The DOJ Friday charged the founder of Theranos Inc. and the company’s former chief operating officer with defrauding investors, doctors, and patients with phony claims about supposedly disruptive blood-testing technology.
Elizabeth Holmes, 34, and her boyfriend, Ramesh “Sunny” Balwani, 53, were each charged with two counts of conspiracy to commit wire fraud and nine counts of wire fraud.
The indictment is here (pdf).
If convicted, they each face up to 20 years in prison.
Theranos claimed its so-called Edison technology could test a drop of blood taken from a finger and achieve the same results as labs that use vials of blood taken by the traditional vein-puncture technique. The technology, Theranos said, would disrupt the blood testing industry by being faster, cheaper, and better.
According to the DOJ indictment, Holmes and Balwani “knew Theranos was not capable of consistently producing accurate and reliable results for certain blood tests.”
“The tests performed on Theranos technology, in addition, were likely to contain inaccurate and unreliable results,” the DOJ said.
The criminal charges come nearly three years after the Wall Street Journal’s John Carreyrou first reported that Theranos couldn’t make its technology work.
By then, big-name investors had already backed the company, including Walmart’s Walton family, Atlanta’s Cox family, the DeVoss family, and Rupert Murdoch.
“Each invested more than $100 million in Theranos — investments that are now worthless,” the Journal’s Carreyrou said Friday.
Walgreens set up about 40 Theranos blood testing centers. When the technology didn’t work, Walgreens sued for $140 million in damages. Theranos reportedly paid about $30 million in June 2017 to settle the lawsuit.
At the close of a funding round in April 2015 — six months before Carreyrou’s first Wall Street Journal report — Theranos had a valuation of $9 billion.
That made founder and CEO Elizabeth Holmes the richest self-made woman in America. Her 50 percent share of the company was worth $4.5 billion.
Theranos is now on the brink of liquidation. Its workforce has shrunk from 340 to about two dozen. Private equity firm Fortress Investment Group, which loaned Theranos $65 million last year, is “likely to seize its assets as soon as late July,” the WSJ’s Carreyrou said Friday.
In March, the SEC charged Theranos, Holmes, and Balwani with a “massive fraud.”
Holmes and Theranos settled the civil charges without admitting or denying wrongdoing. Balwani has denied the SEC’s charges.
The SEC alleged among other things that Holmes and Balwani claimed Theranos’ products were “deployed by the U.S. Department of Defense on the battlefield in Afghanistan and on medevac helicopters and that the company would generate more than $100 million in revenue in 2014.”
“In truth, Theranos’ technology was never deployed by the U.S. Department of Defense and generated a little more than $100,000 in revenue from operations in 2014,” the SEC said.
Theranos didn’t appoint a compliance officer until July 2016.
The Wall Street Journal’s Carreyrou said Friday, “Theranos’s rise and fall has become a symbol of the excesses of the current technology boom, and the company exacted a painful financial and personal toll.”
Federal health regulators forced Theranos to void or correct nearly a million blood-test results.
A British biochemist who worked at the company for eight years committed suicide in 2013 after becoming distraught by its “culture of fear and secrecy and its lack of progress with its technology,” his widow told the Wall Street Journal.
A lawyer for Balwani said Friday in a statement, “Mr. Balwani is innocent and looks forward to clearing his name.”
Richard L. Cassin is the publisher and editor of the FCPA Blog.
This set of facts vividly illustrates why it's so important for boards of fast-growing organizations led by powerful and highly visible individuals to have, early on, the "checks and balances" provided by a (directly reporting) compliance officer.
Comments are closed for this article!