Startup investors are interested in staking their money on groundbreaking ideas. However, it is difficult to determine whether those ideas will become a reality and give them expected returns. Moreover, many ideas are in development phases. So, when they are investing, they are playing a gamble. Sometimes, the gamble pays off. Sometimes, it does not. But there are cases when the idea is fraud and have no bearing. But it is presented and publicized in such a way that it attracts investors and their millions of dollars. It is the case with Theranos Inc. Elizabeth Holmes claimed that her company is developing a groundbreaking machine that can run thousands of tests on a single drop of blood. The hype was created around the idea, outlining that it would transform the medicine industry.
People claiming the idea to be groundbreaking have hit the rock bottom after the U.S. Securities and Exchange Commission (SEC) revealed the fraud. SEC revealed details on how CEO Elizabeth Holmes and deputy chief made false claims about their technology, misled media, and used hype around their idea to make investors invest more than $700 million. However, the lawsuit against Elizabeth Holmes has been settled. She has been asked to pay fine of $500,000, surrender 19 million shares, and restrained from being director or officer of a public company for next 10 years. It is not yet clear whether federal prosecutors will be pursuing criminal charges. The company has been kept under scrutiny by prosecutors from Justice Department in San Francisco.
“The Theranos story is an important lesson for Silicon Valley,” told Jina Choi, director of the SEC’s San Francisco Regional Office to Bloomberg. “Innovators who seek to revolutionize and disrupt an industry must tell investors the truth about what their technology can do today, not just what they hope it might do someday.”
According to the SEC, Holmes claimed that the machine developed by her company could run almost 90 percent of tests performed by standard medical equipment. This claim led to agreement with national pharmacy chain despite the product not being “commercially ready.” When the roll-out with this chain came closer, Holmes asked engineers to introduce modifications in standard blood-testing machines to run Theranos’s tests. The change was hidden from pharmacy executives. Moreover, demonstrations on the company’s machines were given and lab tours were conducted without disclosing the utilization of third party technology. The pharmacy gave an “innovation fee” of $100 million to Theranos for expansion.
According to the complaint of SEC, Holmes and former president Ramesh “Sunny” Balwani have repeatedly made false claims about the technology, its business partnership, and long-term growth opportunities. Theranos used media reports, publications, and every background material they could to convince investors to invest in the company.
The technology could not see the light of the day as per the claims from CEO and President of the company, and everything emerged as a fraud. Theranos eventually had to correct or retract the results of thousands of medical tests. Regulators at the Centers for Medicare and Medicaid Services sanctioned the results and Holmes was banned from operating a lab company for two years. After this result, the company downsized by asking some employees to leave and closed consumer-testing operations to focus on development of its technology.
SEC said that the firm was on the “verge of bankruptcy” by the end of 2017. It obtained a term loan to keep it afloat for nearly a year. The future of the company seems bleary, but it is interesting to see if federal prosecutors will press any criminal charges on Holmes and Balwani. The incident has alarmed a caution among investors to determine whether a new idea has potential to see light of the day or it is another shakedown.