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Charged With Fraud, Theranos CEO Elizabeth Holmes Cuts Deal with Feds

Xconomy San Francisco — 

Charged with what the U.S. Securities and Exchange Commission called “massive fraud,” Theranos CEO Elizabeth Holmes has cut a deal with the agency.

The SEC charged Holmes and the firm’s former president Ramesh “Sunny” Balwani with “an elaborate, years-long fraud,” in which they raised $700 million dollars from investors and enjoyed a multibillion-dollar valuation by misrepresenting the privately held firm’s diagnostic technology. It was supposed to work with just a finger prick and a few drops of blood and cost less than standard blood tests.

As the firm spread its product—walk-up centers were stationed at dozens of pharmacy chain stores—and lobbied to change state laws to allow easier consumer access to its tests, it was revealed that Theranos’s technology was not behind the rollout. It was in fact relying on standard blood-draw technology and analysis, and potentially producing unreliable results. The Wall Street Journal broke the story in 2015.

The firm also inflated revenue totals and lied about the U.S. Defense Department’s use of the technology, the SEC charged. Current Secretary of Defense James Mattis was one of many high-ranking military and government officials tied to Theranos, and he pushed hard for the blood tests while a four-star general. After he retired, Mattis was on the board of directors until he joined the Trump administration.

The SEC said that Theranos and Holmes have agreed to resolve the charges without admitting or denying them. Theranos released a statement attributed to its independent directors: “The company is pleased to be bringing this matter to a close and looks forward to advancing its technology.”

The SEC said it would take its case against Balwani to court in northern California.

Theranos continues to tout its “miniLab” technology, which Holmes rolled out in 2016. At that time, the scandal of its finger-prick technology was in full roar, and the firm was shutting down its consumer testing service.

The deal with the SEC includes a $500,000 fine for Holmes. She is barred from serving as an officer or director of a public company for 10 years. She also has agreed to reduce her equity stake in the firm and ceded her voting control over the company, according to the SEC. It is at least the second time she has agreed to reduce her Theranos holdings. There is no indication that she is stepping down from her executive role.

Because of this, Holmes could only make money from a potential sale or liquidation of Theranos after more than $750 million is returned to other shareholders, according to the SEC.

A court must approve the settlement terms, the SEC said.

In the SEC’s statement, a top agency officer also managed a dig at media attention that allowed Theranos to thrive for so long. “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,” said Steven Peikin, co-director of the SEC’s enforcement division.

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