Theranos, Inc. and its chief executive Elizabeth Holmes have reached a settlement with the Securities and Exchange Commission on March 14 following a massive fraud scandal over misleading blood-test technology.
Like all promising startups, the company also has quite the tale to tell. Influenced by her father who managed relief work for various public agencies, Holmes claimed growing up with a strong desire to make the world a better place.
This is why at 19, she bravely dropped out of Stanford University to pursue her first patent ever for a revolutionary drug-delivery system. Her patch was supposed to automatically adjust dosage to match the patient's blood type and then update doctors via wireless technology.
How Holmes Built The Edison And Theranos
The patch was never released in the market, but that's okay. Holmes had an even bigger idea that stemmed from her childhood fear of needles: a machine that can test for a number of diseases using only a few drops of blood.
Named after the great inventor, the Edison came with a promise to make health care more affordable by bringing blood-test technology to another level. It intended to charge only half of Medicare and Medicaid's rate, potentially sparing the United States from spending $200 billion in the next ten years.
Additionally, the machine will expedite the diagnostic process, allowing any person to have their blood tested at a pharmacy and receive the results within a few hours.
Theranos's Edison had every quality that investors find attractive, and so by 2014, the startup successfully raised over $400 million, increasing its value to $9 billion. The following year, Forbes named Holmes as the youngest self-made billionaire.
Details Of The Theranos Scandal
Holmes talked the talk. She wears black turtlenecks like Steve Jobs, follows a vegan diet, speaks passionately on panels, and even quotes Jane Austen by heart.
When it comes to talking about the Edison, however, she immediately shuts down and starts talking in codes. On top of this, Theranos observed extreme secrecy. Nothing is done without Holmes' approval.
"A chemistry is performed so that a chemical reaction occurs and generates a signal from the chemical interaction with the sample, which is translated into a result, which is then reviewed by certified laboratory personnel," she explains, when asked how the machine worked.
This sparked the suspicion of many, including award-winning journalist John Carreyrou. After investigating the company, he found out that its chief executive's riddles were simply a coverup.
Apparently, the Edison produced inaccurate results, and many of the samples sent to Theranos were processed by mainstream diagnostic machines. He bore all of the startup's secrets in an article published in October 2015, opening an investigation that only confirmed his findings.
By the end of 2015, investors pulled out their shares, and the company was left with nothing, so was Holmes. Financing has somehow helped it to survive, but it went crashing down again this week when the SEC finally took legal action.
'Massive Fraud' Charges Filed By SEC
On March 14, the SEC filed fraud charges against Theranos, Holmes, and its former President and Chief Operating Officer Ramesh Balwani.
According to court documents, the three entities "deceived investors" through false marketing, misleading blood-test technology demonstrations, and exaggerating the depth of the company's relationships with its partners and public agencies.
"The charges ... 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," says SEC Enforcement Division codirector Steven Peikin.
The next day, Theranos issued an official statement announcing that Holmes has agreed to pay the $500,000 fine and to surrender her $18.9 million shares of the startup's stock. She will also be rendered ineligible to serve as director or officer in any publicly traded company for 10 years.
As part of the settlement, Holmes is allowed to keep her silence regarding the Theranos scandal. She neither admitted nor denied any wrongdoing, which led to the fraud charges.