Startups

SEC Charges Theranos Execs With Elaborate, Years-Long Fraud

The Securities and Exchange Commission (SEC) has filed charges against the Silicon Valley medical diagnostics company Theranos, its founder and CEO Elizabeth Holmes, and its former President Ramesh “Sunny” Balwani. The charges allege the two executives of “an elaborate, years-long fraud in which they exaggerated or made false statements about the company’s technology, business, and financial performance,” according to a press release issued by the regulatory agency today.

To settle the fraud charges, Holmes has agreed to pay a $500,000 penalty, be forbidden from serving as an officer or director of a public company until 2028, surrender voting control in the company by converting her “super-majority” Class B Common shares to Class A Common shares, and return the remaining 18.9 million shares she obtained while perpetuating the fraud.

According to the statement, because of the company’s liquidation preference, Holmes would not personally profit from the sale or liquidation of the company unless over $750 million is returned to defrauded investors and other preferred shareholders.

According to Crunchbase data, Theranos has raised over $686 million in venture and private equity financing, plus another $100 million in debt, the latter of which was raised from SoftBank-owned Fortress Investment Group. Theranos shareholders cashed out $582.2 million in a secondary market transaction in May 2017, but it’s unclear whether Holmes or other executives financially benefited from the sale.

Theranos was valued at $8.8 billion in 2014.

Theranos’s board has included a number of high-profile political figures, including former Secretaries of State Henry Kissinger and George Shultz, former U.S. Senate Majority Leader Bill Frist, and current Secretary of Defense James “Mad Dog” Mattis, among others. Silicon Valley venture capitalist Tim Draper, a close family friend of Holmes, wrote the first check for $500,000 to the company in 2004. As recently as January 2017, Draper characterized investigations into the current state of Theranos’s technology and business claims “a witch hunt.”

Jina Choi, Director of the SEC’s regional office in San Francisco, said in a statement that “[t]he Theranos story is an important lesson for Silicon Valley. 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.”

Holmes neither confirms nor denies the allegations in the SEC complaint.

Illustration: Li-Anne Dias