Theranos Founder and CEO Indicted on Federal Wire Fraud Charges

By - June 18, 2018
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Theranos founder and CEO Elizabeth Holmes was indicted last week on federal wire fraud charges, according to the office of the US Attorney for the Northern District of California.

According to media reports, Holmes and former Theranos COO Ramesh Balwani were allegedly engaged in a scheme worth millions of dollars to defraud investors, as well as a scheme with the intention to defraud patients and doctors.

Holmes and Balwani have been charged with two counts of conspiracy to commit wire fraud and nine counts of wire fraud. The indictments occurred last Thursday and were unsealed the next day. If they are convicted, each faces a maximum sentence of 20 years in prison and fines of $250,000. They would also be required to pay restitution for each count of wire fraud and each conspiracy count.

Holmes and Balwain have been accused of misrepresenting the capability of the company’s proprietary blood testing technology. It is alleged by the federal government that both knew there were issues with accuracy and reliability that made the Theranos device unable to compete with more conventional, existing technology.

The federal charge also accused them of using direct marketing communications, statements to the media, models and financial statements to defraud possible investors. They made false claims that their analyzer produced blood test results that were more accurate and reliable and could do so faster than other tests, the federal government claims.

Just before the federal charges were made public, Theranos announced that Holmes had quit as CEO. The company’s attorney, David Taylor, will take the job of CEO effective immediately. Holmes intends to stay on as chair of the board.

Balwani’s lawyer, Jeffrey Coopersmith stated that his client is innocent. He said that Balwani did not commit any crimes and he did not engage in fraud with Theranos investors. The attorney also said Balwani did not defraud any consumers, but worked to empower them with better access to their own health information.

Holmes and Theranos – Once a Self-Made Billionaire Success Story

Holmes dropped out of Stanford in the early 2000s to found Theranos, with a plan to offer cheaper and more efficient alternatives to traditional medical tests. The company’s products offers patients the ability to do tests for conditions such as diabetes and cancer with only a few drops of blood. The startup began to work wth Walgreens in 2013 to offer the company’s tests at Walgreen’s stores.

This move was a validator of Holmes’ work, but the drugstore company ended up jumping the gun on the deal. Walgreens failed to fully validate the technology and ended up losinb $50 million with their investment. Walgreens eventually gave upon the partnershhip and sued Theranos for misrepresenting its technology.

Prosecutors stated in the case that Holmes and Balwani used solicitations and advertisements to encourage doctors and patients to use the company’s blood testing laboratory services. They claimed that the pair did so with full knowledge that the company’s fingerprick blood tests could not produce accurate and reliable results on a consistent basis.

Holmes once was praised as the youngest self-made female billionaire, with her company once valued at $9 billion. For years, Holmes was on the very top of the tech world, with her image on the cover of the style magazine for The New York Times; she also was featured in Forbe s, Fortune, Inc., Glamour and The New Yorker.

But her net worth was recalculated to be almost nothing after an investigative reporter for the Wall Street Journal dug into the technology behind her blood testing startup. The report, John Carreyrou, first ran an expose on the company in 2015. Theranos voided two years of blood tests just a few months later.

In his articles on the company, which he later turned into a book called Bad Blood: Secrets and Lies in a Silicon Valley Startup, the company she built from the ground up was allegedly just one decit after another. Carreyrou claims that Holmes createdly totally false test results from their blood tests when they were courting Walgreens. When the COO of Theranos found out, Holmes fired him then and there.

Holmes also allegedly told other investors that the company was going to earn $100 million in revenue in 2014, but really the company was only on track to earn $100,000 that year. Further, Holmes told the media that her blood testing machine could make more than 1000 tests, when it could actually only do one. It also is alleged that she lied about a contract that her company had with the Department of Defeense, when she claimed the technology was being used on fields of battle; this was not true. She also made up stories in the media about everything from where she went to school to profits to the number of people whose lives would be saved by her company.

Carreyrou noted that other big CEOs, such as Steve Jobs, Mark Zuckerburg and Elon Musk might stretch the truth to improve their companies’ marketshare, Holmes seemed to have no real, legitimate business to begin with. The entire company, he claims in his book, was a house of cards with a completely bogus technology that was being used to do millions of blood tests with people’s lives at stake.

Last March, the SEC announced fraud charges of $700 million against Theranos, Balwani and Holmes. The SEC stated that the company and the two executives had misled partners and investors about the technology developed by Theranos. The SEC further stated the two had misrepresented revenue projections and made false claims that they did not need FDA approval for their testing technology. Holmes and Theranos eventually agreed to a settlement with the SEC.