The Blood Unicorn Theranos Was Just a Fairy Tale  3/14/2018 7:25:21 PM   Matt Levine

It has been pretty obvious for a few years now that Theranos Inc. was a huge fraud. Theranos is a blood-testing startup that developed devices, which it called "TSPUs" and "miniLabs," that were supposed to be able to do a wide range of laboratory tests on a finger-prick blood sample. It seems like Theranos founder Elizabeth Holmes really wanted to build devices that would actually do these things, and thought she could, and tried to. But it didn't work, and Theranos ran out of time: It talked Walgreens into offering Theranos tests at its stores, 1 but "it became clear to Holmes that the miniLab would not be ready" in time for the Walgreens rollout. So she went with Plan B: "Theranos never used its miniLab for patient testing in its clinical laboratory," but did a dozen tests on the earlier-generation Theranos TSPU, 50 to 60 more tests on blood-test-analysis devices that it bought from other companies and modified to take finger-prick samples, and "the remaining 100-plus tests it offered" on regular unmodified devices bought from other companies or sent out to third-party laboratories. Meanwhile Theranos and Holmes were going around giving interviews about how revolutionary their technology was, without ever mentioning that it didn't work and they didn't use it. This got them a lot of favorable press and a $9 billion valuation, which went on for a while until the Wall Street Journal's John Carreyrou reported in 2015 that the product didn't work and that Theranos was lying about using it, after which Theranos fairly quickly collapsed.

But the fact that Theranos was a gigantic fraud doesn't quite mean that it committed fraud. It isn't exactly fraud to go around lying to journalists. 2 People do it all the time! If you decide that you want to be a celebrity, and that the easiest path to fame is by convincing people that you've found a magical new blood test, you can lie about that to your heart's content, and if you fool people then that's their problem, not yours. Undeserved celebrity is a central fact of American life; if it was illegal to lie your way to fame then our politics, for one thing, would be very different.

It becomes fraud in the legal sense if you use those lies to get money. 3  Theranos, in parallel with being a massive fraud, was also raising a lot of money. I used to refer to it pretty regularly as the Blood Unicorn, Elasmotherium haimatos, because it was a Silicon Valley unicorn with a peak valuation of $9 billion that managed to raise $700 million from investors. If you are going around lying publicly about your technology while also raising hundreds of millions of dollars from investors, that certainly suggests that you were defrauding those investors. But it's not a certainty. Theranos wasn't a public company; it raised all that money in negotiated private fundraising rounds where investors received disclosure documents and had the opportunity to conduct due diligence. Perhaps while it was going around talking up its fake product to the press, it was simultaneously giving investors thorough disclosure documents that made clear exactly where its technology stood and exactly what were the risks to its business. Perhaps the investors knew that the technology wasn't ready yet, but invested in the company anyway because they believed that it would be ready one day, and they were kept sufficiently informed of the actual progress for that to be a reasonable belief. This would be a bit of a strange way to roll -- telling self-flattering lies to the press while giving your investors the unvarnished truth 4 -- but it is not impossible, and it would give Theranos a defense against fraud charges.


But no, no, that's not what happened at all. Instead the Securities and Exchange Commission today brought fraud charges against Holmes, Theranos and its former president, Sunny Balwani, and its complaint alleges pretty strongly that the investors were just as bamboozled as everybody else. In fact, Theranos made direct use of its positive press to raise money: It "sent investors a binder of background materials," which included "articles and profiles about Theranos, including the 2013 and 2014 articles from The Wall Street Journal, Wired, and Fortune that were written after Holmes provided them with interviews" and that included her misleading claims about the state of Theranos's technology. She also repeated those claims to investors directly: "For instance, Holmes and Balwani told one investor that Theranos' proprietary analyzer could process over 1,000 Current Procedural Terminology ('CPT') codes and that Theranos had developed a technological solution for an additional 300 CPT codes," even though "Theranos' analyzers never performed comprehensive testing or processed 1,000 CPT codes in its clinical lab," and in fact never processed more than 12 tests on its TSPU. 5 And Theranos would even do a little pantomime blood-draw demonstration directly on the investors:

This initial meeting was often followed by a purported demonstration of Theranos' proprietary analyzers, the TSPU, and the miniLab. In several instances, potential investors would be taken by Holmes and Balwani to a different room to view Theranos' desktop computer-like analyzers. A phlebotomist would arrive to draw their blood through fingerstick, using a nanotainer, a Theranos-developed collection device. Then the sample was either inserted into the TSPU or taken away for processing. Based on what they saw, potential investors believed that Theranos had tested their blood on either an earlier-generation TSPU or the miniLab. As Holmes knew, or was reckless in not knowing, however, Theranos often actually tested their blood on third-party analyzers, because Theranos could not conduct all of the tests it offered prospective investors on its proprietary analyzers.

And so the SEC decided that this all did indeed amount to securities fraud. Theranos and Holmes settled with the SEC without admitting or denying the allegations; Balwani will apparently fight the accusations. Holmes agreed to pay a $500,000 penalty to the SEC, "return" 18.9 million Theranos shares to the company and relinquish her super-voting control, and be barred from serving as a public-company director or officer for 10 years. 6  That is a pretty small fine for such a big fraud: Martin Shkreli had to forfeit $7.4 million for what a judge found to be a $10.4 million fraud, while Holmes will pay just $500,000 for a $700 million fraud. But Holmes, unlike Shkreli, does not seem to have a lavish collection of Picassos and Wu-Tang Clan albums to liquidate to pay a fine. Unlike most people who run nine-digit frauds, she never took much money out: The SEC notes that she "was paid a salary of approximately $200,000 to $390,000 per year between 2013 and 2015" and "has never sold any of her Theranos stock." Forbes once estimated Holmes's net worth at $4.5 billion, but essentially all of that was in stock that is now probably worthless. 7  In a very real sense she was the biggest victim of her own fraud.

Two other points. First, when the Theranos story first broke in 2015, you would occasionally see people saying things like "if this were a public company it would clearly be securities fraud." That always struck me as a curious analysis: Securities fraud just means committing fraud in connection with the sale of securities; whether those securities are public or private doesn't have anything to do with it. 8 The SEC's case today doesn't just confirm that Theranos was a fraud; it also confirms that the SEC will pursue securities fraud in private markets:

"Investors are entitled to nothing less than complete truth and candor from companies and their executives," Steven Peikin, the co-director of the SEC's enforcement division, said in a statement. "There is no exemption from the anti-fraud provisions of the federal securities laws simply because a company is non-public, development-stage, or the subject of exuberant media attention."

Second: We talk sometimes around here about how U.S. law seems to classify a lot of random kinds of misbehavior as securities fraud. Intentionally slowing down iPhones or mispricing chickens or denying climate change or lobbying against fiduciary regulation or overprescribing opioids or municipal bribery can all count as securities fraud: If a securities issuer does a bad thing and doesn't tell its shareholders about it, then that's enough to make out a case of securities fraud, and it is often easier to punish the company for that securities fraud than for the underlying bad thing. There is something morally strange about this: "Securities fraud" suggests that the company's shareholders are the victims, while often what actually happened is that the company victimized someone else in order to make more money for its shareholders. 9  

That's not what's going on here: Theranos really did deceive its investors, and they really were victims of its fraud. But they weren't the only victims. The problem with launching a blood-test machine that doesn't work isn't just that you swindle the investors who funded the machine's development. You are also out there performing a lot of fake blood tests. The Wall Street Journal has reported on the "trail of agonized patients" who got blood-test results from Theranos that turned out to be wrong, and Theranos ultimately "voided" two years of results from its machines because they were not sufficiently accurate. Building a fake blood-testing company that raises hundreds of millions of dollars from investors is bad, certainly, but it's not really any worse than any of the other securities fraud that we so often delight in around here. Building a fake blood-testing company that performs fake blood tests on thousands of people is much worse, even if it doesn't count as securities fraud.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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Matt Levine at

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