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Theranos and its CEO settle 'massive fraud' charges

SEC says case is a lesson in truth-telling for those seeking to disrupt an industry

US SEC Securities Exchange Commission

Theranos, its CEO and former president have been charged with ‘massive fraud’ in a case the US Securities and Exchange Commission said should serve as a warning for Silicon Valley.

The financial regulator said an “elaborate, years-long fraud” saw the US biotech’s technology, business and financial performance either exaggerated or falsely described.

During this time Silicon Valley-based Theranos, which wanted to revolutionise blood testing, raised more than $700 million from investors.

But to do this the SEC says Theranos, CEO Elizabeth Holmes and former president Ramesh ‘Sunny’ Balwani made numerous false and misleading statements in investor presentations, product demonstrations and media articles.

Jina Choi, director of the SEC’s San Francisco Regional Office, said: “The Theranos story is an important lesson for Silicon Valley. Innovators who seek to revolutionise 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.”

Theranos investors were duped into believing that its key product - a portable blood analyser - could conduct comprehensive blood tests from finger drops of blood and thus overhaul the blood testing industry.

Investors were also falsely told by Theranos that the US army used its blood analyser on the battlefield in Afghanistan.

“Investors are entitled to nothing less than complete truth and candour from companies and their executives,” said Steven Peikin, co-director of the SEC’s Enforcement Division. “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.”

Much of this attention stemmed from the founding of the company by a 19-year-old Holmes in 2003 and Theranos’ overinflated revenue predictions of bringing in $100m in 2014 (when it actually generated just over $100,000).

Agreeing to resolve the charges against her, Holmes has been Holmes has been stripped of control of the company and fined $500,000. A separate case will proceed again Balwani.

Holmes will, however, avoid jail time, unlike former Turing CEO Martin Shkreli, who was arrested in 2015 by the FBI on securities fraud charges and last week sentenced to seven years in prison.

Both cases came after the SEC called for greater disclosure from pharma, sounding a warning that companies were leaving themselves open to enforcement action.

Article by
Dominic Tyer

15th March 2018

From: Regulatory

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