- Theranos Inc. CEO Elizabeth Holmes has agreed to settle charges brought by federal regulators alleging "massive fraud" by the once-heralded Silicon Valley startup she founded on the alluring, but ultimately deceptive, promise of revolutionizing blood testing.
- The settlement with the Securities and Exchange Commission strips Holmes of voting control over Theranos and bars her from serving as an officer or director of a public company for 10 years. Holmes, who became a billionaire on paper from her stake in the now near-bankrupt Theranos, will also pay a $500,000 fine.
- The downward spiral of Theranos' business is well documented at this point. Yet the SEC complaint lays bare the lengths by which Holmes and Theranos' now former president Sunny Balwani went to mislead investors about the state of the company's blood-testing technology.
Between 2013 and 2015, Theranos raised $700 million from private investors, propelling it to lofty valuations that ranked the blood-testing company among the upper echelons of Silicon Valley unicorns.
Diligent investigation by The Wall Street Journal and subsequent government probes have since shattered that facade, suggesting the company's promises to run hundreds of blood tests off of a single finger prick of blood were largely a mirage.
According to the SEC, Holmes and Theranos' actions constituted fraud. In bringing the charges against the company, Holmes and Balwani, the securities regulator also delivered a thinly veiled warning that private firms raising billions on the promise of disruption will be held to account.
"The Theranos story is an important lesson for Silicon Valley," said Jina Choi, director of the SEC's San Francisco Regional Office 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."
That balance between promise and reality lies at the heart of the SEC's claims that Theranos and Holmes defrauded investors.
In what's now a well-known story, Holmes founded Theranos in 2003 after dropping out of Stanford University with the idea that blood testing could be transformed into a painless and less invasive procedure. Initial efforts by the company focused on developing a point-of-care analyzer to be used in pharmaceutical clinical trials.
Beginning in 2010, Theranos and Holmes took aim at the retail clinical laboratory space even though — as the SEC alleges — the company's technology wasn't ready to conduct the wide array of tests Theranos promised it could.
Deals with Walgreens Boots Alliance Inc. and Safeway Inc. made it appear the so-called "miniLab" device was ready for widespread commercial use.
That analyzer, however, performed only 12 of the 200 blood tests Theranos listed on a menu of available options. For the others, the company used widely available third-party devices.
"From its retail launch in September 2013 to the time it closed its clinical laboratories in 2016, Theranos never used its miniLab for patient testing in its clinical laboratory," the SEC wrote in its complaint against the company and Holmes.
"Theranos conducted — at its height —12 tests using the earlier-generation TSPU, and processed about 50 to 60 tests using the modified third-party analyzers. Theranos processed the remaining 100-plus tests it offered at Pharmacy A using the same types of industry standard technology as other traditional laboratories, or sent tests out to third-party laboratories."
Despite all this, Theranos and Holmes raised money by selling the same story it had told media companies in exchange for breathless coverage, even including clips of positive stories in materials provided to potential investors.
The company, for example, claimed Theranos products were used by the Department of Defense on the battlefield and in medical evacuation helicopters. Theranos' technology, however, was only used in a DOD study and never saw active military use as company executives suggested.
While Theranos and Holmes neither denied nor admitted wrongdoing, the settlement with the SEC dispels the last shreds of the unicorn myth that Holmes carefully built.
Holmes will also forfeit 18.9 million shares in Theranos, although they are not likely to be worth much given the current state of the company.