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SEC Charges Theranos CEO, President with "Massive Fraud"

SECURITIES-AND-EXCHANGE-COMMISSION-facebook The SEC has charged complaint Wall Street Journal
Despite the device not being commercially ready, the company none the less decided to pursue retail clinical laboratory space, and used misleading product demonstrations to convince buyers of its efficacy. For example, they conducted some demonstrations on modified third party devices while not telling potential buyers that these were not, in fact, the actual products they were developing. It also instructed employees to place labs that could only be used for R&D testing in the same room as the clinical labs and then led pharmacy executives on a tour of that room without telling them of the difference between the machines. It also explicitly denied that there were any technological problems. 

“Investors are entitled to nothing less than complete truth and candor from companies and their executives,” said Steven Peikin, Co-Director of the SEC’s Enforcement Division.  “The charges against Theranos, Holmes, and Balwani make clear that 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.”

Theranos and Holmes have agreed to settle the fraud charges levied against them.  Holmes agreed to pay a $500,000 penalty, be barred from serving as an officer or director of a public company for 10 years, return the remaining 18.9 million shares that she obtained during the fraud, and relinquish her voting control of Theranos by converting her super-majority Theranos Class B Common shares to Class A Common shares.  Due to the company’s liquidation preference, if Theranos is acquired or is otherwise liquidated, Holmes would not profit from her ownership until – assuming redemption of certain warrants – over $750 million is returned to defrauded investors and other preferred shareholders.  The settlements with Theranos and Holmes are subject to court approval.  Theranos and Holmes neither admitted nor denied the allegations in the SEC’s complaint.  The SEC will litigate its claims against Balwani in federal district court in the Northern District of California.