A tale of blood, fraud and money traces Theranos CEO's fall from grace

New York

ELIZABETH HOLMES, a college dropout turned chief executive, built her upstart blood-testing startup Theranos into a US$9 billion Silicon Valley darling with all the trappings of success.

A rare female founder in male-dominated Silicon Valley, she wove a compelling personal story: a 19-year-old wunderkind whose fear of needles drove her to invent a rapid blood-analysing technology that required just a few drops from a finger prick.

Over the years, Ms Holmes, now 34, persuaded some of the most powerful men in Washington to serve on her company's board - drafting former secretaries of state George Shultz and Henry Kissinger and Marine General Jim Mattis as advisers. Their reputations lent credibility, connections and heft to a young company that promised to upend medicine by making blood tests cheap, fast and accessible.

That story unravelled on Wednesday as the Securities and Exchange Commission (SEC) alleged a breathtaking scale of deception in the story that Ms Holmes and former company president Ramesh "Sunny" Balwani told to investors.

The SEC accused Ms Holmes, Theranos and Mr Balwani of an "elaborate, years-long fraud" that included misleading product demonstrations, false reassurances about regulators, incorrect claims that the technology had been deployed on the battlefield in Afghanistan and gross exaggerations about the company's financial status.

Ms Holmes and Theranos have not admitted or denied the allegations, but they have resolved the case. As part of her settlement, she agreed to a US$500,000 fine and a 10-year ban on serving as an officer or director of a public company. She will relinquish her majority voting control of the company and give up significant equity.

"I think it's a pretty unique set of remedies," said Steven Peikin, the co-director of the SEC's enforcement division. "I think it's a particularly meaningful one . . . in Silicon Valley, where the founders of start up companies like this obviously value the concept of control."

Mr Peikin would not say whether Ms Holmes or Mr Balwani could face criminal charges. Mr Balwani did not agree on a settlement and will face the SEC in court.

Theranos has been in free fall since 2015, when a Wall Street Journal investigation revealed problems at the company. Regulators uncovered deficiencies and banned Ms Holmes from owning or operating a laboratory for two years.

In detailed complaints, the SEC alleged that investors sank more than US$700 million into Theranos, swayed by exaggerations and misrepresentations of the proprietary blood-testing technology at the core of the business.

Ms Holmes founded Theranos in 2003, focused on developing its finger-stick blood analyser. Six years later, its funding was running out; Mr Balwani provided a line of credit for the company and became its president.

Ms Holmes and Mr Balwani turned to developing another version of the analyser, the miniLab, that would be capable of a broad variety of blood tests. Although the technology was not ready, they decided to try to partner with a large pharmacy chain and a large grocery chain to take their technology to consumers.

The commercial partners are not named by the SEC, but Theranos opened wellness centres in Walgreens drugstores in Arizona and California. The Wall Street Journal previously reported that Safeway spent US$350 million to build wellness clinics in its stores. Both agreements have since been terminated.

When the blood tests were due to be launched in the first drugstores in September 2013, the technology was not ready, according to the complaint. Instead, Ms Holmes and Mr Balwani allegedly asked company engineers to modify technology already commercially available to analyse samples - but did not disclose that to their commercial partners. WP, BLOOMBERG