Federal agency calls disgraced firm, which allegedly deceived investors of $700m, ‘an important lesson for Silicon Valley’.
The Silicon Valley startup Theranos and its chief executive Elizabeth Holmes were charged by the Securities and Exchange Commission (SEC) on Wednesday with “massive fraud” for raising $700m from investors by allegedly deceiving them about their supposedly groundbreaking blood-testing technology.
Theranos and Holmes agreed to settle the charges without admitting or denying wrongdoing. Holmes, a Stanford dropout who was once hailed as the next Steve Jobs, will pay a $500,000 penalty, return millions of shares to the company, and relinquish her company voting power under the terms of the settlement. She will also be barred for 10 years from serving as an officer or director of a public company.
“The Theranos story is an important lesson for Silicon Valley,” Jina Choi, the director of the SEC’s San Francisco office, said 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.”
The settlement bookends an ignominious tale of Silicon Valley excess.
Holmes founded Theranos in 2003 with the goal of revolutionizing blood testing. The company received glowing press coverage and raised more than $700m from investors based on its promise that it had invented a machine that could conduct hundreds of laboratory tests with a single finger prick of blood.
But in 2015, a series of Wall Street Journal articles revealed the company’s technology to be more of a parlor trick than a medical miracle. Most of the tests Theranos claimed to perform on its Edison machines were actually being performed by traditional blood-testing machines bought from other companies, the Journal revealed. 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.
Theranos initially defended its technology, but subsequently agreed to shut down its labs and testing centers. In 2016, Holmes was barred from running a lab for two years by regulators. Theranos has settled lawsuits with an investor and Walgreens.
“The company is pleased to be bringing this matter to a close and looks forward to advancing its technology,” Theranos’s independent directors said in a statement.
The SEC complaint provides an inside look at how Holmes and Theranos enticed investors. The company would stage a blood test for potential investors, with phlebotomists actually taking a finger prick of their blood, despite the fact that the company’s machines were not being used to perform the tests.
The complaint also details how Holmes fooled the media into overstating the capabilities of the technology, then used that coverage to raise funds.
Holmes allegedly falsely told investors that Theranos’ machines were being used by the US defense department on the battlefield in Afghanistan and that the company would bring in $100m in revenue in 2014.
Theranos’ actual 2014 revenues were approximately $100,000. The SEC also charged the company’s former president Ramesh Balwani, who left Theranos in 2016. He has not agreed to a settlement, so the charges against him will be litigated in federal court.