Theranos founder Elizabeth Holmes, former president indicted on wire fraud charges

ByChris Nguyen and Amanda del Castillo KGO logo
Saturday, June 16, 2018
Theranos founder Elizabeth Holmes indicted on wire fraud charges
EMBED <>More Videos

Theranos founder Elizabeth Holmes and former president Ramesh "Sunny" Balwani have been indicted on two counts of conspiracy to commit wire fraud and nine counts of wire fraud, the Department of Justice says.

SAN JOSE, Calif. (KGO) -- Theranos founder Elizabeth Holmes has been charged with multiple counts of wire fraud by the federal government and is now out as CEO. This all comes just three months after the SEC sued Holmes and the Palo Alto-based company for massive fraud.

RELATED: Theranos founder paying to settle charges she ran massive fraud

A federal grand jury has indicted Holmes, as well as her former president, Ramesh Balwani. The two of them appeared before a judge Friday afternoon, pleading not guilty to the charges.

Holmes was once considered a rising star, but on Friday afternoon, she appeared in U.S. District Court to face federal charges of wire fraud alongside Balwani.

Holmes dropped out of Stanford in 2003 when she was 19 years old, pitching the company's technology as a cheaper and more efficient way of doing blood tests.

Video shows her meeting with then-Vice President Joe Biden when he visited the company's Newark lab in 2015.

However, federal prosecutors say Holmes and Balwani engaged in a multi-million dollar scheme to defraud investors and a separate scheme to defraud doctors and patients, alleging the two of them knowingly lied about the accuracy and reliability of some of their products.

VIDEO: Journalist who broke Theranos fraud story walks through investigation

In a statement, U.S. Attorney Alex Tse for the Northern District of California said, "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."

Both Holmes and Balwani were each released on $500,000 bond and ordered to surrender their passports at the arraignment.

If convicted, Holmes and Balwani could each face up to 20 years in prison.

They'll return to court on August 15.

Below is a statement from Balwani's attorney:

In over 28 years of practicing law, as both a federal prosecutor and a defense attorney, I havenever seen a case like this one, where the government brings a criminal prosecution against adefendant 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.

The government has been under intense criticism for failing to prosecute cases arising from the worst financial crisis since the Great Depression, and it may have charged this case in response to that criticism. Ironically, right before Mr. Balwani joined Theranos in 2009, in the depths of that financial crisis, he guaranteed an unsecured, $12 million loan, saving scores of U.S.-based technology and manufacturing jobs without demanding common benefits typically provided by companies in these circumstances, such as significant financial concessions or greater control over the company. Mr. Balwani also did not demand a round of employee layoffs to reduce the risk of default by the company. When he joined Theranos shortly after that, Mr. Balwani asked for only $1 of annual compensation, and later purchased stock from Theranos with approximately $4.5 million of his own money so that the company could use the funds to build the business. Mr. Balwani had opportunities to sell his stock at a substantial profit but never sold even one share.

Mr. Balwani was also instrumental in assembling a team at Theranos of over 100 scientists with Ph.D and M.D. degrees. These employees, along with hundreds of others, worked extremely hard along with Mr. Balwani and Ms. Holmes to try to make Theranos a success. Unfortunately,in the end, Theranos was unable to execute on its business plan -- although it still created tremendous value. The value of Theranos' intellectual property is such that a lender used it to secure a $100 million loan to the company in late 2017. Mr. Balwani is a named inventor on many of the company's patents. If the federal government is going to start treating business failures as fraud cases, it will stifle the innovation that is the lifeblood the U.S. needs to stay globally competitive.

All Mr. Balwani did was put his heart and soul, and millions of dollars of his money, towardchanging the face of healthcare by giving people access to cost-effective blood tests so theycould take charge of their own health and monitor changes for signs of disease. Mr. Balwanibelieved so much in Theranos that over the years his own mother and other family membersused the company's lab to enable them to make informed decisions about important health carematters.Mr. Balwani looks forward to trial because he did not defraud anyone, and it will be an honor todefend him vigorously.