Theranos: One Machine for the Tour, Another for the Test

Theranos’ CEO agreed to a $500,000 civil penalty in the Theranos securities enforcement case over allegations that the company raised money on false claims about its blood-testing technology. The SEC alleged that investors saw proprietary analyzers and received test results while other manufacturers’ machines did much of the work. If you knew which machine processed a sample or why a test disappeared from an order, you could see something the investor could not.

The Securities and Exchange Commission charged the privately held diagnostics company and its founder and CEO together, and its former president and chief operating officer in a separate complaint. The SEC emphasized that private companies and businesses still developing a product must tell investors the truth. Here we follow the Theranos laboratory, demonstrations, investor materials and financial claims. Our broader account of false product and business capability claims follows the same problem across other businesses.

The Analyzer on the Menu and the Machine in the Lab

According to the SEC’s complaint against Theranos and its CEO, investors understood that the company could run a comprehensive range of laboratory tests from a few drops of blood taken by fingerstick. The sample would go onto a cartridge, into a proprietary analyzer, and produce results Theranos could transmit to a patient or care provider. The promised advantage was faster, cheaper and more accurate testing in a compact instrument that could work outside a traditional laboratory.

The SEC alleged that Theranos’ proprietary analyzer performed approximately 12 of the more than 200 tests on its published patient menu. Other manufacturers’ analyzers handled the remainder. Some had been modified to process fingerstick samples, while other testing used standard laboratory equipment or outside laboratories.

The generations of equipment mattered. The complaint described an earlier analyzer limited to immunochemistry testing and a later version, the miniLab, intended to handle a broader range of methods. As the retail launch approached, the SEC alleged, Theranos had not completed the scientific verification needed to make any miniLab test available for patient testing. It instead used the earlier analyzer and asked engineers to modify commercially available machines.

The complaint says the miniLab never performed patient testing in Theranos’ clinical laboratory between the retail launch in September 2013 and the laboratories’ closure. For an employee who knew the test menu, instrument assignments or verification work, the difference between a machine under development and one producing patient results was visible every day. That distinction sat at the center of what investors were buying.

A Demonstration Followed by a Binder

The SEC described an investor solicitation that commonly combined a meeting with the CEO, a technology demonstration and a binder of materials. Prospective investors saw Theranos’ analyzers and had blood drawn by fingerstick. Their samples were either put into an analyzer or taken away, and they believed the results came from the company’s equipment.

According to the complaint, Theranos often processed those samples on third-party analyzers because its own equipment could not run all the tests offered to prospective investors. The alleged substitution extended beyond headquarters demonstrations. When potential investors tried the service at a pharmacy with a physician’s laboratory order, the CEO instructed employees to remove tests the company could not perform from a fingerstick collection. In the SEC’s account, the order was edited to fit the demonstration.

The complaint also described a tour for pharmacy executives before the retail launch. The CEO allegedly had rows of miniLabs placed in a clinical-laboratory room even though those instruments could be used only for research and development. In the SEC’s allegation, the miniLabs were ready for the tour. They were not ready for the work.

The binder carried that impression beyond the visit. It contained a company overview, financial projections, clinical-trial reports and media profiles, along with incorporation and shareholder documents. The SEC alleged that reports bearing pharmaceutical-company logos looked like outside endorsements, although only one had been co-written by a pharmaceutical client:

For someone who prepared those materials, the author and the logo told different stories. The SEC alleged that investors believed the pharmaceutical companies had written endorsements they had not written. Drafts, approvals and the version delivered to an investor can explain how an internal report acquired the appearance of independent validation.

The Business Claims Behind the Blood-Test Pitch

The technology claim came with a commercial story. The SEC alleged that military relationships, retail expansion, regulatory assurances and revenue figures reinforced investors’ belief that Theranos had a working business built around its proprietary technology. Each claim reached a different part of the company, with its own contracts, correspondence and financial records.

The SEC’s Allegation of a Burn Study Sold as Battlefield Deployment

The SEC alleged that the CEO told investors Theranos technology had been deployed by the Defense Department in Afghanistan and on medevac helicopters. The complaint says the technology had been used in a Defense Department burn study, but never in those battlefield or helicopter settings. It put revenue from three Defense Department contracts at approximately $300,000.

Those relationships supplied credibility as well as a revenue story. According to the complaint, the CEO’s cover letter suggested contracts had funded the company’s growth, while Theranos primarily grew through investor financing. Someone familiar with the military work could distinguish a study from an operational deployment and contract proceeds from money supplied by shareholders.

The SEC’s Allegation of Expansion Plans Built on Stalled Relationships

The SEC alleged that investors heard Theranos would expand into hundreds of pharmacy stores even as that relationship had stalled. Pharmacy executives had concerns about performance, including the lower-than-expected share of fingerstick collections. The parties discussed changing the relationship so that Theranos would rent store space, developments the CEO allegedly did not share with investors.

The grocery relationship had its own gap. The complaint alleged that the CEO continued describing a coming rollout after the companies had stopped communicating. These partnerships mattered because investors treated them as evidence of commercial readiness and sources of future revenue. An employee handling rollout plans or contract changes could see whether the expansion in the presentation still matched the agreement being negotiated.

FDA Correspondence Said Approval Was Necessary

The SEC alleged that the CEO told investors Theranos was seeking FDA approval voluntarily. According to the complaint, FDA representatives had already told the company through meetings and letters that clearance or approval was necessary for its analyzer and tests. The CEO agreed to submit the technology’s components while continuing to describe the effort to investors as voluntary.

For the regulatory employee, the useful comparison was the agency correspondence against the assurance in the financing discussion. The SEC’s point was commercial: required approval stood between Theranos and full commercialization. A representation about regulatory status therefore helped sell the revenue story too.

The SEC’s Allegation of Different Revenue Figures for Investors

The complaint alleged that investor materials projected more than $100 million in revenue for 2014 and approximately $1 billion for 2015. The SEC put actual 2014 operating revenue at little more than $100,000. It also alleged that Theranos supplied its actual revenue figures to a firm hired to value the company’s common stock while giving investors a different financial picture.

The projected business lines made the comparison concrete. According to the complaint, Theranos forecast revenue from pharmaceutical services and laboratory services for hospitals and physicians’ offices even though those lines generated none that year. The SEC alleged that the projections made investors believe the company had already secured contracts capable of delivering that income.

The financing worked: the SEC alleged that Theranos and its executives raised more than $700 million from late 2013 through 2015. That was money investors put into the company. The revenue figures described what the business could earn from its operations, and the alleged difference between those stories ran through the investor binder.

What the People Inside Theranos Could See

The securities fraud evidence in this kind of case connects what an investor heard to what people inside the business knew at the time. At Theranos, the complaint described engineers modifying analyzers, employees preparing demonstrations, staff compiling investor binders and executives presenting commercial and financial claims. An insider’s contribution is knowing how those activities fit together.

For laboratory and engineering staff, instrument records and sample routing can connect the blood draw to the machine that produced the result. Test-verification work can show whether a claimed capability existed when investors were shown it. For staff preparing investor materials, report drafts and presentation versions can connect an internal document to the endorsement or product claim the investor received.

Finance and commercial staff see another part of that comparison. Revenue records and the information sent to a valuation firm can test the figures in an investor presentation. Contract changes, store plans and FDA correspondence can explain whether the assumptions behind a forecast matched what the company knew. We work with insiders to connect those records to the representation and the people responsible for it.

A study of occupational fraud, The Significance of Whistleblowing as an Anti-Fraud Measure, published in the Journal of Forensic & Investigative Accounting in 2018, found that fraud was more likely to be detected through whistleblowing when more people participated in the scheme. The Theranos complaint illustrates why different operational perspectives can matter: the person who prepared the demonstration and the person who prepared the projections could explain different parts of the same investor pitch.

The SEC’s action concerning Momentus and Stable Road supplies a parallel. The agency alleged that a failed in-space test was represented as successful and that Stable Road repeated the claims without reviewing the test results or adequate licensing documentation. In both accounts, the employee who knew what the test actually showed could explain what the financing materials left out.

For insiders with evidence of securities fraud, SEC whistleblower awards can pay 10% to 30% of qualifying sanctions collected when the SEC action exceeds $1 million in monetary sanctions. We assess how your information can support an enforcement action and an award claim.

The SEC’s Civil Resolution

In its March 2018 announcement, the SEC said Theranos and its CEO had agreed to settle the fraud charges. Alongside the CEO’s cash penalty, the agreed terms required her to return 18.9 million shares and give up voting control by converting super-majority shares into Class A common shares. She also agreed to a ten-year bar on serving as an officer or director of a public company. We see a cash penalty dwarfed by the investor money the SEC said the company raised.

The voting-control term addressed a specific feature of the fundraising. The complaint alleged that the CEO obtained a special class of shares that left her with over 99% of the voting power while outside investors supplied capital. Reading SEC complaints and settlement documents together shows how the agreed terms reached both her equity stake and her control of the company. The SEC also described a provision putting defrauded investors and other preferred shareholders ahead of the CEO if Theranos were sold or liquidated.

You Know What Ran the Test

If you know why a demonstration worked, who wrote an apparent endorsement or why investors received different revenue figures, speak to one of our whistleblower experts about what really ran the test. We build your strongest securities whistleblower case around what you know and bring in securities fraud whistleblower lawyers who understand technology and financing claims. We stay beside you as that knowledge becomes a case the SEC can investigate.