Theranos News Gets Worse for the Former Silicon Valley Hero

Indictments in latest Theranos news are a warning to technology startups – and labs

CEO SUMMARY: In a tale of two fraudsters, the Department of Justice has filed a warning shot to all technology startups: Criminal indictments against Elizabeth Holmes and Ramesh “Sunny” Balwani could mean prison time and massive fines. In this latest Theranos news, The DOJ cited harm to investors, doctors and patients by the two company leaders.

TWO HIGH-PROFILE EXECUTIVES associated with Theranos, Inc. were indicted recently. Elizabeth Holmes and Ramesh “Sunny” Balwani were arraigned before U.S. Magistrate Judge Susan van Keulen in U.S. District Court for the Northern District of California, San Jose Division. Each one was charged with two counts of conspiracy to commit wire fraud and nine counts of wire fraud.

The indictment contains at least one new development in the long-running Theranos news drama. The indictment states Holmes and Balwani sent to patients and doctors test results that they knew contained—or were likely to contain—data that were inaccurate and unreliable, came from improperly adjusted reference ranges, and were generated from improperly validated assays. Also, the indictment states, the results contained or were likely to contain improperly removed ‘critical’ data.

If convicted, Holmes and Balwani could face prison sentences that would keep them behind bars for the rest of their lives and fines totaling $2.75 million each, the Associated Press reported in its coverage of the latest Theranos news.

Under a federal grand jury indictment unsealed on June 15, the charges stem from allegations Holmes and Balwani engaged in a multimillion-dollar scheme to defraud investors, and a separate scheme to defraud doctors and patients. Both schemes involved efforts to promote the lab company Theranos of Palo Alto, Calif., the federal Department of Justice announced.

In the indictment, the DOJ charged that Theranos, Holmes, and Balwani not only defrauded investors, but also defrauded consumers who trusted and relied on Theranos’ blood-testing technology that Holmes and Balwani claimed was revolutionary and would change the clinical lab testing business in significant ways.

“This indictment alleges a corporate conspiracy to defraud financial investors,” said FBI Special Agent in Charge John F. Bennett. “This conspiracy misled doctors and patients about the reliability of medical tests that endangered health and lives.”

If convicted, Holmes, age 34, and Balwani, 53, face a maximum sentence of 20 years in prison, and a fine of $250,000, plus restitution, for each count of wire fraud and for each conspiracy count, the DOJ said.

The DOJ’s indictment comes three months after earlier blockbuster Theranos news, when the federal Securities and Exchange Commission (SEC) filed charges March 14 in the same court. The SEC charged that Theranos, Holmes, and Balwani raised more than $700 million from investors through an elaborate, years-long scheme that involved exaggerating or making false statements about the company’s technology, business, and financial performance. The SEC’s charges are similar to those in the DOJ’s indictment.

‘Deceived Investors’

In the SEC case, the federal agency said Theranos, Holmes, and Balwani deceived investors into believing that the company’s portable blood analyzer could do comprehensive laboratory blood tests from drops of blood collected via a fingerstick. (See TDR, March 26, 2018.)

In fact, the company’s proprietary analyzer could complete only a small number of tests while the company conducted most patients’ tests on modified, industry-standard commercial analyzers, the SEC said.

To settle the SEC’s charges, Holmes agreed to pay a $500,000 fine and she agreed to surrender almost 19 million shares of Theranos stock and voting control of the company, the SEC said. Also, she was barred from running a public company for 10 years. At the time, Holmes did not admit to nor deny the charges. Balwani said he would contest the charges.

After dropping out of Stanford University at age 19, Holmes founded Theranos in 2003 with the idea that the company would revolutionize medical laboratory testing through allegedly innovative methods for drawing blood and testing blood and for interpreting the resulting patient data, the DOJ said. At one time, Theranos was valued at more than $9 billion and because Holmes owned almost 50% of the company’s stock, her personal wealth was valued at more than $4 billion, making her the youngest self-made female billionaire, the AP said.

Balwani’s Role at Theranos

From 2009 through 2016, Balwani served the company in several roles, including as president, chief operating officer, and as a member of the board of directors.

The Wall Street Journal’s John Carreyrou, whose Theranos news reporting broke open the fraud case, reported that Holmes had stepped down as CEO and that the indictments were the culmination of a 30-month investigation by the U.S. attorney’s office in San Francisco that was sparked by Carreyrou’s reporting on Theranos since October 2015. (See “WSJ Reporter Tells All About Downfall of Troubled Theranos,” TDR, May 29, 2018.)

Sara Ashley O’Brien at CNN reported that minutes before the charges were made public, Theranos announced that Holmes stepped down as CEO and that the general counsel, David Taylor, would assume the role of CEO. Holmes will stay on as chair of the company’s board.

The indictment explained in detail how Holmes and Balwani used advertisements and solicitations to doctors and patients to get them to use Theranos’ blood testing services, even though both Holmes and Balwani knew the technology was incapable of producing accurate and reliable results for certain blood tests consistently and that the tests were likely to contain inaccurate and unreliable results, the DOJ said.

Indictments Are a Warning

In its Theranos news press announcement about the indictments, the federal Department of Justice outlined how it will pursue cases against those who misrepresent the technology they are developing.

That announcement for the DOJ’s district office in San Francisco serves as a warning to companies in Silicon Valley where Theranos is based, as well as to clinical and genetic testing labs.

In addition, lab directors and pathologists should note that the federal Food and Drug Administration’s Office of Criminal Investigations assisted the FBI and DOJ in its pursuit of fraud charges against Holmes and Balwani.

“This district, led by Silicon Valley, is at the center of modern technological innovation and entrepreneurial spirit; capital investment makes that possible. Investors large and small from around the world are attracted to Silicon Valley by its track record, its talent, and its promise,” the DOJ said. “They are also attracted by the fact that behind the innovation and entrepreneurship are rules of law that require honesty, fair play, and transparency.

“The conduct alleged in these charges erodes public trust in the safety and effectiveness of medical products, including diagnostics,” the DOJ added.

Has ongoing Theranos news impacted the way your lab operates? Please share your thoughts with us in the comments below.


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