The company’s former president, Ramesh “Sunny” Balwani, was also charged with federal criminal wire fraud charges. Holmes and Balwani both appeared in U.S. District Court in San Jose, Calif., for their arraignment Friday afternoon.
The blood testing company’s board of directors announced Friday that David Taylor, Theranos’ general counsel, has been appointed CEO.
The criminal charges allege that Holmes and Balwani defrauded investors of hundreds of millions of dollars by lying about the abilities of Theranos’ technology to perform a wide array of blood tests from just a finger prick rather than requiring a vial of blood to be drawn from the patient.
The indictment, returned Thursday and unsealed Friday, alleged the pair, who were a couple during part of the company’s history, also defrauded doctors and patients.
Holmes will remain with the company as founder and chair of the board, Theranos said in a statement Friday. The company did not respond to a request for comment on the charges.
Holmes, 34, once graced the cover of countless magazines and was worth billions on paper. With its technology still a secret, Theranos had garnered the backing of a Who’s Who of Silicon Valley and government elite, including Gen. James Mattis, who then led the U.S. Central Command, former secretaries of State Henry Kissinger and George Shultz.
Her downfall began with a series of stories reported by the Wall Street Journal that questioned the statements the company was making about its technology.
Holmes and Balwani used ads and solicitations to encourage doctors and patients to use Theranos’s blood testing services, even though they knew the tests were not capable of consistently producing accurate and reliable results for certain blood tests, according to the indictment. Hundreds of patients paid for blood tests and test results that were inaccurate, unreliable, and improperly validated, and in some cases which had had critical results removed, according to the indictment.
The tale of a young and charismatic CEO who charmed investors with a tale of Silicon Valley innovation has all the makings of a movie – and may be headed for the silver screen. Wall Street Journal reporter John Carreyrou, who helped break the story, came out with a book on the company just last month, titled “Bad Blood: Secrets and Lies in a Silicon Valley Startup.” The movie version was slated to star Jennifer Lawrence as Holmes.
It’s also a cautionary tale of the cult of the CEO and the danger of boards not paying close attention to the companies they supposedly oversee.
In Theranos’ case, the scheme to defraud investors and users was not only illegal but threatened the very heart of Silicon Valley’s success, the FBI’s Special Agent in Charge Bennett said in a statement.
“Investors large and small from around the world are attracted to Silicon Valley by its track record, its talent, and its promise. They are also attracted by the fact that behind the innovation and entrepreneurship are rules of law that require honesty, fair play, and transparency,” he said.
The agency “will vigorously investigate and prosecute those who do not play by the rules that make Silicon Valley work,” he said.
The criminal charges come three months after the Holmes was charged with “massive fraud” by the Securities and Exchange Commission. According to the SEC complaint, Theranos raised more than $700 million from late 2013 to 2015 while “deceiving investors by making it appear as if Theranos had successfully developed a commercially-ready portable blood analyzer” that could perform a full range of laboratory tests from a small sample of blood.
“But in reality, we allege that after years of development, Theranos was able to process just a small number of blood tests upon its proprietary analyzer, and instead conducted the vast majority of its patients’ tests on modified commercial analyzers that were manufactured by others,” Steven Peikin, the SEC’s co-director of enforcement, told reporters.
The SEC complaint also charged the pair with lying about the technology being used by the Department of Defense in battlefield situations.