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Theranos founder Elizabeth Holmes charged with massive fraud

CLOSETheranos founder Elizabeth Holmes charged with massive fraud

A California startup offering easy and inexpensive blood tests to help people check themselves for STIs, celiac disease or high cholesterol levels has again run afoul of federal lab regulators. USA TODAY

SAN FRANCISCO — Theranos founder Elizabeth Holmes was charged with “massive fraud” by the Securities and Exchange Commission Wednesday, a downbeat coda to a once high-flying company that promised to revolutionize the blood analysis process. 

The SEC complaint charged that Theranos raised more than $700 million from late 2013 to 2015 while “deceiving investors by making it appear as if Theranos had successfully developed a commercially-ready portable blood analyzer that could perform a full range of laboratory tests from a small sample of blood.”

Also charged was former Theranos president Ramesh “Sunny” Balwani. Among a variety of charges, the SEC complaint said Holmes and Balwani lied about the technology being used by the Department of Defense in battlefield situations. 

Gen. James N. Mattis, who then led the U.S. Central Command, personally pushed Holmes’ tech to be used although military regulators flagged issues with Theranos before the notion took wing. Mattis later joined Theranos’ board, but resigned from that position when he become U.S. defense secretary in 2016.

Mattis was one of many famous names to be wooed by Holmes. Her board often seemed like a Who’s Who of historical figures, including former secretaries of state Henry Kissinger and George Shultz, former senators Sam Nunn and Bill Frist and former secretary of defense William Perry.

But regardless of such boardroom firepower, the company — which Holmes pitched as a salvation to those fearful of needles like herself — never delivered on its grand vision.

Holmes, who once graced the cover of countless magazines and was worth billions on paper, has already settled the charges against her. She will pay a $500,000 penalty, be barred from serving as an officer or director of a public company for 10 years, and return 18.9 million shares she amassed during the alleged fraud.

Holmes also cedes her voting control of the company she founded in 2003 at the age of 19 after dropping out of Stanford University in order to pursue her start-up.

Theranos and Holmes neither admitted nor denied the allegations in the SEC’s complaint and the settlements are subject to court approval.

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The rise of Holmes’ company was swift but cloaked in secrecy.

Although she sat for interviews, she would not share with media and often investors the secret sauce: how Theranos was managing to do complex blood analysis with a mere drop of blood sourced from a finger prick and stored in its patented Nanotainers. Typically blood tests require vials of blood extracted with needles.

But despite the lack of technological transparency, investors and partners signed on, pushing Theranos’ value to $9 billion, with Holmes worth roughly half of that.

The company forged deals with national chains such as Walgreens, promising to eventually put Theranos Wellness Centers in all of the pharmacy’s national locations after first piloting a program in Arizona.

But a comprehensive investigation of Theranos launched in 2015 by The Wall Street Journal steadily chipped away at the company’s reputation as regulators started to circle, notably the Food and Drug Administration and the Centers for Medicare and Medicaid Services.

Among the findings that came out were the fact that in some cases, Theranos had to send the blood it had collected from patients out to traditional labs in order to conduct the required analysis of the samples.

In one case in 2015, examiners from Medicare inspected the company’s lab, in Newark, Calif.,  and found deficiencies around Theranos’ test for the clotting ability of blood, which is critical when determining the correct dose of blood thinners. Prescribing too much can result in internal bleeding, while too little can lead to a stroke.

Holmes said she would have the offending lab rebuilt. But Holmes’ problems only grew. Lawsuits flew and regulators pressed on. Holmes stuck by her story, but gradually refocused her efforts on perfecting the device that she claimed was capable of doing complex bloodwork from just a drop of blood.

Last spring, Theranos agreed to pay Arizona consumers $4.65 million under a consumer-fraud settlement brought by more than 175,000 consumers who purchased Theranos tests at Arizona retail locations since 2013. 

The Arizona agreement came a day after Theranos announced a settlement with the Centers for Medicare and Medicaid Services, resolving federal regulators’ efforts to revoke that company’s laboratory certificate.

Under both the Arizona and federal settlements, Theranos agreed to a two-year ban from the blood-testing business, and paid a $30,000 civil penalty as part of the federal settlement.

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