The SEC fraud actions against Theranos, Holmes and Balwani (2018)

analysisThe SEC filed two civil complaints in the Northern District of California on March 14, 2018: SEC v. Elizabeth Holmes and Theranos, Inc. (5:18-cv-01602) and SEC v. Ramesh "Sunny" Balwani (5:18-cv-01603). It charged that the three raised more than $700 million from investors from late 2013 to 2015 through an elaborate, years-long fraud in which they exaggerated or misstated the company's technology, business and financial performance. These were the SEC's charges, not findings of a court. Theranos and Holmes settled the same day without admitting or denying them; the SEC said it would litigate against Balwani, and a public radio report in September 2018 said he was still contesting the charges. ^{1 2 3 4}

analysisThe complaints allege that investors were led to believe Theranos had a commercially ready portable analyser that could run a full range of tests from a few drops of blood, when its proprietary analyser performed only about 12 of the more than 200 tests on its menu and the rest ran on third-party analysers, some modified for fingerstick samples. They also allege false claims that the technology had been used by the Department of Defense in Afghanistan and on medevac helicopters, and that Theranos would generate more than $100 million in revenue in 2014, when it generated a little more than $100,000 in revenue from operations. In August 2015, the SEC alleged, Holmes gave a potential investor results showing $108 million of 2014 revenue and projections of $240 million for 2015 and $750 million for 2016. Holmes and Theranos neither admitted nor denied these allegations in their settlement. ^{1 3 5}

analysisThe complaints also tell the company's history. They state that Holmes and Balwani were its only senior managing executives during 2013 to 2015; that in 2012, after concerns at a national pharmacy chain the SEC calls "Pharmacy A", the contract became a two-phase roll-out with testing at two central Theranos laboratories; that in 2016, after regulatory inspections, Theranos left the retail testing business, both retail partners ended their relationships and Balwani left in May 2016; and that in 2017 Theranos, Holmes and Balwani settled an investor's securities-fraud suit and Theranos settled the pharmacy chain's breach-of-contract suit. ^{1 2}

analysisAgainst Holmes and Theranos the SEC sought injunctions, a civil penalty from Holmes, a bar on her serving as an officer or director of any listed company, the return of shares including 18,897,137 Class B shares and the surrender of her super-majority voting shares; against Balwani it sought an injunction, a civil penalty and an officer-and-director bar. ^{1 2}

analysisTheranos and Holmes settled the same day without admitting or denying the allegations. Holmes agreed to pay a $500,000 penalty, to be barred for ten years from serving as an officer or director of a public company, to return the remaining 18.9 million shares she obtained in the period and to convert her Class B shares, giving up voting control. The SEC said this reduction, combined with shares she had returned earlier, materially reduced her stake, and that because of the company's liquidation preference she would not profit from it on a sale or liquidation until, assuming redemption of certain warrants, over $750 million had been returned to what it called defrauded investors and other preferred shareholders. Judge Edward J. Davila signed final judgments against Holmes and Theranos on March 27, 2018 and closed the case. ^{3 4}

analysisThe SEC said it would litigate its claims against Balwani in the Northern District of California. On July 2, 2018 the court related his case to SEC v. Holmes and reassigned it to Judge Davila; its final outcome is not documented in the record. ^{4 3}