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Understanding Investor Fraud in the Wake of the Theranos Investigation

Published on April 25, 2018

She was seen as the next Steve Jobs or Bill Gates, but it turns out that Elizabeth Holmes and the $9 billion blood testing startup she founded at the age of 19 were little more than smoke and mirrors. Theranos raised over $700 million from investors eager to cash in on the promise of technology that would revolutionize blood testing. The only hitch was that their blood testing device was unable to perform as well as they hoped. Holmes continued to attract investors with false promises, effectively committing investor fraud.

Fraud charges are serious, and they bring with them harsh penalties. If you or a loved one are facing such charges, contact a Los Angeles fraud attorney or staff member from Spolin Law P.C. at (310) 424-5816 to schedule a free case consultation.

What Will Happen to the Theranos CEO?

Unlike Bernie Madoff or Martin Shkreli, who received criminal sentences for defrauding their investors, Holmes has so far escaped criminal prosecution. This March, she settled a complaint with the Securities and Exchange Commission (SEC), which accused her and Theranos of fraud. Neither she nor the company admitted to any wrongdoing. In exchange, Holmes has agreed to:

Pay a $500,000 fine.
Not serve as director or officer of a publicly traded company for 10 years
Return 18.9 million shares of Theranos stock.
Give up her majority voting control of the company by swapping from Class A to Class B Common shares.

These penalties are not particularly harsh. Theranos is not a publicly-traded company, so Holmes can and will continue to serve as the CEO of the company she founded in 2003. Furthermore, Holmes will avoid costly litigation with defrauded investors, because most of them agreed to not sue her after she offered them shares in Theranos’ new preferred stock.

Holmes Targeted Gullible Investors and Board Members Who Looked Past Technical Details

Few people with a solid science background backed Theranos or served on its board of directors. Instead, Holmes wooed top a-list board members such as former secretaries of state George Schultz and Henry Kissinger with grandiose promises of revolutionizing the blood testing process. Holmes’ strength was in confidently selling the future impact of her device on multiple industry sectors, from health care to defense.

Holmes said her company was able to conduct a complete battery of tests from just one drop of blood, whereas traditional testing would require several vials. But when pressed for technical details, Holmes remained elusive, saying, “a chemistry is performed so that a chemical reaction occurs and generates a signal from the chemical interaction with the sample, which is translated into a result, which is then reviewed by certified laboratory personnel.”

Theranos Will Likely not Survive After Fraud Allegations

Theranos has struggled since a 2015 Wall Street Journal article revealed that its blood testing technology was not performing as well as Holmes claimed. While she and Theranos never admitted to lying about their technological prowess, investors began to panic. Her combative television appearances became increasingly bizarre as more and more evidence of the investor fraud emerged.

Walgreens, Theranos’ partner in a blood testing business, jumped ship, which leaves the company without broad access to customers. The lack of demand prompted Theranos to shut down some of its labs and lay off almost half of its employees. Yet, Theranos is still in business, and Holmes is still its CEO. The firm is now developing a new “mini-lab” blood testing apparatus. But in all likelihood, the taint of Holmes’ monumental fraud will keep Theranos from ever attaining its prophesied status.

Will Holmes Get Charged with a Crime?

Investor fraud may result in civil lawsuits from the victims, criminal prosecution from the government, and civil action from the SEC. So far, Holmes has faced only charges from the SEC, which she promptly settled. She was able to ward off civil lawsuits with investors through a share swap. But it’s hard to believe that the suspected perpetrator of a $700 million fraud will escape criminal charges.

The U.S. Attorney’s Office in San Francisco is investigating Holmes, but has not shared any information with the press. According to former SEC Enforcement Division lawyer and legal head of the Office of the Special Inspector General for the Troubled Asset Relief Program (SGTARP), “the fact that the alleged fraud was not just financial but also presented a potential harm to public safety is a further factor that could motivate DOJ to investigate.”

Facing Fraud Charges? Call Spolin Law P.C. for Help

To convict you of investor fraud, a prosecutor must show beyond a reasonable doubt that you knowingly lied to investors with the intent of convincing them to give you money. In these circumstances, the assistance of an experienced Los Angeles fraud attorney from Spolin Law P.C. is essential. If you believe you are under investigation for fraud, now is the time to get legal help.