What to Learn From the Theranos 'Massive Fraud' SEC Settlement

By George Khoury, Esq. on March 15, 2018 | Last updated on March 21, 2019

The Theranos debacle abruptly shot the company in the foot and into the spotlight all at the same time. As the story has developed over the past couple years, quite a few details have emerged about the SEC's charge of massive fraud against the company, it's CEO Elizabeth Holmes, and president Sunny Balwani.

Recently, SEC announced that it has reached a settlement as to Theranos and Holmes, but is still pursuing Balwani. The settlement requires Holmes to divest her super-majority hold, give back almost 20 million shares, pay $500,000, and give up control of the company she founded. Additionally, as part of the settlement, Holmes cannot be the CEO or director of a publicly held corporation for a decade. In earlier compromises, Holmes and Theranos agreed not to run clinical labs for a period of years and also agreed to pay millions in fines.

How Not to Defraud Investors: Don't Lie

Perhaps the most important thing to learn from the whole Theranos debacle is that companies should not lie to rally investors. Notably, Theranos claimed $100 million in revenue in 2014, when in reality it was more like $100K. Additionally, the company claimed that their tech was deployed by the Department of Defense in Afghanistan on the battlefield, which simply was not true.

Perhaps most significantly, Theranos claimed that the revolutionary technology they had developed worked and could perform hundreds of different tests with just one drop of blood. In reality, the tech only worked when it came to a handful of tests.

In the announcement of the recent settlement, SEC Co-Director of enforcement explained that federal securities laws apply even to non-public, privately held corporations, even in the development stage, and even if it is "the subject of exuberant media attention." Theranos clearly was all of these things, as the company promised to revolutionize the blood testing industry.

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