Our New Year’s 2018 prediction (after December’s $100 million loan from Fortress Investment Group): “Ms. Holmes will be removed and replaced, then the company will be reorganized and/or renamed.”
Fortress did not have to wait long or get their hands dirty. Today, the Securities and Exchange Commission (SEC) charged both founder and now former CEO Elizabeth Holmes and past CEO/president Ramesh ‘Sunny’ Balwani with securities fraud. While Mr. Balwani will fight the charges, Ms. Holmes escaped trading her black turtleneck for an orange jumpsuit by agreeing to pay a penalty of $500,000 to the SEC, give back 18.9 million shares to the company, give up her uniquely Silicon Valley perk of super-voting equity rights, and is now barred from serving as a public company director or officer for 10 years. From the Theranos release: “As part of the settlement, neither the Company nor Ms. Holmes admitted or denied any wrongdoing.”
This penalty may seem puny in the light of other securities fraud cases, but it appears that Ms. Holmes took little salary out of the company, with most of her long-gone billions in presently worthless remaining stock.
The exact meaning of fraud, as determined by the SEC in cases like these, is not casual. We can say that we never believed the Edison or miniLabs would work despite the press hype. We can observe that patients and doctors were misled in test results, resulting in major human cost (our Ch. 22). The fraud here is directly tied to representations made to investors that enabled Theranos’ massive funding, in multiple rounds, of over $700 million between 2013 to 2015. These misleading representations included demonstrations, reports on the functioning of its analyzers, inflating its relationships such as with the DOD, and its regulatory status with the FDA.
It also does not matter that all the funds were privately raised. The SEC in its statement firmly stated that it will treat private equity as it does public when it comes to investments (pay attention, health tech companies):
“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.”
Hundreds of millions gone, fools made out of supposedly savvy Sand Hill investors, fake blood tests down the literal drain….this Editor wonders what Ms. Holmes’ next chapter will be. (Working in a leper colony? Social work for the multiplying homeless and addicted in nearby San Francisco and Oakland?) One wonders also what Mr. Balwani, who’s undoubtedly not feeling Sunny, will have to say to the SEC in his defense. That may be an interesting reveal.
And one wonders what Fortress is picking over that’s worth anything.
The schadenfreude about the Bug-Eyed Ms. Holmes is muted by this point, but the object lesson presented by her actions and company is not.
SEC filing in US District Court, Northern District of California, San Jose Division. Bloomberg: The Blood Unicorn Was Just A Fairy Tale and Blood, Fraud and Money. WaPo does a lot of rehashing. Our 45 chapters and more as it Augured In here.