Elizabeth Holmes was an even smoother scamster than anyone thought -- and she's apparently getting to keep her job.
The SEC just charged the 34-year-old onetime billionaire with fraud related to claims she made about her blood-testing company, Theranos. To settle the charges, Holmes is giving up 18.9 million Theranos shares, losing voting control of the company, paying a $500,000 fine and will be barred from running a public company for ten years. She will, however, continue as the chief executive of Theranos, which under the fraudulent scheme described by the SEC raised $700 million.
Holmes' longtime right-hand man, Sunny Balwani, 52, is also being charged with fraud. He is no longer at Theranos, and the SEC says it will litigate the case.
What emerges from the SEC's complaint is this: The Theranos scam, uncovered by the Wall Street Journal's John Carreyrou, appears to be even worse than previously thought. Forbes had reported in 2016, when we stripped Holmes from our wealth lists, that Theranos’ sales were much lower than the company had led outsiders to believe. But the SEC puts a fine point on it: At a time when Theranos claimed it had annual sales of $100 million, sales were just $100,000. Holmes and Balwani claimed that the Department of Defense was using Theranos' technology on medevac helicopters. The DoD wasn't using it at all.
The baldness of the alleged lies piles up. Look at what the SEC says Theranos told a company labeled in the agency’s complaint as "Pharmacy A," which is clearly Walgreens. In 2010, the SEC says Holmes showed the pharmacy chain's executives written evidence that Theranos would be able to run just about any blood test on its machines by the end of that year, using drops of blood taken from finger pricks instead of using needles. The next year, the pharmacy executives raised concerns with Holmes that this device might need to be approved by the FDA. But they missed the scale of her deception.
In 2013, when the Theranos miniLab was supposed to have been rolled out in Pharmacy A, the machine wasn't ready at all. That's when Balwani and Holmes told their engineers to start using other companies' machines in unapproved ways to analyze finger-prick samples, the complaint says. Theranos allegedly never told the pharmacy executives.
At this time Holmes and Theranos repeatedly made statements to journalists, including reporters at Forbes, Fortune, Wired and the Wall Street Journal, puffing up the abilities of a machine that didn't really exist. Theranos' miniLab could, at its height, do just 12 tests, the SEC says, not the 90% of tests that Holmes claimed. Fortune's descriptions of the machine saying otherwise were personally approved by Holmes, the SEC complaint says.
Theranos' pitches to investors relied heavily on Holmes' charisma. I interviewed her on stage twice, and I can attest that she had an unusual ability to make you feel like the most important person in the room. But the SEC complaint also says that the investors got binders of printed information that included reports that appeared to be written by pharmaceutical companies that had worked with Theranos, but were actually written by Theranos.
And then there is the matter that had worried Walgreens' execs: whether Theranos needed the Food and Drug Administration's approval. Holmes repeatedly and insistently stated that Theranos did not need the FDA's approval, but was seeking it as part of a strategy to embrace regulation. But the SEC says that in 2014 the FDA told Theranos its tests required FDA approval – yet one more example of how making the FDA's communications with companies more public could have benefits for investors.
Holmes will probably not get rich because of this scheme, because of a fact previously noted by Forbes: Her investors have preferred shares, and the valuation of Theranos would have to soar above $750 million before her stake is worth anything. The SEC's decision to settle is an indication that Theranos is worth far less than that. Theranos' hoodwinked investors, meanwhile, at one point valued Theranos at $9 billion. This was the entire source of Holmes' net worth.
In the end, the SEC describes a stunningly brazen scheme, one that emphasizes that no matter how smart investors in private companies are, they are far more at risk than stockholders of public companies that have to employ auditors and deal with detailed scrutiny of their businesses. Elizabeth Holmes presented herself as a technological revolutionary. In the end, she was anything but.
