Theranos: SEC Sends Warning Shot to Silicon Valley

by: The Knowledge Group

March 20, 2018


Through the Theranos case, the U.S. Securities and Exchange Commission has put startup tech companies on notice. If you are challenging an industry that’s ripe for disruption, be up-front to your investors about every aspect of your business, including the current limits of your technology.

The Rise and Fall of Elizabeth Holmes

Elizabeth Holmes, who dropped out of Stanford University, has often been compared to Steve Jobs. Fifteen years ago, aged 34, Holmes set off to raise millions of dollars in startup funding for a new company in Palo Alto, California. Simply, it promised a cost-saving method of blood testing.

Holmes not only became a billionaire, but also had the charisma to attract Henry Kissinger and George Schultz, two former U.S. Secretaries of State, to the Theranos board.

But two years ago, a Wall Street Journal investigation of whistleblowers‘ claims came to the attention of state regulators and the SEC. Perhaps the company’s cutting-edge technology was not all it seemed. Its focal point was the “Edison” machine, vaunted as capable of detecting numerous diseases using just a few drops of a person’s blood. At worst, this put people at risk of having actual diseases missed, or misdiagnosed.

The Centers for Medicare and Medicaid Services pulled Holmes’s licensing to do blood test and to operate clinics. Spectacular layoffs followed.

And now, with the SEC case, Holmes has lost control of Theranos, has agreed to avoid serving as any public company’s officer or director for a decade, and has the responsibility of paying half a million dollars to settle the fraud case. Holmes has returned all ill-gotten shares in Theranos. Should the firm be liquidated, Holmes may not profit before investors recover at least $750 million.

What’s Next?

The SEC extracted about a million dollars from insurance startup Zenefits for misleading investors. It recently assessed a six-figure fine against Credit Karma Inc.—a billion-dollar private corporation—for failing to properly disclose employee stock options.

Watch for compliance-by-checklist to be replaced by algorithm-based software detecting problematic patterns within companies. The SEC might be well-advised to mandate it.

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