SEC settlement strips CEO Elizabeth Holmes of her control of blood-testing startup Theranos

Photo: Max Morse for TechCrunch

Silicon Valley-based Theranos Inc., its founder and CEO Elizabeth Holmes, and its former President Ramesh “Sunny” Balwani are being charged with raising more than $700 million from investors through an elaborate, years-long fraud in which they made false statements about the company’s technology, business, and financial performance.

Theranos and Holmes have agreed to resolve the charges against them, the Securities and Exchange Commission said Wednesday. In addition to a $500,000 penalty, Holmes has agreed to give up majority voting control over the company, as well as to a reduction of her shares which, combined with shares she previously returned, reduces her stake in the company.

The lawsuits allege that Theranos, Holmes, and Balwani made false and misleading statements in investor presentations, product demonstrations, and media articles in which they deceived investors into believing that its key product – a portable blood analyzer – could conduct comprehensive blood tests from finger drops of blood, revolutionizing the blood testing industry.

Actually, Theranos’ analyzer could complete only a small number of tests, and the company conducted most of patient tests on modified and industry-standard commercial analyzers manufactured by others, according to the SEC’s lawsuits.

The lawsuits also charge that Theranos, Holmes, and Balwani claimed that Theranos’ products were used 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. However, Theranos’ technology was never used by the department and generated only about $100,000 in revenue in 2014.

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

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

Stephanie Avakian, co-director of the SEC’s Enforcement Division, said the package of remedies shows the agency’s efforts to impose tailored sanctions on Holmes and Balwani rather than impose a corporate penalty that would have been harmful to shareholders who already been victims of fraud.

Theranos and Holmes have agreed to settle the fraud charges against them. Holmes agreed to pay a $500,000 penalty, be barred from serving as an officer or director of a public company for 10 years, return the remaining 18.9 million shares that she obtained during the fraud, and relinquish her voting control of Theranos by converting her super-majority Theranos Class B Common shares to Class A Common shares.

Due to the company’s liquidation process, if Theranos is acquired or liquidated, Holmes wouldn’t profit from her ownership until more than $750 million is returned to defrauded investors.

The settlements with Theranos and Holmes require court approval. Theranos and Holmes haven’t admitted or denied the allegations in the SEC’s lawsuits.

Balwani still faces SEC charges in a California federal court.