In March, the Securities and Exchange Commission (SEC) announced that it has settled charges filed against Theranos and its founder and CEO Elizabeth Holmes. Charges against the company’s former president, Ramesh Balwani, remain pending. The charges stem from what the SEC called, “an elaborate, years-long fraud,” that resulted in the company taking in approximately $750 million through a series of false representations made to potential investors.
From $9 Billion to Nothing
A few years ago, Theranos was the talk of the investment world for an entirely different reason. Led by a charismatic 30-something college dropout, the company attracted investments from some of the biggest names inside and outside of the industry, as its blood testing technology appeared to be on the verge of revolutionizing an industry plagued with long delays and unnecessary costs. Holmes became the world’s youngest self-made female billionaire and the instantly-recognizable face of Silicon Valley’s startup culture.
But, according to the SEC, the Theranos empire was almost all smoke and mirrors. Allegations against Theranos, Holmes and Balwani range from misrepresenting that their proprietary technology could conduct comprehensive testing with a single drop of blood (when in reality they relied heavily on pre-existing industry-standard products), to claiming that they company would generate $100 million in revenue in a year when it generated little more than $100,000. The company has faced numerous private lawsuits from investors based upon similar allegations as well.
As a result of the settlement, Holmes will pay a $500,000 fine and return the 18.9 million shares she acquired in Theranos during the fraud, and she will not be entitled to any profits from Theranos until the company has returned more than $750 million to its investors. She is also being forced to give up control of the company and will be prohibited from serving as an officer or director of a public company for 10 years.
A Cautionary Tale for Silicon Valley Investors
While the Theranos case is undoubtedly an extreme example, it should nonetheless serve as a cautionary tale for individuals thinking about investing in Silicon Valley startups and other early-stage companies seeking equity investment. Potential investors need to do their research, verify all information and avoid making investment decisions based upon company sales pitches or media hype. A former media darling, Theranos is now a symbol of what can go wrong when a company takes advantage of its public image to secure funds from investors who are hoping not to miss out on the next big thing.
Although private companies often fly under the SEC’s radar (Theranos never went public), they are subject to many of the same investment laws and regulations as publicly-traded companies. This means that they need to be candid when sharing information with potential investors, and that their investors can pursue legal remedies when they discover that they have fallen victim to fraud.
Are You Concerned About Financial Fraud? Contact Zamansky, LLC
If you are concerned that you may have lost money in an investment fraud or financial fraud scheme, we encourage you to contact us to discuss your case. To speak with an experienced lawyer at Zamansky, LLC in confidence, please call (646) 633-5628 or request an appointment online today.