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Billionaire startup founders charged with fraud

Getty Images for techcrunch Elizabeth Holmes at an event in 2014: false claimsGetty Images for techcrunch

The Securities and Exchange Commission (SEC), the federal agency that regulates capital markets in the US, has formally charged biotechnology company Theranos, its founder Elizabeth Holmes, and former president Ramesh Balwani with commiting “an elaborate, years-long fraud in which they exaggerated or made false statements about the company’s technology, business, and financial performance.” To settle the case with the SEC, Holmes agreed to pay a fine of US$500,000 and to return 18.9 million of the company’s shares. The company, of which she owns 50%, was once valued at US$4.5 billion, leading to comparisons between Holmes and entrepreneurs such as Steve Jobs and Mark Zuckerberg. All money raised by the company from now on will be used to pay back investors.

Based in Silicon Valley, California, Theranos developed a blood-testing device called Edison that it claimed was capable of testing for various health issues, including cholesterol levels and cancer, using just a few drops of blood. The startup raised US$750 million from investors, including Larry Ellison, the founder of Oracle. Two years ago, a report in The Wall Street Journal revealed that the technology was neither mature nor scalable. Company employees had doubts about the accuracy of the tests—they detected lower cholesterol levels than traditional blood exams, for example. The claim that only a few drops of blood were needed for a diagnosis was also exaggerated, although the method does require less blood than other exams. The company was also found to have been secretly conducting tests using conventional methods and equipment. Of the 240 types of exams offered by Theranos, only 15 were performed by the Edison machine.

It had promised to generate revenues of US$100 million in 2014, but only earned US$100,000. “The Theranos story is an important lesson for Silicon Valley,” said Jina Choi, director of the SEC’s San Francisco Regional Office, as reported by Reuters. “Innovators who seek to revolutionize and disrupt an industry must tell investors the truth about what their technology can do today, not just what they hope it might do someday.”