceding her voting control of Theranos, which was on the verge of bankruptcy late last year. She will not profit from her remaining ownership stake until money is recouped by other investors and shareholders.

Theranos, a blood-testing start-up that promised to revolutionize consumers’ access to their medical information, was a Silicon Valley darling once valued at $9 billion.

Matt Robinson and Rebecca Spalding of Bloomberg News reported that the settlement doesn’t preclude criminal charges:

The settlement leaves unanswered whether federal prosecutors will pursue criminal charges. Theranos was under scrutiny by Justice Department prosecutors in San Francisco, but the status of any probe is unclear. Abraham Simmons, a spokesman for the U.S. Attorney’s office in San Francisco, declined to comment.

Theranos said in a statement that it was “pleased to be bringing this matter to a close and looks forward to advancing its technology.” The company said it cooperated with the SEC’s investigation. John Dwyer, a lawyer for Holmes with Cooley LLP, declined to comment.

“The Theranos story is an important lesson for Silicon Valley,” said Jina Choi, director of the SEC’s San Francisco Regional Office. “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 began to rise to national attention in 2013 when she claimed that Theranos had developed a medical technology that could do what seemed impossible: Its secret machines could run thousands of medical tests using the blood from a tiny finger-prick, and do so quickly and cheaply.

Maya Kosoff of Vanity Fair noted that the SEC tweaked the business press for its coverage:

Under the terms of the settlement, even if Theranos is acquired by a third party, Holmes won’t profit from the sale “until . . . over $750 million is returned to defrauded investors and other preferred shareholders.” The agency is still pursuing charges against Balwani, who jointly ran Theranos with Holmes for seven years. (“The Company is pleased to be bringing this matter to a close and looks forward to advancing its technology,” Theranos said in a statement to the Hive, adding that both Holmes and the company complied with the S.E.C.’s investigation.)

The charges herald a fresh round of humiliation for a company once seen as Silicon Valley’s brightest star. Theranos came with the perfect origin story: a blonde, turtlenecked dropout dedicated to revolutionizing the blood-testing industry. The fledgling start-up raised hundreds of millions from Sand Hill Road and less traditional tech investors, catapulting Holmes into the ranks of the world’s wealthiest. The tech world fawned. “When I finally connected with what Elizabeth fundamentally is, I realized that I could have just as well been looking into the eyes of a Steve Jobs or a Bill Gates,” Stanford chemical-engineering professor and Theranos adviser Channing Robertson told Fortune in 2014.

In its statements on Wednesday, the S.E.C. pointed a finger at the credulous business press, which covered Holmes and her company so breathlessly for years. “Investors are entitled to nothing less than complete truth and candor from companies and their executives,” the S.E.C.’s Enforcement Division Co-Director Steven Peikin said in a press release. “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.”