WASHINGTON, March 14, 2018: Utterly ineffective under the Obama administration, the SEC finally stepped up to the plate Wednesday. The financial watchdog agency announced a lawsuit against Elizabeth Holmes, founder and CEO of the dicey blood testing firm Theranos. Holmes and another Theranos executive are charged with what ZeroHedge terms “massive fraud” in an online article Wednesday morning.
“A little over two years after Theranos was exposed as a fraud by the WSJ, and not that much longer after its CEO Elizabeth Holmes was prancing around with Bill Clinton on the stage of the Clinton Global Initiative, the SEC finally woke up, and moments ago it announced that it has charged Elizabeth Holmes as well as Theranos’ former president Ramesh Balwani with ‘massive fraud’ for raising $700M+ ‘through an elaborate, years-long fraud in which they exaggerated or made false statements about the company’s technology, business, and financial performance.’
“The SEC announced that as part of a settlement, Theranos and Holmes have agreed to resolve the charges against them, and ‘in addition to a penalty, Holmes has agreed to give up majority voting control over the company, as well as to a reduction of her equity which, combined with shares she previously returned, materially reduces her equity stake.’
“As a result of Holmes’ alleged fraudulent conduct, she is being stripped of control of the company she founded, is returning millions of shares to Theranos, and is barred from serving as an officer or director of a public company for 10 years,” said Stephanie Avakian, Co-Director of the SEC’s Enforcement Division. “This package of remedies exemplifies our efforts to impose tailored and meaningful sanctions that directly address the unlawful behavior charged and best remedies the harm done to shareholders.”
“Theranos and Holmes have agreed to settle the fraud charges levied against them. Holmes agreed to pay a $500,000 penalty, be barred from serving as an officer or director of a public company for 10 years, return the remaining 18.9 million shares that she obtained during the fraud, and relinquish her voting control of Theranos by converting her super-majority Theranos Class B Common shares to Class A Common shares.
“…Theranos and Holmes neither admitted nor denied the allegations in the SEC’s complaint. The SEC will litigate its claims against Balwani in federal district court in the Northern District of California.”
ZeroHedge concludes its report with a decent benediction:
“So yes, no prison time, and no actual financial hardship. But at least story of the “brilliant entrepreneur,” who was supposed to be the next turtleneck-clad Steve Jobs according to the idiot press and who ended up being a complete fraud, is officially finished.” (Bold text appears in ZeroHedge’s original article.) For more details, plus the SEC press release on this case, refer to the ZeroHedge article just cited..It looks like Holmes, 34, got off easy for perpetrating this blatant fraud. This might be due at least in part to the fact that she was aided and abetted for years by individuals who should have known better. These figures included former Reagan Secretary of State George P. Schultz, who served on the board of Theranos.
Born in Washington, D.C. to parents employed by the Federal government, Elizabeth Holmes later grew up in Houston, Texas. She enrolled at Stanford University to study chemical engineering. However, she dropped out of that program. She never completed her undergraduate degree in chemical engineering or any other discipline.
This suspiciously light academic record led some to question the scientific validity of blood testing performed via Theranos’ signature “Edison” device. Those worries eventually surfaced in an October 2015 article appearing in the Wall Street Journal (WSJ). The WSJ noted Theranos’ miracle device stood accused of providing consistently inaccurate results. After follow-up investigations by the WSJ and regulatory agencies, government prosecutors announced their criminal investigation against Holmes and Theranos. The charge: Fraudulently misleading investors in the company, shareholders, the government and the public on their “breakthrough” blood-testing regime.
Elizabeth Holmes: The “next Steve Jobs”?
Lionized in the media as “the next Steve Jobs,” the attractive, engaging, black turtleneck-clad blonde soon rose to the status of a young, feminist icon in the male-centric world of science and bioengineering. This likely led many in the media who travel the path of such trendy memes to ignore the building investigative pressure on her company’s signature product.
These same touchstones may also have led to the SEC’s surprisingly lenient proposed actions against Elizabeth Holmes and Theranos, a company that very likely may cease to be after this case concludes. This seems plausible in light of the recent heavy sentence – and jail time – handed down to another notorious miscreant in a similar field – “pharma bro” Martin Shkreli.
Nonetheless, Holmes is losing her company, a great deal of income and stock that was once worth billions, and her ability to head up any company at all for another decade.
The entire situation reminds us of the once famous but now apparently forgotten “Peter Principle.” First described an eponymous 1969 book by Laurence J. Peter, the author’s thesis asserts that managers in business inevitably “rise to the level of their incompetence.”
Such a situation doesn’t end well. And it most certainly didn’t end well for the overpraised and underperforming Elizabeth Holmes. The numerous victims of Theranos’ phony technology, however, may have a less charitable view.