Theranos founder Elizabeth Holmes and former president Balwani charged by feds with wire fraud

  • Elizabeth Holmes, the founder of Theranos, was criminally charged with wire fraud along with former company president Ramesh "Sunny" Balwani on Friday.
  • Holmes' charges and departure as CEO come three months after the Securities and Exchange Commission sued Holmes and Theranos for a "massive fraud" at the company.
  • Investors in the company included Rupert Murdoch, Tim Draper, Education Secretary Betsy DeVos, and the Walton family, which founded Walmart, according to court files.

Elizabeth Holmes, the college dropout who founded the blood-testing company Theranos, and the firm's ex-president Ramesh "Sunny" Balwani were indicted Friday on criminal charges related to false claims they made about the accuracy of their much-hyped testing devices.

Both Holmes, who stepped down as CEO of the financially crippled company earlier Friday, and Balwani appeared in U.S. District Court in San Jose, California, for arraignment on two counts of conspiracy to commit wire fraud and nine counts of wire fraud.

Both Holmes and Balwani, who surrendered Friday to the FBI, were released on $500,000 bond each and ordered to surrender their passports at the arraignment, which was attended by Holmes' parents.

The indictment accuses Holmes, 34, and then 53-year-old Balwani of engaging in a multimillion-dollar scheme to defraud investors, and a separate scheme to defraud doctors and patients.

Both schemes involved efforts to promote Theranos by wildly overstating the technological capability of Theranos' blood-testing machines, as well as the company's revenue prospects and business contractual relationships, according to federal prosecutors.

Holmes and Balwani face up to 20 years in prison if convicted.

Theranos in 2013 had begun touting its devices as offering a less expensive and less painful option for drawing blood, from a finger stick.

The company, which at one point had a valuation of $9 billion, also claimed the devices would be able to test for a wide range of health conditions from just a few drops of blood.

Alex Tse, acting United States Attorney for the Northern District of California, said the alleged conspiracy of the duo "not only defrauded investors" but "more egregiously ... misled doctors and patients about the reliability of medical tests that endangered health and lives."

Tse's office said that Holmes and Balwani made claims in ads and solicitations to induce doctors and patients to use Theranos' blood-testing, "even though the defendants knew Theranos was not capable of consistently producing accurate and reliable results for certain blood tests."

"The tests performed on Theranos technology, in addition, were likely to contain inaccurate and unreliable results," the prosecutors' office said.

The indictment says that Holmes and Balwani also made "numerous misrepresentations to potential investors about Theranos' financial condition and its future prospects."

Those lies included claiming that the company used Theranos-made analyzers for patient tests when it was actually using third-party devices that were commercially available.

"The defendants also represented to investors that Theranos would generate over $100 million in revenues and break even in 2014 and that Theranos expected to generate approximately $1 billion in revenues in 2015 when, in truth, the defendants knew Theranos would generate only negligible or modest revenues in 2014 and 2015," according to the U.S. Attorney's Office.

Elizabeth Holmes, CEO of Theranos.
Brendan McDermid | Reuters
Elizabeth Holmes, CEO of Theranos.

On top of that, Holmes and Balwani claimed that Theranos "has a profitable and revenue-generating business relationship with the United States Department of Defense and that Theranos' technology had deployed to the battlefield," the office said.

In reality, Theranos has "limited revenue from military contracts and was not deployed in the battlefield," according to prosecutors.

Balwani's lawyer, Jeffrey Coopersmith, said, "In over 28 years of practicing law, as both a federal prosecutor and a defense attorney, I have never seen a case like this one, where the government brings a criminal prosecution against a defendant who obtained no financial benefit and lost millions of dollars of his own money."

"Mr. Balwani committed no crimes. He did not defraud Theranos investors, who were among the most sophisticated in the world. He did not defraud consumers but instead worked tirelessly to empower them with access to their own health information. Mr. Balwani is innocent and looks forward to clearing his name at trial," Coopersmith said.

Lawyers for Holmes declined to comment to CNBC after the arraignment.

Theranos said Friday that Holmes has been replaced as chief executive officer by David Taylor, who will also remain as general counsel.

Holmes will remain as chairman of Theranos' board, according to the company.

The criminal charges come three months after Holmes was slapped with a civil lawsuit in March by the Securities and Exchange Commission that alleged "massive fraud" by her and California-based Theranos.

The SEC had alleged that Theranos raised more than $700 million from investors between late 2013 and 2015 while at the same time "deceiving investors" by overselling the ability of the company's diagnostic devices.

At the same time of that complaint, Holmes agreed to a settlement with the SEC that stripped her of voting control of Theranos, required her to return nearly 19 million shares she obtained from the company "during the fraud," and also prevents her from serving as an officer or director of a public company for a decade.

Holmes, who had founded Theranos in 2003 as a 19-year-old Stanford University dropout, also agreed to fork over a $500,000 fine.

Holmes, who in dress and demeanor consciously mimicked Apple co-founder Steve Jobs, had previously been a media darling who wooed former secretaries of state George Schultz and Henry Kissinger to her company's board, along with now-Defense Secretary James Mattis.

But the company in recent years had burned through more than $600 million invested by a number of high-profile investors, including Walmart founders the Walton family, media baron Rupert Murdoch, and the family of U.S. Education Department Secretary Betsy DeVos. According to a recent lawsuit, each had invested $100 million or more in Theranos.

In April, Holmes told most of Theranos' 125 remaining employees that they would be out of work by this past Tuesday, The Wall Street Journal reported. And she told Theranos shareholders that the company could be liquidated by August.

Earlier this week, John Carreyrou, the Journal reporter who broke many damning articles about Theranos, said the company now has only 20 employees. At one point, 800 people had worked for the firm.

Theranos' downfall was set in motion by a series of stories in the Journal that undercut the company's high-flying claims.

The first Journal story, in October 2015, said that Theranos' machine was capable of doing only a small number of the tests it was selling customers.

Holmes fired back at the newspaper at that time, telling CNBC's Jim Cramer, "This is what happens when you work to change things. First they think you're crazy, then they fight you, and then all of a sudden you change the world."

But the SEC complaint showed the Journal was on track in its reporting.

Theranos duped investors by "hosting misleading technology demonstrations, and overstating the extent of Theranos' relationships with commercial partners," the complaint said.

At the time of those demonstrations, Theranos' technology could only do about 12 tests of the more than 200 tests the company claimed it could handle, the SEC said.