Theranos Founder and Former COO Charged with Fraud

Elizabeth Holmes and Sunny Balwani addressing their staff in 2015. (Credit: WSJ)

Elizabeth Holmes, founder of the disgraced biotech Theranos, and her former Chief Operating Officer, Ramesh ‘Sunny’ Balwani, have been indicted with alleged wire fraud schemes in the state of California. The charges, which were produced by a federal grand jury, were announced in a joint statement from Alex Tse, Acting US Attorney, John Bennett, FBI Special Agent in Charge, and Scott Gottlieb, FDA Commissioner. Together, Holmes and Balwani are being charged with nine counts of wire fraud and two counts of conspiracy to commit wire fraud.

Theranos was founded in 2003 by Holmes with the goal of revolutionising diagnostic testing through novel and innovative blood tests. These tests earned a lot of attention within the medical community and beyond, with hope and investment high for the new technology. In 2009, Holmes brought in Sunny Balwani as her COO and second-in-command and together they drew in vast amounts of money from investors and doctors willing to use their tests.

Despite the early hype, however, it all came crashing down in 2016 when rumours started to appear that the ‘revolutionary blood tests’ were not the sensitive, accurate diagnostic tool being promised. By the end of the year, Theranos was being hit with lawsuits from all corners (including the state of Arizona) as investors accused the company of lying to them about an over-promised product. The backlash from investors, the government, and the public led to significant structural changes within Theranos as the company tried to slash their costs.

Elizabeth Holmes herself received a lot of the negative press from the fallout, including a two-year lab ban from CMS in 2016 and a previous fraud charge from the SEC earlier this year. In that lawsuit, Theranos and Holmes agreed to settle without admitting wrongdoing, leaving Holmes with a $500,000 penalty and an order to relinquish her company voting power. The agreement also barred her from serving as an officer or director of a public company for ten years.

Now, both Holmes and Balwani are facing charges of wire fraud in the Northern District of California. The basis of these charges is that the pair knowingly used advertisements and solicitations to encourage the use of medical products that could not produce reliable results, namely the company’s touted blood tests.

“This indictment alleges a corporate conspiracy to defraud financial investors,” said Special Agent in Charge Bennett. “This conspiracy misled doctors and patients about the reliability of medical tests that endangered health and lives.”

At the present time, Holmes and Balwani are only being charged with fraud, and are legally considered to be innocent unless proven guilty beyond a reasonable doubt. However, if they are convicted, then they could face a maximum sentence of 20 years in prison, in addition to a fine of $250,000 plus restitution for each count of fraud and conspiracy. The defendants made their initial court appearances last week.