A federal grand jury on June 14 indicted the former founder and chief operating officer of private healthcare and life sciences company, Theranos, arising from allegations that they engaged in a multimillion-dollar scheme to defraud investors, and a separate scheme to defraud doctors and patients.
The stated mission of Theranos, which CEO Elizabeth Holmes founded in 2003, was to revolutionize medical laboratory testing through allegedly innovative methods for drawing blood, testing blood, and interpreting the resulting patient data.
Theranos’ health took a turn for the worse in 2015, however, after a Wall Street Journal exposé called its claims into question, alleging that the company was not using its proprietary technology for most of the tests it offers. After the story broke, the Securities and Exchange Commission, the Department of Justice, and federal health regulators launched civil and criminal investigations.
According to the indictment, unsealed June 15, Holmes and Ramesh Balwani—who served in several roles at Theranos from 2009 through 2016, including as a board member, president, and as chief operating officer—used advertisements and solicitations to encourage and induce doctors and patients to use Theranos’s blood-testing laboratory services, even though they knew the company was not capable of consistently producing accurate and reliable results for certain blood tests.
The indictment alleges that Holmes and Balwani used a combination of direct communications, marketing materials, statements to the media, financial statements, models, and other information to defraud potential investors. Specifically, they claimed to have developed a revolutionary and proprietary analyzer that could perform a full range of clinical tests using small blood samples drawn from a finger stick. They further claimed that the analyzer could produce more accurate, reliable, and faster results than those yielded by conventional methods.
According to the indictment, Holmes and Balwani knew that many of their representations about the analyzer were false. For example, Holmes and Balwani allegedly 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.
The indictment charges Holmes and Balwani with two counts of conspiracy to commit wire fraud, in violation of 18 U.S.C. § 1349, and nine counts of wire fraud, in violation of 18 U.S.C. § 1343. If convicted, each faces a maximum sentence of 20 years in prison, and a fine of $250,000, plus restitution, for each count of wire fraud and for each conspiracy count.
An indictment merely alleges that crimes have been committed, and the defendants are presumed innocent until proven guilty beyond a reasonable doubt. Both Holmes and Balwani appeared on June 15 before U.S. Magistrate Judge Susan van Keulen for their initial appearances. The matter was assigned to U.S. District Judge Lucy Koh for further proceedings.
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