Chennai: The US Securities and Exchange Commission (SEC) has charged Theranos, the once-purportedly ‘revolutionary’ diagnostics company, – at its peak valued at $9 billion – and its CEO Elizabeth Holmes and former president Ramesh Balwani for “massive” fraud.
Holmes and Balwani were charged for defrauding investors to the order of $700 million by providing false information about their products, contracts and revenue.
On March 14, Holmes agreed to pay a penalty of $500,000; to relinquish her control of the company; to accept a ban on serving on the board of any public company for the next 10 years and to return 18.9 million Theranos shares that she had amassed during the fraud. Further, in a move to ensure that shareholders are repaid in case Theranos is sold or liquidated, she was also forced to convert her shares to a lower category.
Holmes and Theranos reached this agreement without accepting or contesting the charges levelled against them. The SEC filed a litigation against Balwani and intends to pursue its claims in court.
As a result, Forbes magazine, which once valued Holmes at $4.5 billion, making her the youngest self-made female billionaire, downgraded her net worth to $0 – nothing.
Tall promise, sharp fall
The story of Theranos began when a 19-year-old Holmes designed a drug-delivery patch that could adjust dosages based on the patient’s blood group, while she was an undergraduate at Stanford University. She dropped out shortly after filing a patent for the patch.
Though the idea never took off, it paved the way for Theranos to emerge, with the claim that it would revolutionise diagnosis through blood tests. Theranos’s product, Edison, named after the famous inventor, is at the centre of all the controversy. Theranos claimed that this machine would be the one-stop shop for all blood tests, from sugar levels to cancer. Moreover, they declared that all this could be managed with a couple of drops of blood.
An investigation by the Wall Street Journal, led by two-time Pulitzer-Prize-winner John Carreyrou, revealed in 2015 that a lot of Theranos’s claims were bogus. Employees at the company told him that the company was using Edison to be able to run only 15 tests regularly. According to Carreyrou, “some employees were leery about the machine’s accuracy”. One alleged that Theranos was refusing to share test results for fear they could reveal the machine’s imprecisions.
Employees also divulged that Theranos was using regular diagnostic equipment like Siemens AG to run most of its tests while claiming to use the “revolutionary” Edison.
This report brought Theranos under scrutiny. Other whistleblowers emerged, like George Schultz, one of the first members of the company’s board, alleging that Balwani had forced employees to run important tests, such as vitamin D and for prostrate cancer, on Edison despite knowing that the machine was not up to standards.
Actions have consequences
Soon after, the Centres for Medicare and Medicaid Services (CMS) issued sanctions against the company. They also rescinded an authorisation certification awarded to Theranos to run diagnostic tests, and banned the owners from opening and operating laboratories for two years. Subsequently, the CMS withdrew the revocation of the certificate and ordered a civil penalty of $30,000, but Theranos could still not operate labs.
The SEC, known to target public companies, went after Theranos and Holmes, charging them for financial crimes. According to their report, Theranos had raised nearly $700 million from investors and venture capitalists under the false pretence of having developed a “a commercially-ready portable blood analyser”.
The regulator charged Theranos with overstating the machine’s abilities, misrepresentation, and lying about revenue and its sources, among other offences.
Steven Peiken, director of the SEC’s Enforcement Division, said in a release, “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.”
Some venture capitalists in Silicon Valley admitted that the ‘tech-world hype cycle’ and the VC business model was partially to blame for crimes like this. One investor said, “I find many investors encourage massive growth in the marketing side of a business outside of the product side, and what happens is products are being marketed as complete that don’t exist.”
But another investor disagreed, “It’s on her, it’s on the company, it’s on the investors, and the board members who didn’t ask any of the right questions. Or any questions at all.”