Theranos Founder Charged


Theranos founder Elizabeth Holmes and Ramesh 'Sunny' Balwani, the company's then-No. 2 official, address employees in 2015.

 Federal prosecutors filed criminal charges against Theranos Inc. founder Elizabeth Holmes and the blood-testing company's former No. 2 executive, alleging that they defrauded investors out of hundreds of millions of dollars and also defrauded doctors and patients.
 The indictments of Ms. Holmes and Ramesh “Sunny” Balwani, the former president and chief operating officer of Theranos who was also Ms. Holmes's boyfriend, are the culmination of a 2½-year investigation by the U.S. attorney's office in San Francisco, sparked by articles in The Wall Street Journal that raised questions about the company's technology and practices.
 Ms. Holmes, 34 years old, and Mr. Balwani, 53, were each charged with two counts of conspiracy to commit wire fraud and nine counts of wire fraud in an indictment handed up Thursday and unsealed Friday. If convicted, they each face a maximum sentence of 20 years in prison and a fine of $250,000, plus restitution to those found to have been defrauded, on each count.
 “This indictment alleges a corporate conspiracy to defraud financial investors,” said John F. Bennett, special agent in charge of the Federal Bureau of Investigation in San Francisco. “More egregiously, this conspiracy misled doctors and patients about the reliability of medical tests that endangered health and lives.”
 A lawyer for Mr. Balwani, Jeffrey B. Coopersmith, said in a statement, “Mr. Balwani is innocent and looks forward to clearing his name.” A lawyer for Ms. Holmes didn't respond to a request for comment.
 Before the charges were filed, Theranos announced that Ms. Holmes had stepped down as chief executive and that David Taylor, the company's general counsel, has been appointed CEO and general counsel. Ms. Holmes will remain as founder and board chair, the company said.
 Coming three months after the Securities and Exchange Commission filed civil fraud charges against Theranos, Ms. Holmes and Mr. Balwani, the criminal charges are a warning shot for Silicon Valley. As money has gushed into the Valley's ecosystem in recent years, hundreds of private tech startups valued at more than $1 billion have sprouted, embracing a culture of disruption of incumbent industries and a cavalier attitude toward regulations.
 In the case of Theranos, the industry Ms. Holmes sought to disrupt was the blood-testing business. At the height of her fame, the Stanford dropout claimed to have invented new technology that could run the full range of laboratory tests on just a drop or two of blood pricked from a finger.

 'This conspiracy misled doctors and patients,' said FBI agent John F. Bennett.  

On the strength of her unproven claims, Theranos rolled out its vaunted finger-stick blood tests in Walgreens stores in California and Arizona and rocketed to a valuation of more than $9 billion, making Ms. Holmes a billionaire and media celebrity. Her bold talk and black turtlenecks drew comparisons to Steve Jobs.
 But as the Journal revealed in a series of articles beginning in October 2015, Theranos's blood-testing device was unreliable and the company used it for just a fraction of the more than 240 tests it offered to consumers. Behind the scenes, it performed the vast majority of the tests with commercial analyzers purchased from other companies.
 Moreover, Theranos modified some of those commercial analyzers in ways that neither their manufacturer nor the federal health agency overseeing Theranos had authorized. The modifications, including diluting the tiny finger-stick samples to create more volume, led to inaccurate test results, according to former Theranos employees.
 Prosecutors alleged that Ms. Holmes and Mr. Balwani “knew that many of their representations about the analyzer were false.” They alleged that the two executives “knew that the analyzer, in truth, had accuracy and reliability problems, performed a limited number of tests, was slower than some competing devices, and, in some respects, could not compete with existing, more conventional machines.”
 Following pressure from federal health regulators, Theranos voided or corrected nearly a million blood-test results. It also agreed to reimburse the 76,000 Arizonans who used its blood-testing services.
 Theranos is now on the verge of liquidation. The company's head count is down to two dozen employees and Ms. Holmes told investors in a recent email that the private-equity firm Fortress Investment Group was likely to seize its assets as soon as late July. Fortress lent Theranos $65 million last year to keep it afloat.
 Ms. Holmes and Theranos reached a settlement with the SEC to resolve the agency's civil charges in March without admitting or denying wrongdoing. Mr. Balwani has denied the SEC charges filed against him and is fighting them in a California federal court.
 Theranos's rise and fall has exacted a painful financial and personal toll. A British biochemist who worked at Theranos for eight years committed suicide in 2013 after becoming distraught by its culture of fear and secrecy and its lack of progress with its technology, according to his widow. Tyler Shultz, a grandson of former Secretary of State George Shultz and the first employee to blow the whistle to a state regulator about what he saw as troubling practices, became estranged from his grandfather, a board member.
 Theranos's investors, most of whom poured money into the company after its commercial rollout in Walgreens stores in late 2013, have collectively lost nearly $1 billion.
 They include the Waltons, heirs to Walmart Inc. founder Sam Walton; Atlanta's Cox family; the family of Secretary of Education Betsy DeVos; and Rupert Murdoch, executive chairman of 21st Century Fox and of News Corp, the Journal's parent company. Each invested more than $100 million in Theranos — investments that are now worthless.  

BY JOHN CARREYROU

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