I. WHY THIS CASE MADE THE LIST
A highly publicized and long-running multi-agency action against the former Chief Executive Officer and the former Chief Operating Officer of Theranos Inc. resulted in criminal convictions last year against both executives for their roles in deceiving investors, doctors, and patients about the Company's failed diagnostic tests. While this case is not premised upon violations of the Federal Food, Drug, and Cosmetic Act (FDCA)—and might even be considered by some industry observers to be ancient history at this point—the case is nevertheless important, and not only because the individuals at the helm were held personally and criminally accountable for their conduct. The case remains relevant because it has attracted the attention of lawmakers, and regulators are pointing to the underlying facts as a cautionary tale to promote a change in the regulatory landscape surrounding diagnostics.
II. SUMMARY OF THE CASE
Former Chief Executive Officer (CEO) of Theranos Inc. (Theranos or the Company), Elizabeth Holmes, and former President and Chief Operating Officer (COO), Ramesh "Sunny" Balwani, were indicted in June 2018 for defrauding investors, doctors, and patients by lying about the performance of the Company's blood testing technology and about the Company's financial condition, key business dealings, and future prospects.1 Charges were brought by the U.S. Department of Justice (DOJ) in the Northern District of California based on an investigation conducted by the Federal Bureau of Investigation (FBI), U.S. Food and Drug Administration (FDA), and the U.S. Postal Inspection Service (USPIS). Each defendant was charged with two counts of conspiracy to commit wire fraud, in violation of 18 U.S.C. § 1349, and nine counts of wire fraud, in violation of 18 U.S.C. § 1343.
Bryant Godfrey is a Partner at Foley Hoag LLP, where he advises FDA-regulated companies throughout the product lifecycle, including development, approval, labeling, advertising/promotion, post-marketing obligations, enforcement investigations, and regulatory strategy and compliance. Mr. Godfrey previously held several Senior Counsel positions with FDA where he advised on a range of issues relating to medical products and tobacco products. Tina Papagiannopoulos is a Counsel at Foley Hoag LLP, where she provides policy advice and counsels FDA-regulated clients on applicable regulatory and compliance requirements under the Federal Food, Drug, and Cosmetic Act; Public Health Service Act; and Federal Trade Commission Act.
In essence, the defendants were charged with making false statements in advertisements and using other methods to persuade doctors and patients to use the Company's tests, even though they were aware that the tests were not capable of providing accurate and reliable results. For example, the executives claimed (or directed the Company to claim) that Theranos could quickly and accurately run a combination of tests at once from a single blood sample comprised of a few drops of blood collected from a fingerstick. Defendants made these representations despite their personal knowledge that the technology was not capable of consistently producing accurate and reliable results for certain blood tests, including tests for calcium, cholesterol, gonorrhea, glucose, HbA1c, HIV, testosterone, and TSH. To induce individuals to purchase the tests, the advertisements also falsely claimed that the Theranos tests were cheaper than blood tests from conventional laboratories.
The defendants were also alleged to have made numerous material misrepresentations to potential investors (though direct communications, marketing materials, media statements, financial statements, etc.) about the Company's business relationships with Walgreens and the U.S. Department of Defense (DoD), the regulatory status of the analyzer and tests, and the quality of the tests. The executives claimed that the TSPU (Theranos' proprietary analyzer) was capable of performing the full range of clinical tests using fingerstick samples while producing better results and at a faster speed than conventional methods. In reality, the TSPU performed a limited number of tests, was slower than some competing analyzers, and could not compete in terms of throughput or simultaneous testing against larger, conventional machines. The indictment alleges that the defendants were aware of the accuracy, reliability, and performance limitations of the analyzer when they touted the technology's performance.
In addition to misrepresenting the technology's performance capabilities, the indictment alleges that the executives misrepresented to investors the Company's revenue potential and made a number of false representations, including that 1) its business partnership with Walgreens was expanding when, in fact, the rollout was stalled due to Walgreens' concern with the performance of the technology; 2) the Company had a profitable relationship with the DoD when, in fact, the revenue from military contracts was limited; 3) the DoD had deployed the technology to the battlefield, when in fact, it had not; 4) the Company had conducted certain tests on patient samples using the Company's proprietary technology, when in fact, the patient samples were tested using other commercially available analyzers; 5) the Company's proprietary technology had been validated by several pharmaceutical companies and research institutions, when in fact, it had not; 6) patient samples were being run using the Company's proprietary technology during certain demonstrations to investors, when in fact, the demonstration was faked; and 7) FDA clearance or approval of the proprietary analyzer and tests was not required but that Theranos was planning to make a submission to the FDA voluntarily because FDA clearance or approval was considered the "gold standard" in the industry. In reality, the indictment alleges that the executives knew that FDA was requiring Theranos to make a submission.
The case against Holmes and Balwani was bifurcated into separate trials for each defendant. The trial against Holmes commenced in September 2021. After a fifteen-week trial, the jury found Holmes guilty of conspiracy to commit wire fraud against the Company's investors and three counts of wire fraud related to the scheme to defraud investors.2 Holmes was acquitted of the patient-related fraud conspiracy count and the three counts of fraud against individual patients. The jury could not reach a unanimous verdict with respect to three individual investor fraud counts against Holmes. An additional count of wire fraud relating to a Theranos patient had been dismissed during trial. On November 18, 2022, Holmes was sentenced to over eleven years (135 months) in federal prison and was ordered to surrender to begin serving her sentence on April 27, 2023.3
Balwani's trial commenced in March 2022, and he was convicted in July 2022 on all counts of investor and patient fraud.4 In December 2022, Balwani was sentenced to almost thirteen years (155 months) in federal prison for his role in perpetuating the fraud.5 A hearing on the amount of restitution that each defendant will owe is still pending. Both defendants have appealed their convictions.6
Aside from the criminal action, the individual defendants and the Company have suffered additional fallout from their actions. Holmes and Theranos previously settled a civil complaint by the U.S. Securities and Exchange Commission (SEC) related to the fraud whereby Holmes agreed to pay a $500,000 penalty, return 18.9 million shares of Theranos, relinquish her voting control in the Company, and be barred from serving as an officer or director of a publicly owned company for ten years.7 (Balwani's SEC case was stayed pending resolution of the criminal case.8 ) In addition, Theranos settled consumer law violation claims made by the Arizona Attorney General alleging that the Company made false, deceptive, misleading, and unfair claims to consumers regarding the tests.9 Walgreens and Safeway ended their business relationships with Theranos, and Walgreens sued the Company, which resulted in a settlement for an undisclosed amount.10 In the face of these and other legal actions, the Company eventually closed its labs, laid off its employees, and dissolved.11
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Footnote
1. The original indictment was superseded on July 14, 2020, and the second indictment was superseded on July 28, 2020. The summary below discusses the allegations that were made in the operative indictment dated July 28, 2020. See Third Superseding Indictment, United States v. Elizabeth Holmes & Ramesh "Sunny" Balwani, No. 5:18-CR-0258-EJD, Doc. No. 469 (N.D. Cal., July 28, 2020.
2. Final Verdict Form, United States v. Holmes, Case No. 5:18-CR-00258-EJD, Doc. No. 1235 (N.D. Cal. Jan. 3, 2022).
3. Order on Sentencing, United States v. Holmes, Doc. 1712 (Jan. 10. 2023).
4. Final Verdict Form, United States v. Balwani, Doc. 1507 (July 7, 2022).
5. Order on Sentencing, United States v. Balwani, Doc. 1730 (Feb. 16, 2023).
6. Holmes Notice of Appeal, United States v. Holmes, Doc. 1670 (Dec. 2, 2022); Balwani Notice of Appeal, United States v. Balwani, Doc. 1705 (Dec. 21, 2022).
7. Press Release, U.S. Sec. & Exchange Comm'n, Theranos, CEO Holmes, and Former President Balwani Charged with Massive Fraud (Mar. 14, 2018), https://www.sec.gov/news/press-release/2018-41.
8. Order Staying and Administratively Closing Action, Sec. & Exchange Comm'n v. Ramesh Sunny Balwani, Case No. 5:18-CV-01603-EJD (N.D. Cal. June 30, 2021).
9. Press Release, Az. Att'y General, AG Brnovich Obtains $4.65 Million for Arizonans Who Purchased Theranos Blood Tests (Apr. 18, 2017), https://www.azag.gov/press-releases/ag-brnovich-obtains-465-million-arizonans-who-purchased-theranos-blood-tests; Ken Alltucker, Theranos Reaches $4.65 Million Fraud Settlement with Arizona, AZCENTRAL (Apr. 18, 2017), https://www.azcentral.com/story/money/business/health/2017/04/18/theranos-reaches-465-million-settlement-arizona-blood-testing/100582618/.
10. Walgreens Officially Breaks-Up with Theranos, FDANEWS (June 17, 2016), https://www.fdanews.com/articles/10158-walgreens-officially-breaks-up-with-theranos; Christopher Weaver, John Carreyrou & Michael Siconolfi, Walgreen Sues Theranos, Seeks $140 Million in Damages, WALL ST. J. (Nov. 8, 2016), https://www.wsj.com/articles/walgreens-seeks-to-recover-140-millioninvestment-from-theranos-1478642410; Emily Wasserman, Safeway Severs Ties with Theranos as $350M Deal Collapses, FIERCE BIOTECH (Nov. 11, 2015), https://www.fiercebiotech.com/medicaldevices/safeway-severs-ties-theranos-as-350m-deal-collapses.
11. Theranos Calls It Quits, FDANEWS (Sept. 6, 2018), https://www.fdanews.com/articles/188300- theranos-calls-it-quits; Embattled Blood-Testing Firm Theranos to Dissolve: WSJ, REUTERS (Sept. 4, 2018), https://www.reuters.com/article/us-theranos-bankruptcy/embattled-blood-testing-firm-theranos-to-dissolve-wsj-idUSKCN1LL077.
