The former CEO and chief operating officer of embattled Palo Alto blood-testing company Theranos have been indicted by a federal grand jury for an alleged multimillion-dollar scheme to defraud investors, doctors and patients.
Elizabeth Holmes, 34, of Los Altos Hills, and Ramesh "Sunny" Balwani, 53, of Atherton, have been charged with two counts of conspiracy to commit wire fraud and nine counts of wire fraud.
Holmes dropped out of Stanford University at the age of 19 to found Theranos in 2003. Balwani held various positions within the company during his seven years there, starting in 2009, notably as chief operating officer, president and member of the board of directors.
An indictment unsealed Friday accuses the pair of carrying out a multimillion dollar scheme against their investors and a separate one against doctors and patients by asserting the company could provide accurate, affordable and fast blood tests and test results based on a few drops of blood. The 11-page document also accuses the two of leaving out the limitations and drawbacks to the company's technology.
The defendants appeared before U.S. Magistrate Judge Susan van Keulen on Friday in federal court in San Jose for arraignment. They pleaded not guilty to the charges, posted $500,000 bail and surrendered their passports. Their next court appearance on the case was set for Aug. 15.
If convicted, they each face up to 20 years in prison, $250,000 in fines and restitution for each count, a press release issued Friday by the U.S. Attorney's Office states.
Holmes and Balwani allegedly used advertisements and solicitations to persuade doctors and patients to use the company's services, despite knowing certain blood tests wouldn't provide accurate results, according to the indictment. The advertisements promoted Theranos' blood tests at Walgreens stores in California and Arizona.
The blood tests were for chemical elements and components such as calcium and chloride; HIV; glycated hemoglobin; and human chorionic gonadotropin, also known as hCG. hCG is a hormone found in pregnant women, according to the Centers for Disease Control and Prevention.
"The tests performed on Theranos technology, in addition, were likely to contain inaccurate and unreliable results," the press release states.
In promoting the company's services, Holmes and Balwani allegedly claimed the company had a "revolutionary and proprietary analyzer" capable of conducting multiple clinical tests through small blood samples drawn from a finger stick, the indictment states. The analyzer went by different names including TSPU, Edison and minilab.
A mix of marketing materials, media statements, models and other communications were used to convey that the results were more valid than conventional methods and produced at a faster rate than current devices, the U.S. Attorney's Office said. The pair was aware of their misrepresentation of the analyzer, which in reality performed a limited number of tests, had a slow performance rate, produced inaccurate results and, in some instances, weren't competitive with current machines.
"This conspiracy misled doctors and patients about the reliability of medical tests that endangered health and lives," FBI Special Agent in Charge John F. Bennett said in the press release.
Some patients were referred by their doctors to Theranos' services, which produced test results without vital information that was wrongly removed, the indictment states.
Theranos financially benefited from the alleged scheme in the form of payments from their patients, patients' medical insurance companies or Walgreens, the indictment said.
Potential investors were also defrauded through multiple alleged schemes, including technology demonstrations in which the would-be investors were led to mistakenly believe they were witnessing a blood test done by the company's analyzer when they weren't, the indictment states. Holmes and Balwani also allegedly bought commercial, third-party analyzers that they presented to investors as Theranos-manufactured analyzers.
The defendants also allegedly told investors that the company would make $100 million in revenues and break even in 2014, with estimates of $1 billion in revenues the following year, according to the indictment.
In 2014, Theranos was valued at $9 billion. Holmes, who had become the darling of the Silicon Valley tech world, and Theranos at one time enjoyed the strong support of high-powered persons. Former Secretaries of State George Shultz and Henry Kissinger served on the Theranos board, as did former Secretary of State William Perry and James Mattis, prior to his current appointment as Secretary of Defense. Investors included the founders of Walmart, media mogul Rupert Murdoch and Secretary of Education Betsy deVos, according to the Wall Street Journal.
The federal grand jury also called to question the company's claims surrounding their business relationships. Holmes and Balwani are accused of telling investors that Theranos was earning profit from work done for the U.S. Department of Defense, which was using their technology on the battlefield, which turned out to be false, according to the indictment. Additionally, the defendants asserted that Theranos would expand the number of Wellness Centers at Walgreens stores, but by late 2014 the rollout at the stores came to a halt after the company's performance drew concern.
In March, Holmes agreed to pay a $500,000 fine as part of a settlement of a civil fraud case brought by the U.S. Securities and Exchange Commission (SEC), which was investigating the offer and sale of Theranos securities from 2013 to 2015. The settlement dictated that Holmes will not be eligible to serve as a director or officer of a publicly traded company for 10 years, and she will return about 18.9 million shares of stock and relinquish her super-voting equity rights. Neither Theranos nor Holmes admitted or denied any wrongdoing, a March 14 company press release states.
In early April, the company laid off most of its employees, save for two dozen or fewer, the Wall Street Journal reported at the time.
According to CNBC, Theranos reported Friday Holmes has resigned as CEO and that its general counsel, David Taylor, has replaced her. Holmes continues to serve as chair of the company's board.
The U.S. Attorney's Office and FBI were aided in the investigation by personnel from the U.S. Food and Drug Administration and U.S. Postal Inspection Service.
Holmes is represented by San Francisco attorney John D. Cline and Kevin M. Downey of Washington, D.C. firm Williams & Connolly LLP.
Balwani's lawyers are Jeffrey Coopersmith and Kelly Michelle Gorton of law firm Davis Wright Tremaine LLP.