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Did Control Come at a Price for Theranos Founder?

Did Control Come at a Price for Theranos Founder?

In a couple years, when you go to see Jennifer Lawrence in the movie about blood-testing company Theranos, the most recent turn of events will come at the very end. That turn of events, if you’ve been following along, is the SEC’s civil settlement with founder Elizabeth Holmes. Having charged Holmes and Theranos with a “massive fraud,” the SEC settled with Holmes in a deal under which the charismatic founder must give up a $500,000 fine, millions of Theranos shares, and the ability to serve as an officer or director of any public company for the next decade.

 

It’s no wonder Hollywood has already picked up this tale. It features scads of famous investors and board members, many presumably duped into believing that Theranos was realizing its vision of performing a wide array of blood tests using just a pinprick of blood. There is a heroic young whistleblower, who sacrificed his relationship with his grandfather, George Schultz (the former secretary of state, Theranos board member, and Holmes loyalist) in order to do the right thing. There is power lawyer David Boies, whose firm plays an unseemly brand of damage control in a manner that is now all too familiar. There is a sure-to-be-bestselling book by a Pulitzer Prize winning reporter, John Carreyrou.

At the center of it all is Holmes herself, the brilliant Stanford dropout who willingly served as catnip to an adoring business press. She adopted a trademark black-turtleneck look, encouraging comparisons to Steve Jobs. More relevant to today’s Silicon Valley entrepreneurs, however, is the fact that she went to considerable lengths to retain control of her company. The SEC’s complaint details the fact that just as Theranos embarked on a $700 million financing spree, Holmes engineered the creation of a new class of shares, allowing her to retain 99 percent of the company’s voting power. The SEC’s co-director of enforcement, Steven Peikin, put it this way: “Really this company was a company that was a two-person operation, where Holmes and [COO ‘Sunny’] Balwani exclusively controlled Theranos. They were responsible for all of the misconduct alleged in this complaint,” he said.

According to Peikin, the SEC fashioned its response accordingly. It pursued action directly against Holmes, and not the company itself, because Holmes was the one in control and penalizing the company would only further damage defrauded investors. (The SEC is also going after Balwani. He has not settled civil charges against him.)

This should perhaps raise concerns for other Silicon Valley companies, such as Snap, in which the founders have retained a great degree of control, even after going public. Are they perhaps exposing themselves to enhanced liability? Peikin’s comments suggest they might be. “It’s a pretty unique set of remedies,” he said, speaking of the Holmes settlement. “And I think it’s a particularly meaningful one . . . in Silicon Valley where founders of startup companies like this obviously value the concept of control.”

But viewed from another perspective, Holmes does not seem to have suffered too much. The fraud that she and Theranos perpetrated cost investors hundreds of millions of dollars. Meanwhile, “pharma bro” Martin Shkreli, whose investors suffered no financial loss, was sentenced to seven years in prison.

Of course, there could yet be criminal charges coming against Holmes. The U.S. Attorney’s office in San Francisco, which had been investigating, isn’t talking. If they come after Holmes, her degree of control over Theranos may very well count against her. At that point, the credits will finally roll.

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