Criminal Indictment Filed Charging Fraud
The fallout continues for Elizabeth Holmes and Sunny Balwani, respectively the CEO and COO of Theranos. The pair were charged with fraud by the SEC and were indicted last week on wire fraud and conspiracy charges. Michael Volkov reviews the cautionary tale of Theranos, outlining many of the ways Theranos defrauded investors and health care professionals.
Sometimes a fraudster is just a fraudster. They are dangerous because they can manipulate without remorse or conscience. The rise and fall of Elizabeth Holmes and Theranos is a classic story of a manipulative CEO engaged in nothing more than a classic fraud.
Holmes was once the Silicon Valley star who claimed to be a billionaire. Her fortunes started to unravel quickly following a Wall Street Journal investigative report that uncovered massive fraud at Theranos in late 2015. Seven months later, Theranos announced that its blood test results for the past two years were “void.”
Holmes settled SEC charges of fraud earlier this year for $50 million. Ramesh “Sunny” Balwani, the company’s former COO, was also charged, and his case is still pending.
Last Friday, the criminal shoe dropped on Silicon Valley’s glamour CEO and COO with the filing of charges against Elizabeth Holmes, the former CEO, and Balwani. They were each charged with two counts of conspiracy to commit wire fraud and nine counts of wire fraud relating to Theranos, the company that claimed it would revolutionize medical laboratory testing of blood. (Read the indictment here).
Holmes founded the company in 2003. Balwani worked at Theranos from 2009 to 2016. As alleged in the indictment, Holmes and Balwani defrauded investors and health care professionals as to Theranos’ claimed new technology for collecting, testing and interpreting blood samples.
Following the basic maxim, Holmes made claims that were simply too good to be true. She claimed that Theranos had developed a new technology that would allow quick blood tests to be completed based on a small sample, even a pinprick of blood, that would be more reliable and effective than conventional blood-testing products.
Prior to the launch of the company in 2013, Holmes and Balwani unleashed a torrent of marketing to convince investors of Theranos’ revolutionary new technology and focused their efforts on physicians and patients. Their communications were loaded with false claims and assertions that they knew were false.
The government’s indictment claims that Holmes and Balwani falsely advertised and solicited doctors and patients to use Theranos’ blood-testing laboratory services, knowing that Theranos was not capable of producing accurate and reliable results for certain blood tests.
Further, and as a separate conspiracy, the indictment alleges that Holmes and Balwani used a large number of false direct communications, marketing materials, statements to the media, financial statements and models to defraud investors about the accuracy and reliability of Theranos’ technology.
The defendants claimed that Theranos’ analyzer, referred to by various names such as TPSU, Edison and minilab, was able to perform a full range of clinical tests using small blood samples drawn from a finger stick. They also claimed that this technology produced results that were more reliable than those from conventional methods.
Holmes and Balwani knew that these claims were, in fact, false – specifically, the indictment claims they knew that the analyzer had accuracy and reliability problems, performed only a small number of tests and was slower than competing devices.
The defendants knew that Theranos was delivering to doctors and patients blood results that were inaccurate, unreliable and improperly validated. Theranos also regularly removed critical blood test results when providing results to doctors and patients.
The defendants also made numerous misrepresentations to potential investors about Theranos’ financial condition and its future prospects. For example, the indictment references the defendants’ representation to investors that Theranos conducted its tests using Theranos-manufactured analyzers, when in fact, Holmes and Balwani knew that Theranos purchased and used competitors’ commercially available analyzers to conduct the tests.
The defendants also claimed that Theranos would generate $100 million in revenues in 2014 and $1 billion in 2015 but knew that actual results would be negligible or modest, at best, for both years. The defendants falsely claimed that Theranos had valuable contracts with the U.S. Department of Defense to deploy its testing analyzer on the battlefield, when in fact, the Department of Defense had no plans to use the analyzer on the battlefield.
Theranos had established a relationship with Walgreens and planned to participate in the establishment of Walgreens’ Wellness Centers. Holmes and Balwani specifically claimed that Theranos would dramatically increase the number of Wellness Centers in Walgreens; in fact, they knew by late 2014 that Theranos’ retail rollout at Walgreens stalled because of Walgreen’s concerns with Theranos’ performance.
Holmes and Balwani falsely claimed that Theranos did not need FDA approval for its new technology while simultaneously seeking approval from the FDA as required under applicable law and regulations.
This article was republished with permission from Michael Volkov’s blog, Corruption, Crime & Compliance.
