Published: Thu, March 15, 2018
Global | By Marsha Munoz

Theranos and its founder Elizabeth Holmes charged with 'massive fraud' by SEC

Theranos and its founder Elizabeth Holmes charged with 'massive fraud' by SEC

The Securities and Exchange Commission has charged Elizabeth Holmes, founder and CEO of scandal-ridden startup Theranos, with "massive fraud".

Obama invited Holmes to the White House back in 2015, where she was named a Presidential Ambassador for Global Entrepreneurship. Holmes has already said she plans to give away shares to the "most significant shareholders". Its 34-year-old founder, Elizabeth Holmes, will pay a $500,000 penalty, cede her control of the company, and be barred from serving as an officer or director of a public company for a decade. Regulators subsequently raised serious concerns about the accuracy of testing that Theranos did conduct with its machines, and the company eventually retracted two years of blood tests.

Both Theranos and Holmes agreed to settle the fraud charges, the SEC said.

Wednesday's SEC complaint asserts that the company's claims about its technological abilities were misrepresentations at best and outright lies at worst.

"The Theranos story is an important lesson for Silicon Valley", said Jina Choi, director of the SEC's San Francisco Regional Office. In 2016 the Centres for Medicare and Medicaid Services, which oversees blood-testing labs in the United States, banned Ms Holmes from operating a lab and revoked Theranos' blood-testing license.

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"Theranos' actual financial performance bore no resemblance to the financial information Holmes shared with investors", it notes.

Theranos and Holmes neither admitted or denied the allegations in the SEC's complaint, and Balwani will face litigation in the Northern District of California from the SEC related to its claims against him.

Since then, the company has become a cautionary tale for healthcare investors.

Theranos's board has included a number of high-profile political figures, including former Secretaries of State Henry Kissinger and George Shultz, former U.S. Senate Majority Leader Bill Frist, and current Secretary of Defense James "Mad Dog" Mattis, among others.

In late 2014, Holmes explained the company's process to The New Yorker: "A chemistry is performed so that a chemical reaction occurs and generates a signal from the chemical interaction with the sample, which is translated into a result, which is then reviewed by certified laboratory personnel".

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The claims, if true, would have been revolutionary.

"This is what happens when you work to change things", Holmes told CNBC immediately following the publication of The Wall Street Journal story.

Theranos and Holmes for months refused to acknowledge that its machines were effectively a sham. The Department of Justice is also investigating the matter - but that's a separate case. These SEC charges, filed March 14, are the first to come on a federal level for Theranos.

A settlement with the SEC does not preclude criminal charges from being pursued by USA prosecutors, but Peikin declined to comment on whether any other agencies were investigating the case. The SEC said it will litigate claims against Balwani in federal court. In fact, even though she faces some serious penalties over the charge - she's losing control of the company and won't profit if it is sold - she also doesn't have to admit wrongdoing as part of a settlement with regulators.

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