Theranos Settles SEC Lawsuit as CEO Holmes Stripped of Control

Theranos Inc. and its founder Elizabeth Holmes agreed to settle U.S. allegations that they raised more than $700 million from investors through an elaborate fraud in which they exaggerated or made false statements about their technology, business and financial performance.

In a lawsuit and settlement announced on March 14, the Securities and Exchange Commission said Holmes, the CEO, and former president Ramesh “Sunny” Balwani maintained a years-long fraud by making up claims about the effectiveness of its blood testing product. In reality, its portable blood analyzer could only complete a small number of tests and used analyzers manufactured by other companies, the SEC said.

Holmes agreed to pay a $500,000 penalty to resolve the case, surrender voting control of Theranos, and be barred from serving as an officer of a public company for 10 years, the SEC said. The agency’s suit against Balwani, who didn’t settle, is pending in federal court in California. The SEC made no mention in its statement of a penalty imposed on Theranos.

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

Theranos was one of the health-care world’s best-funded and highest-profile startups, with a CEO who gained attention for her bold statements about the company’s blood tests. As those claims unraveled, the company went through a dramatic downfall marked by accusations of scientific fraud, lawsuits and sanctions by health regulators.

The company said it could run dozens of diagnostic tests using a single drop of blood, an advance that could have upended a medical diagnostics market worth billions of dollars. Doubts began to emerge about the technology after a Wall Street Journal report that the testing equipment might not be what it seemed.

“The company is pleased to be bringing this matter to a close and looks forward to advancing its technology,” Theranos said adding that it cooperated with the SEC’s investigation.

The company eventually had to retract or correct tens of thousands of medical tests that had been administered to patients. It later said that it had been running some tests on conventional testing equipment while it worked on its own technology, and its investors and partners began to pull out. It was sanctioned by regulators at the Centers for Medicare and Medicaid Services, which banned Holmes from running a lab company for two years. The company fired workers and shut down its consumer testing operations, and said it would focus on developing its technology.

By Matt Robinson