SEC accuses Theranos of 'elaborate' fraud

Founder Elizabeth Holmes to step down, return shares, pay $500K fine

A Silicon Valley blood-testing company and its chief executive were accused by the U.S. Securities and Exchange Commission on Wednesday of "elaborate, years-long fraud" that deceived investors into providing more $700 million.

The SEC simultaneously filed a civil lawsuit against Theranos Inc. and founder Elizabeth Holmes in federal court in San Francisco and announced a settlement in which Holmes will step down from authority there and pay millions of dollars in fines and stock to be returned to the company.

Holmes, 34, of Los Altos Hills, founded Palo Alto-based Theranos in 2003 after dropping out of Stanford University and has been its chief executive officer. Under the settlement, she will pay a fine of $500,000, return 18.9 million shares to the company, relinquish her voting control of the company and be barred from serving as an officer of a publicly traded company for 10 years.

The company promised a pioneering blood testing technology in which a portable blood analyzer could conduct comprehensive blood tests from drops of finger blood. The now-settled lawsuit alleges that the company's testing menu listed 200 tests that could supposedly be carried out, but that the company could perform only 12 of those tests in its clinical laboratory and in some cases used equipment developed by other companies.

The lawsuit said that Theranos, Holmes and another officer made "false and misleading statements" to investors and the media "with the intent to deceive or with reckless disregard for the truth."

Among other claims, the lawsuit said Holmes misled investors by claiming Theranos technology was used by the U.S. Department of Defense in Afghanistan and in medical evacuation helicopters. In fact, the device was used by the department only in a small burn study, according to the suit.

The SEC also sued former Theranos president Ramesh "Sunny" Balwani. That lawsuit was not settled and remains pending.

Theranos previously faced and settled lawsuits by Walgreens and the state of Arizona, was sanctioned by the Centers for Medicare and Medicaid Services, and scaled back its work and its workforce.

The lawsuit says Theranos was near bankruptcy at the end of last year, but received a loan that will allow it to continue work on its mini-laboratory for one year.

SEC regional director Jina Choi said in a statement, "The 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," Choi said.

Theranos's board of directors issued a statement saying, "The company is pleased to be bringing this matter to a close and looks forward to advancing its technology."

The statement said the company cooperated with the SEC investigation and noted that Holmes and Theranos did not admit to any wrongdoing in the settlement.

— Bay City News Service

What is community worth to you?
Support local journalism.


12 people like this
Posted by Spaetzle
a resident of Another Palo Alto neighborhood
on Mar 14, 2018 at 3:42 pm

The penalty seems too low for the huge damage she’s caused.

Remembering Chief Scientist Ian Gibbons.

Web Link

13 people like this
Posted by Old Timer
a resident of Professorville
on Mar 14, 2018 at 3:58 pm

I’m amazed that it took so long. It was so obviously a scam from the beginning. Nobody I know ever thought that was a real technology.

13 people like this
Posted by resident
a resident of College Terrace
on Mar 14, 2018 at 4:31 pm

This company was a hoax all along. Why does it still exist?

6 people like this
Posted by BP
a resident of Barron Park
on Mar 14, 2018 at 6:56 pm

I hope criminal charges are coming from the Justice Department for Elizabeth Holmes and Sunny Balwani.

Remember, her company's fraudulent testing results put thousands of patients at risk for mis-treatment by their doctors.

This plea deal with the SEC is too light a penalty.

15 people like this
Posted by Curmudgeon
a resident of Downtown North
on Mar 14, 2018 at 7:19 pm

"Theranos's board of directors issued a statement saying, "The company is pleased to be bringing this matter to a close and looks forward to advancing its technology."

The scam abides?

25 people like this
Posted by Ahem
a resident of Another Palo Alto neighborhood
on Mar 14, 2018 at 8:58 pm

"Holmes — a Steve Jobs wannabe who dressed exclusively in black turtlenecks as she talked up her blood-testing unicorn, which at one point boasted a valuation north of $9 billion — settled with the regulators for $500,000 while neither admitting nor denying the accusations"

Sounds like a big win for Holmes to me.

9 people like this
Posted by Mark Michael
a resident of Community Center
on Mar 15, 2018 at 9:20 am

A corporation's board of directors has ultimate responsibility to protect the interest of shareholders. Often the most important duty of the board relates to hiring and firing the CEO. The ethics of a company are set by the tone at the top. How did the Theranos board discharge their duties? What was the composition of this board? What mix of experience and wisdom did they bring? This group was largely made up of former Republican government and military officials from the highest level. Cabinet members. 4-star generals. Senate majority leader. Massive fraud! The board has duties of care, loyalty and candor. Strike 3?

10 people like this
Posted by Tim
a resident of Crescent Park
on Mar 15, 2018 at 9:42 am

Regarding the front page story about the Theranos/Elizabeth Holmes SEC settlement (March 15, 2018). To come right to the point, Holmes should be in prison. One need not go far back in white collar crime history to draw a comparison, since Martin Shkreli was sentenced just a few days ago. For his fraud, in which $0 of investor capital was lost, Shkreli was sentenced to 7 years in prison and levied a $7.5 million fine. In the case of Elizabeth Holmes, the investor value lost from peak to trough was $8 billion, and the consequence is a minuscule fine (covered, I suspect, by insurance) and a meaningless ban from serving as director/officer of a public company (as if any firm would even want to hire her, given her global infamy). Something stinks to high heaven about this deal, and I can only hope whatever judge is asked to approve this pushes back and demands to know why she's getting off so lightly. Being a young blue-eyed blonde might not "look" the part of a business criminal, but that shouldn't be an excuse to walk away from one of the largest frauds in business history with nary a scratch.

10 people like this
Posted by Mom of 2
a resident of Green Acres
on Mar 15, 2018 at 9:46 am

How can you people be so mean. Elizabeth is a sweet person who was only trying to help people. She god bad advice and was caught up in something way over her head. She should be forgiven and deserves our compassion.

20 people like this
Posted by Tim
a resident of Crescent Park
on Mar 15, 2018 at 10:40 am

[Post removed.]

2 people like this
Posted by JM
a resident of Charleston Gardens
on Mar 15, 2018 at 10:56 am

It's pointless to blame Elizabeth Holmes too harsh. To put it in perspective, what she did is all too common in the world of venture capital funded innovators. There are so many failed expectations, unfulfilled promises, and lost "fortunes", but that's part of the business and everyone in the circle accepted it. Elizabeth Holmes' failure is singled out because she is trying to do something in a highly regulated field, and she was too successful to practice the Silicon Valley lure. I think what Jina Choi said is a pretty good conclusion: " Theranos story is an important lesson for Silicon Valley". No more, no less.

5 people like this
Posted by carefulbalancedconsideration
a resident of Charleston Meadows
on Mar 15, 2018 at 2:26 pm

[Post removed.]

7 people like this
Posted by maguro_01
a resident of Mountain View
on Mar 15, 2018 at 4:08 pm

There would seem to be more to this story. That is, how did this all come together in the first place? Holmes was 19, if memory serves, when it started.

Who put together the initial investors and the illustrious initial Board? The BOD did nothing, apparently, and should be fined themselves. Of course the connections they had to draw the appointments keep them out of trouble now. They must be untouchable, especially in current Washington.

Who hired the people supposedly knowledgeable about FDA regulations? We read that the little vials used to collect the initial blood samples were not FDA approved medical devices. That's game over right there or over for a time at least. Was the project properly organized at all? By whom? Were there prototypes or proof of concept devices constructed? Even a commercial project for less regulated environments would be unlikely to miss something of that importance.

We see that Holmes made the problems her own with rather misplaced perseverance, possibly admirable in other contexts. It sounds like she effectively grew up at Theranos which may compromise her own employability forwards. How much did she know and when? What was her workaday functions there? Has anyone looked up her name at the patent office? Maybe she should return to Stanford and finish.

Money these days apparently washes through the corridors of Stanford like sea water through New Orleans in Katrina. Stanford can't control what students choose to do, but might do a better job in educating the students early to be more realistic and cynical and to offer to vet propositions if asked.

2 people like this
Posted by maguro_01
a resident of Mountain View
on Mar 15, 2018 at 10:05 pm

The Wikipedia article on Elizabeth Holmes answers some of the questions above. It also provides information about her early entrepreneurial activity and somewhat cosmopolitan background. Theranos' Website claims she has her name on 200 patents, a rather large number. But it doesn't explain the failure of the industrial project, the serious accounting fraud, etc. No one would think she had the experience base to manage one. Nor does it explain the relatively modest penalty if she is culpable or that she is still the CEO of Theranos (apparently) with a much more relevant BOD. So questions remain; VC's have no small control over their companies and will replace their officers and so on. So ????

2 people like this
Posted by margaret heath
a resident of Evergreen Park
on Mar 16, 2018 at 4:26 pm

margaret heath is a registered user.

[Post removed due to unverified information.]

Sorry, but further commenting on this topic has been closed.

Stay informed

Get daily headlines sent straight to your inbox.

After 39 years of cakes and pastries, Palo Alto institution Prolific Oven to close
By Elena Kadvany | 55 comments | 16,787 views

Local Transit to the Rescue?
By Sherry Listgarten | 7 comments | 1,358 views

The Regional Housing Needs Allocation (RHNA) Process Explained
By Steve Levy | 5 comments | 1,281 views

Do something about assault weapons, now!
By Diana Diamond | 37 comments | 1,097 views

"You Gotta Have Balls [to do counseling] . . .
By Chandrama Anderson | 0 comments | 947 views


Register now!

​On Friday, October 11, join us at the Palo Alto Baylands for a 5K walk, 5K run, 10K run or half marathon! All proceeds benefit local nonprofits serving children and families.

More Info