Rise and bloody downfall of a Silicon Valley star

Holding up a few drops of blood, Elizabeth Holmes became a darling of Silicon Valley by promising that her company's new device would give everyday Americans unlimited control over their health with a single finger prick.

Holmes, a Stanford University dropout who founded her company, Theranos, at age 19, captivated investors and the public with her invention: a technology cheaply done at a local drugstore that could detect a range of illnesses, from diabetes to cancer.

With that carefully crafted pitch, Holmes, whose striking stage presence in a uniform of black turtlenecks drew comparisons to Steve Jobs, became an overnight celebrity, featured on magazine covers and richest-woman lists and in glowing articles.

Her fall - and the near-collapse of Theranos - has been equally dramatic in the last few years. On Wednesday, the Securities and Exchange Commission charged Holmes, now 34, with widespread fraud, accusing her of exaggerating - even lying - about her technology while raising $700 million from investors.

The company, whose valuation was once estimated at $9 billion, has skirted bankruptcy and is now barely afloat. Holmes was exceptionally secretive about the private company's finances and its intellectual property.

In announcing the charges, the SEC said that Theranos and Holmes had agreed to a settlement, with Holmes agreeing to pay a $500,000 penalty. Holmes, who clung to her position as chief executive even after revelations about Theranos first surfaced three years ago, will be stripped of control of her company. She is barred from serving as an officer or director of any public company for 10 years.

She and the company did not admit or deny the allegations, and the settlement will have to be approved in court, the SEC said. A lawyer for Holmes, John Dwyer, declined to comment. Theranos said in a statement that it was "pleased to be bringing this matter to a close and looks forward to advancing its technology."

The troubled arc of Holmes' reign over the company has stunned Silicon Valley investors and served as a cautionary counterpoint to the success stories of other self-made billionaires, like Mark Zuckerberg and Elon Musk.

"There are a handful of people who, whether through vision or communication skills or both, can rally employees and investors and the ecosystem to try and do something big," said Bryan Roberts, a partner at Venrock who invests in health startups. "Arguably, she was one of those people."

"This is Silicon Valley hubris in force," said Lakshman Ramamurthy, a former official with the Food and Drug Administration and currently the global regulatory lead at Foundation Medicine.

At its height, Theranos was viewed as the tech world's answer to the nation's antiquated and high-cost health care system - heralded as another example of how Silicon Valley would disrupt major industries. Through its proprietary "nanotainer" devices, the company claimed to be able to perform myriad lab tests from just a few drops of blood, avoiding the pain and inconvenience of a conventional blood test. In a vote of confidence, Walgreens signed onto a partnership in 2013 placing Theranos "wellness centres" inside some of its drugstores.

Prominent venture capitalists soon signed on, including Timothy Draper, Holmes' former neighbour, and Don Lucas, an early investor in Oracle. Holmes also assembled a star-studded board of directors, including the former secretaries of state George P Shultz and Henry A Kissinger as well as two former US senators. General Jim Mattis, the current secretary of defence, also served on the board: he told Fortune magazine in 2014 that he joined the board after retiring from the military because he was impressed by the strength of Theranos' leadership.

In October 2015, Holmes, in her signature turtleneck, appeared on the cover of Inc. magazine, next to the headline The Next Steve Jobs. That month marked a turning point: a series of articles in The Wall Street Journal cast doubt on whether the technology worked, leading to a spate of investigations. Well-known lawyer David Boies not only defended Theranos, but he also joined the board at the height of the company's turmoil. The company faces a separate federal criminal inquiry, in which no charges have been filed yet.

In 2016, federal regulators barred Holmes from owning and operating a medical laboratory for two years, sanctions that Theranos said it would appeal. Later that year, Theranos announced it was closing its lab and laying off about 340 employees, or more than 40% of its workforce. Walgreens also sued Theranos over a breach of contract, although the companies later settled for an undisclosed amount.

Exaggerated claims

The SEC complaint made public on Wednesday outlined a concerted effort by Holmes and Theranos to exaggerate the company's technology, when in fact the vast majority of the tests it was conducting was done using traditional equipment made by other companies. Holmes also claimed that the Defense Department was deploying the company's test in battlefield settings, which was untrue, according to the complaint.

Holmes and the company even went so far as to demonstrate their product on potential investors, the SEC said, drawing their blood through a finger stick and placing it in one of Theranos' nanotainers. But while investors thought their blood was being tested with the company's technology, Theranos "often actually tested their blood on third-party analysers, because Theranos could not conduct all of the tests it offered prospective investors on its proprietary analysers," according to the complaint.

"The Theranos story is an important lesson for Silicon Valley," Jina L Choi, director of the SEC's San Francisco regional office, said in a statement. "Innovators who seek to revolutionise 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."

Theranos' saga has proved mesmerising: Tyler Shultz, the grandson of the former secretary of state and a Theranos director, was revealed to be a key source behind The Wall Street Journal's investigation in 2016. A former Theranos employee, Shultz is described as cooperating with federal investigators on matters that pitted him against his grandfather, a key adviser to Holmes. Jennifer Lawrence will play Holmes in a forthcoming movie.

The company's future remains unclear. In an attempt to salvage her company two years ago, Holmes tried to pivot Theranos away from conducting lab tests to developing a miniature lab testing machine that could be used in doctors' offices. It was able to raise $100 million in debt last December, according to Crunchbase.

But unlike another highly scrutinised testing company, 23andMe, which faced a moratorium by the Food and Drug Administration on its genetic tests in 2013 but was recently allowed to begin offering certain tests directly to consumers, Theranos "is a contrasting tale," Ramamurthy said.

In a separate complaint, the SEC also accused Theranos' former president, Ramesh Balwani, of participating in the fraud. The commission said it planned to pursue its claims against Balwani in US District Court for the Northern District of California.

Jeffrey B Coopersmith, Balwani's lawyer, described the SEC's actions on Wednesday as "unwarranted." Balwani invested millions of dollars in Theranos, Coopersmith said, and "never benefited financially from his work at the company.