Theranos’ Appeal Not Enough to Cover Up Massive Alleged Fraud

GUEST BLOGGER

Mason Wilder, CFE
ACFE Research Specialist

The Securities and Exchange Commission (SEC) charged Theranos, a Silicon Valley company founded on supposedly revolutionary, portable blood testing technology, its founder and CEO Elizabeth Holmes, and its former President Ramesh Balwani with fraud this week related to false statements and representations made while raising more than $700 million from investors.

Holmes shot into the public spotlight around 2014 with an intriguing backstory as a Stanford dropout who claimed to have developed health technology that enabled comprehensive blood tests to be run from a small sample of several drops taken from a finger for a fraction of the cost of conventional blood testing. She founded Theranos to develop the technology and ostensibly revolutionize an industry in a way that could change the world, recruiting a high-profile board of directors and hundreds of millions in investments on the ambitious premise.

Years later, after controversies, skepticism and doubts stemming from the infamous secrecy with which Theranos operated as a private company, Holmes and Theranos agreed to settle the SEC fraud charges against them while neither admitting nor denying guilt; Balwani maintains his innocence and appears headed for litigation. As part of the settlement, Holmes agreed to pay a $500,000 fine, return almost 19 million shares, give up voting control of the company, and be prevented from serving as a director or officer of a publicly traded company for 10 years. Although she retains her position as CEO and an undisclosed amount of equity in the company, Theranos’s valuation would have to surpass $750 million before she gets any return out of her equity.

The company’s troubles began when Tyler Shultz, a Theranos employee whose grandfather served on the board, raised concerns about some research and test results and requested a meeting with Holmes. Balwani reportedly rebuffed the request rudely, prompting Shultz to contact New York state’s public health lab with his allegations and begin giving confidential interviews to the Wall Street Journal. The ensuing reporting and controversy called into question all the claims made by Theranos and Holmes about the legitimacy of the company’s supposedly groundbreaking proprietary technology, jeopardized a deal between Theranos and Walgreens, and helped prompt the SEC to investigate Theranos.

Prior to the whistleblower allegations, Theranos had reached an estimated valuation of roughly $9 billion. The valuation was seemingly based as much on Holmes’ charisma, confidence and image as the next Silicon Valley pioneer as it was the purported potential of the technology itself. In the end, the allure of Holmes’ and Theranos’ claims was not enough to make up for their fraudulent nature and the house of cards appears to be collapsing. Although the SEC charges against Holmes and Theranos will be settled, a federal criminal investigation is ongoing, civil suits have already been filed against the company by patients in Arizona, and more lawsuits from a variety of plaintiffs are possible.

Read even more about the history of the company in the Fraud Magazine article, "Theranos: Science or science fiction?".