“It’s an important lesson for Silicon Valley,” said SEC’s Jina Choi. “Innovators who seek to revolutionize and disrupt an industry must tell investors the truth….”
By Jan Bauer, Safehaven.com:
The SEC has laid fraud charges against the CEO of a company that once had a $9-billion valuation and was a darling of Silicon Valley thanks to its portable blood analyzer which claimed to be so revolutionary it was used by the Department of Defense on the battlefields of Afghanistan.
Except that it wasn’t, and now the U.S. Securities and Exchange Commission is striking back with massive fraud charges.
On Wednesday, Elizabeth Holmes, the founder and CEO of Theranos was charged for running an “elaborate, years-long fraud” by the SEC, which accused her and partner Ramesh “Sunny” Balwani, of having “allegedly deceived investors into believing that its key product—a portable blood analyzer—could conduct comprehensive blood tests from finger drops of blood.”
The DoD, it turns out, never used Theranos products or its purportedly proprietary technology, though it was at one point touted by U.S. Central Command head General Jim Mattis, who later joined the Theranos board before becoming U.S. Secretary of Defense.
According to the SEC, “Holmes, and Balwani claimed that 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.”
“It’s an important lesson for Silicon Valley,” SEC San Francisco direction Jina Choi said in a separate 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.”
According to the SEC, Holmes raised more than $750 million between late 2013 and 2015 on fraudulent claims. But in reality, the SEC alleged, “Theranos was able to process just a small number of blood tests upon its proprietary analyzer, and instead conducted the vast majority of its patients’ tests on modified commercial analyzers that were manufactured by others.”
The SEC charges come two years after an investigation prompted by the Wall Street Journal.
So what happens now, other than a lesson for Silicon Valley that not even a handful of big names with military might can keep the regulators off your back?
Holmes will pay a $500,000 penalty and give back the 18.9 million shares in Theranos that she managed to collect along the way. She is also set to be banned from serving as an officer or director of a public company for 10 years. It’s a major fall from grace for a high-school drop-out who became a fast start of Silicon Valley before falling from grace just as quickly.
Holmes, 34, won’t be the only target, either. The SEC said it would also pursue Balwani, noting that this was a “two-person operation, where Holmes and Balwani exclusively controlled Theranos. They were responsible for all of the misconduct alleged in this compliant.” Neither Theranos nor Holmes has admitted or denied the SEC allegations against them. By Jan Bauer, Safehaven.com
Why is Sears’ CEO still touting “progress” and “improvement” even in SEC filings? Why not tell investors the truth, for once? Read… Sears is Dead Meat Walking, after Horrid Holiday Quarter
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Here’s the only lesson brought to you by QTR Research:
Martin Shkreli = 7 years, $7.5M fine
Investor capital lost = ~$0
Elizabeth Holmes = $500k fine, D&O bar
Company value lost = ~$8 billion
We don’t need Women’s Day.
$9 billion was only the theoretical “valuation,” a big part of which the founders still owned at the time. The actual investment by aggrieved investors was $750 million, which puts the fine in perspective.
And Holmes is not through yet getting hounded and could still serve time in prison…
Wolf, I see your point, but 750 million is still an infinitely bigger sum than zero. AND, that inflated valuation could have caused more investors to put in even more money, creating a network effect.
I am sure I am preaching to the choir here, but there should not have been any discussion of could/may/etc. This is fraud, plain and simple. And so far, she hasn’t admitted to anything.
1. This company was never even worth what the private investors had put in because it was burning up their capital in operating expenses. Holmes was running the company on other people’s money and the 9 billion valuation was always hype and nonsense but Americans just love corporate hype especially the dumb media cheer leaders and public that endlessly lap it up. Except for the guy (John Carreyrou) at the WSJ of course who blew the lid off all the hype with his expose article on 16 Oct 2015 that started the ball rolling.
2. These were not dumb ass investors that put 100s of millions into Theranos and it’s then young college drop out with an idea. They were professional/venture capital investors who should have done their homework with thorough due diligence including talking to real experts who worked in the industry.
No doubt they hoped for a quick public IPO float on all the PR hype to dumb investors so they could both recover their investment and earn probably 10 times their investment in profit from the float and then get out. So don’t feel too sorry for the few pro investors that have done their money because most of the venture capitalists would not put cash into this company.
3. Theranos was reportedly close to bankruptcy at the end of 2017 but was saved for a little longer with a 100 million conditional loan from Fortress Investment. This just goes to show the insanity of investors in these start ups. The company was under investigation at this point, the authorities had banned Theranos in 2016 from running labs for 2 years, Theranos then laid off 340 employees, Walgreens had pulled the plug on the Theranos parnership, had closed the Theranos centers in Arizona and sued Theranos. The Theranos sham was well exposed at this point. Why any sane person would make a conditional 100 mil loan to a company like this is beyond me. If you had 100 mil is this how you would invest it in DEC 2017 knowing what was going on at that time?
-Cameron5 – But but butbutbut … it had “dot com” in the name!
“It’s a major fall from grace for a high-school drop-out…” not to quibble but Wikipedia and other news sources say that she is a “Stanford University dropout” at the age of 19.
Playing with people’s lives for money…give her life in prison…
As a physician, this is beyond belief…
How is it possible we have deviated so much from basic social and human principles on a massive scale?
I agree with the good doctor They need jail time not a financial slap on the wrist
We’ve infected economic acting with unlimited greed.
Greed = Good.
And we waisted most moral antidote.
Well at least, that’s how I look at it now..
I’ve has problems with blood tests numerous times, pretty sure none of them are properly calibrated and cannot be trusted.
Aside from Theranos, wonder how many others have incorrectly been told they have a disease they don’t really have?
Sloppy bloodwork everywhere you go, it seems.
If these people could make a 1 cent per ton profit by kidnapping people, grinding them up, and selling them as cat food, they would do it without a second thought – if someone convinced them they wouldn’t face prosecution.
Don’t even need to do that. Just sell opioids hand over fist. It’s perfectly legal (if you’re a doctor) to sell enough pills in your little town to keep your whole county addicted.
How does any of this get past the Hippocratic Oath?
Bet the crypto ICO’s have one more thing on their mind too now.
Fraud is the primary product being produced in Silicon Valley.
Theranos is QUANTUM of SOLACE / SPECTRE / “The Syndicate” In plain sight.
A few notes – Holmes dropped out of college, not high school, Balwani hasn’t settled yet and is slated to go to trial, and this is just the SEC investigation. They already got hammered by the FDA and Medicare. Wait for the civil suits from deep-pocketed investors and liability/malpractice lawsuits from Walgreens customers who did or didn’t receive the right amount of anti-clotting agent because Theranos couldn’t even use other companies’ machines properly.
It was pretty obvious that Theranos was BS. A medical tech company doesn’t stock their board with political heavyweights: Secretaries Kissinger, Schultz, and Perry, Senators Nunn and Frist, Flag Officers Mattis and Roughead (http://fortune.com/2015/10/15/theranos-board-leadership/)
Though this is exemplary of a big problem with Silicon Valley VCs trying to get software-like times to market from companies making actual physical equipment. you can’t solve some problems without physical experiments by throwing a bunch more coders at the problem, and some you can’t solve at all. Plus, with medical devices, you can’t ship a product that doesn’t work as claimed and fix it with a series of software update and patches.
Fraud and over promising is nothing new. This kind of behavior is just backed into to business because we have never, to my limited knowledge, been able to filter out every unscrupulous business person from the system. The best you can do is deal with them on a case by case basis. Or elect them President….
The people involved with running Theranos likely deserve what they get. But investors probably share some of the blame for not thoroughly investigating claims and promises made by a company trying to sell something… Some of these claims sound on the surface like things that would be impossible to lie about. Like having open contracts with the US armed forces. But I suppose it depends on how much detail was used to fabricate their projected revenue claims.
Can someone explain how it is that Holmes causes 9 billion to disappear and gets a 500k fine, while Shkreli maybe (but probably not really) blows less than 10 million of investor money, and gets 7 years prison? Is Holmes still subject to criminal prosecution?
She is better looking than Schkreli.
She should be subject to criminal prosecution and imprisoned for at least ten years for what she has done. A $500,000.00 fine is just the price of doing business. Absolutely disgusting.
This is what having no rule of law looks like. This is Africa.
The SEC case settlement that was announced was a civil case. According to the WSJ, a criminal probe by the SEC is still underway.
Search for Tharenos’ board of director list, zerohedge. A bunch of 80,90 year old former washington officials are board directors. Secretary of state, military.
You can be smart or dumb in the securities or how to do the fraud, but the bigger game is about Washington, ALWAYS Washington.
Shkreli was publicly a &%$# and thumbed his nose at the powers that be (publicly) and made Hillary upset.
What was the title of that book – “four felonies a day?” As in, Federal criminal laws are so vague/overbroad that everyone is guilty of something at all times.
So don’t upset the kind of people that he upset. And don’t make yourself an absurdly unsympathetic potential defendant.
Gee a politician who actually gets upset when evil things are done? Isn’t that the kind we need? Our present leader probably thinks Shkreli’s antics are merely hilarious.
I hope you all appreciate that Ms. Holmes wasn’t acting alone. Oh, no!! Do please remember that Theranos’ Board of Directors was peopled with such celebrities, luminaries and noted humanitarians as Henry Kissinger (war criminal), George Schultz (Reagan’s SOS and former Dean of the University of Chicago’s Graduate School of Business) and four-star General Jim Mattis (current US Defense Secretary under the estimable President Donald J. Trump). All of whom were willing to lend their names, reputations and “gravitas” to the pimping out of this company to sucker the dupes in the general public. No due diligence as sitting Board members necessary or required; just send our checks to the right address, care of the Cayman Islands. I’ve seen more integrity in a whorehouse. (The pay isn’t as good, though.)
I hope they all get their asses sued off for directors’ negligence.
Demonic Possession? A Coven of Ghouls??
Look at the Elisabeth Holmes TED-Talk for a few minutes. Since I am an engineer and I can remote-diagnose people: Clearly something is not right with that fixed stare!
One of things I check before investing log-term in a company is the board – Geriatrics and Former Politicians are a big warning;
The first category are likely to be medically incompetent, the second consist of career liers and frauds. And with Theranos they managed to combine both parts of the “package” into one assembly!
Its the adrenochrome – it makes their eyes bug out. Same with Schiff, Schaff (Bezerkley), and the rest of the ghouls. As a poster said above, he wouldnt be surprised if they kidnapped people and ground them up for cat food if they could make a penny.
What makes anyone think they dont do that as well? Most dont want to know the truth.
The punishment given out is very very lenient..
Speaking of lenient has anyone heard anything about Jon Corzine lately?
The real mystery is how a high school dropout gets admitted to Stanford?
“Theranos’ founder and CEO, dropped out of Stanford University to launch the company in 2003”
The rest we know and are too familiar with involves complete dishonesty especially amongst US government swamp creatures.
But she can’t possibly be a fraud. She wore black turtleneck and jeans just like Steve Jobs did. End of sarcasm.
I wonder if they will go after any of the other frauds in the valley. Like the guys who were doing the super mayo.
Scammers are gonna scam, but it doesn’t reflect well on all the overstatused and unperforming bigwigs sitting on the board, or the credulous media organizations like Forbes that were happy to feature Holmes apparently with no verification of claims. The mechanisms that are supposed to detect and stop this type of fraud failed miserably, because too many were along for the ride for a quick buck and asked no questions.
This is a good argument against the post-1980 focus on share value. A company that was focused on profit wouldn’t have any REASON to pretend that it was developing new machines. Lots of medical service firms make good profits by testing blood on machines made by others. If they made false claims, their customers (doctors and hospitals) would quickly go elsewhere.
The focus on jacking up share prices with the promise of huge future returns is the specific driver for this fraud.
Nobody ever got to examine how Theranos’s blood testing actually worked. Simple as that. Not even the FDA, which gave early approvals in 2015 based on fraudulent data, without ever closely examining her methods.
This idea of drawing tiny samples of blood for testing from a fingerstick is hardly new, and has been kicking around for a long time, decades even. And years of work in this area by others more expert than Holmes had shown that what you are drawing is capillary blood, and your tests on capillary blood for some things will be fairly similar to the rest of your blood, enough to be considered accurate. Blood glucose monitor test strips for diabetics is the classic example – the blood samples needed have gotten smaller and smaller over time. Heelstick capillary blood has been used for some tests in tiny premature infants for many years also. But for other tests, the results will NEVER ever come close simply because the capillary environment for blood is not the same as it is for blood acquired from a nice big vein.
This whole idea of doing a whole panel of bloodwork from a tiny fingerstick was thus the biological equivalent of a perpetual motion machine. Not compatible with physical reality.
Not surprisingly, Holmes refused to divulge the “secret” of her process for doing these tests, the same as what perpetual motion machine frauds do in refusing to open up their magical black boxes (which would of course reveal a battery or other power source).
Ex-Theranos employees had started to out the truth in 2015. It just took a while for the business community to catch on.
Holmes needs to go to jail.
Honesty when you put ads saying the government or the military uses your product, only it doesn’t, you are looking for trouble.
And it was quite stupid, is not like they couldn’t have made a deal so the government or the military used it. Like “first thousands units are free because thry are a donation”.
In the year 2000 I had invested in a company that wrote in their 10-k that Wells Fargo owned around 25% of the company.
After the stock collapsed I discovered Wells Fargo owned 0%. I wrote the SEC about this.
They wrote back ….awww too bad for you… we don’t have the staff to…