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SEC Charges Theranos' Holmes and Balwani With "Massive Fraud"

Theranos, once the biotech darling of Silicon Valley, has fallen far. These are the first charges brought by U.S. government regulators against the company.

The Securities and Exchange Commission has charged Theranos executives Elizabeth Holmes and Ramesh “Sunny” Balwani with “massive fraud,” stripping them of control of the biotech company. 

Holmes, the CEO, and Balwani, the president, raised more than $700 million from investors “through an elaborate, years-long fraud in which they exaggerated or made false statements about the company’s technology, business, and financial performance,” according to the SEC. 

Theranos, once the biotech darling of Silicon Valley, fell far after the Wall Street Journal uncovered that the company had doctored research and ignored quality control testing of its purportedly revolutionary blood testing device. These SEC charges, filed March 14, are the first brought by U.S. government regulators against Theranos. 

“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 decision, in an announcement. 

The SEC complaints allege that Balwani, Holmes, and Theranos created investor presentations and product demonstrations that “deceived investors into believing that its key product – a portable blood analyzer – could conduct comprehensive blood tests from finger drops of blood.” They also allegedly provided statements to the media that this was the case. 

According to the SEC complaint, the blood testing product could “complete only a small number of tests.” 

Additionally, the SEC is charging the three with allegedly claiming that Theranos products had been deployed by the U.S. Department of Defense for use on the battlefield in Afghanistan. They claimed that this move would generate Theranos $100 million in 2014, the SEC alleged. 

In truth, according to the SEC, the Department of Defense never deployed Theranos technology. As such, according to the SEC, Theranos only generated $100,000 in revenue in 2014. 

Major investors included hedge fund Partner Fund Management, which in 2016 sued Theranos for misleading investors. Partner Fund had invested roughly $100 million in the biotech company, Institutional Investor’s Alpha reported at the time. The two settled the suit in April 2017, according to Alpha.

Holmes and Theranos have agreed to resolve charges levied against them. Holmes will give up majority voting control over the company in addition to reducing her equity stake in Theranos. She is also barred from serving as an officer or director at a public company for ten years. She will also pay a $500,000 penalty. 

As Balwani has not entered into a plea deal, the SEC will litigate its claims against him in federal district court in the Northern District of California, according to the announcement. 

“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.”

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