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SEC Charges Theranos With Widespread Fraud

Posted 14 March 2018 | By Zachary Brennan 

SEC Charges Theranos With Widespread Fraud

Holmes previously appeared on a number of magazine covers, including these three.

Capping a series of question marks about the blood-testing startup Theranos, the US Securities and Exchange Commission (SEC) on Wednesday charged the Silicon Valley-based company, its CEO Elizabeth Holmes and its former president with raising more than $700 million from investors through an elaborate and fraudulent scheme in which they exaggerated or made false statements about the company’s technology, business and financial performance.

The SEC’s complaints allege that the company and two top employees made numerous false and misleading statements in investor presentations, product demonstrations and media articles deceiving investors into believing that Theranos’ key product – a portable blood analyzer – could conduct comprehensive blood tests from finger drops of blood, perhaps revolutionizing the blood testing industry. 

“In truth, according to the SEC’s complaint, Theranos’ proprietary analyzer could complete only a small number of tests, and the company conducted the vast majority of patient tests on modified and industry-standard commercial analyzers manufactured by others,” the SEC said.

Theranos and Holmes have agreed to settle the fraud charges levied against them by the SEC. 

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, though the settlement is subject to court approval.

Questions about the company and blood analyzer were first raised in an October 2015 Wall Street Journal investigation into the accuracy of the company's proprietary blood testing technology and how the company is operating.

And in September 2016, the US Food and Drug Administration (FDA) released a Form 483 for the company, detailing how it had patients to consent to sample collection in two Zika-related trials without approval of an institutional review board (IRB).

Holmes’ Complaint

When speaking to potential investors in late 2013 through 2015, the SEC complaint says Holmes consistently stated that Theranos did not need to obtain approval from the FDA for its device and tests, which she said were lab-developed tests (LDTs).

However, the complaint notes, “By the time of Theranos’ financing round in 2014, FDA representatives told Holmes that clearance or approval would be necessary for Theranos’ analyzer and tests. In late 2013 and throughout 2014, FDA representatives met with Holmes and sent letters to Theranos stating that they did not believe Theranos was offering LDTs, and that even if Theranos was not selling its miniLab or tests, FDA clearance or approval was necessary.”

In addition, Holmes met with a potential investor in 2015 and said Theranos’ 2014 net revenues were $108 million, while 2015 and 2016 net revenue projections were $240 million and $750 million, respectively.

In reality, the complaint notes, “Theranos recorded little more than $100,000 in revenue in 2014 and was nowhere near generating $100 million in revenue by the end of 2014.”

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