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March 16, 2018 at 10:11 AM
The Securities and Exchange Commission charged Silicon Valley-based private company Theranos Inc., its founder and CEO Elizabeth Holmes, and its former President Ramesh “Sunny” Balwani with raising more than $700 million from investors through an elaborate, years-long fraud in which they exaggerated or made false statements about the company’s technology, business and financial performance.
Theranos and Holmes have agreed to resolve the charges against them. 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.”
The complaints allege that Theranos, Holmes and Balwani made numerous false and misleading statements in investor presentations, product demonstrations and media articles by which they deceived investors into believing that its key product — a portable blood analyzer — could conduct comprehensive blood tests from finger drops of blood, revolutionizing the blood testing industry.
In truth, according to the SEC’s complaint, Theranos’ proprietary analyzer could complete only a small number of tests, and the company conducted the vast majority of patient tests on modified and industry-standard commercial analyzers manufactured by others.
The complaints further charge that Theranos, Holmes and Balwani claimed that Theranos’ products were deployed by the Defense Department on the battlefield in Afghanistan and on medevac helicopters and that the company would generate more than $100 million in revenue in 2014. In truth, Theranos’ technology was never deployed by the Defense Department and generated a little more than $100,000 in revenue from operations in 2014.
“Investors are entitled to nothing less than complete truth and candor from companies and their executives,” said Steven Peikin, Co-Director of the SEC’s Enforcement Division. “The charges against Theranos, Holmes, and Balwani make clear that there is no exemption from the anti-fraud provisions of the federal securities laws simply because a company is nonpublic, development-stage, or the subject of exuberant media attention.”
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 supermajority Theranos Class B Common shares to Class A Common shares.
Insurance Agent Arrested In Annuity-Related Fraud Scheme
The California Insurance Commissioner announced that Department of Insurance detectives arrested an insurance agent on 16 felony counts related to a $1.6 million fraud scheme targeting elderly southern California residents.
Mark Malatesta, a licensed insurance agent at the time, allegedly exploited at least six elderly consumers by falsifying information on annuity applications and netted more than $135,000 in illegal commissions. Malatesta faces a range of other charges.
An investigation revealed Malatesta persuaded his senior victims to terminate their investments, causing them to lose a total of $45,000 in surrender penalties. Malatesta then sold them new annuities for which they did not qualify due to their advanced age. The fraudulent investments were canceled by the insurers once they discovered Malatesta provided false information.
When insurers canceled the new investments, they refunded the $1.6 million in deposits to the victims. The department suspended Malatesta’s insurance license and will pursue revocation if he is convicted.
SEC Foils Penny Stock Executive’s Plan to Pump Stock and Exploit Investors
