The disgraced founder of Theranos has surrendered control of the blood testing company and paid more than half a billion dollars in penalties to settle charges of "massive fraud" brought by the US Securities and Exchange Commission.
Elizabeth Holmes and the company's former president Ramesh "Sunny" Balwani allegedly raised more than US$700 million ($957m) from investors through an "elaborate, years-long fraud in which they exaggerated or made false statements about the company's technology, business, and financial performance", the SEC said in a statement on Wednesday.
Among the alleged false statements were that Theranos would generate more than US$100m in revenue in 2014, when the real number was "little more than US$100,000".
Holmes, who just a few years ago was America's youngest female billionaire with an estimated net worth of US$5.9 billion, has agreed to pay a US$500,000 penalty, be barred from serving as an officer or director or a public company for 10 years, return her remaining 18.9 million shares and relinquish voting control.
"The Theranos story is an important lesson for Silicon Valley," SEC's San Francisco office director Jina Choi said in a statement. "Innovators who seek to revolutionise and disrupt an industry must tell investors the truth about what their technology can do today, not just what they hope it might do someday."
Theranos duped investors by hyping its "revolutionary" blood-testing technology, which Holmes — who modelled herself a the female version of Apple founder Steve Jobs — claimed could test for hundreds of diseases with a single drop of blood from the finger.
At its peak, the company was estimated to be worth US$11.8b. High-profile investors included Rupert Murdoch, executive chairman of News Corp — publisher of news.com.au — and US Education Secretary Betsy DeVos.
In late 2015, The Wall Street Journal published a bombshell expose revealing that the technology was a sham and the vast majority of its testing was conducted using third-party services.
What followed were a string of investigations by numerous US authorities, lawsuits from disgruntled investors, the closure of labs, and the sacking of 340 staff as the company attempted to salvage something from the wreckage.
A later investigation by Vanity Fair that when Theranos' chief scientist Ian Gibbons — who had struggled to make the technology a reality — committed suicide in 2013, Holmes' immediate response was to send lawyers to prevent her secret getting out.
In March last year Holmes, offered investors extra shares in the company in return for agreeing not to sue. In May, Theranos settled two lawsuits brought by hedge fund Partner Fund Management LP, which alleged it had been defrauded out of US$127m.
According to the SEC's complaint, Theranos, Holmes, and Balwani made "numerous false and misleading statements in investor presentations, product demonstrations, and media articles by which they deceived investors into believing that its key product — a portable blood analyser — could conduct comprehensive blood tests from finger drops of blood, revolutionising the blood testing industry".
"In truth ... Theranos' proprietary analyser could complete only a small number of tests, and the company conducted the vast majority of patient tests on modified and industry-standard commercial analysers manufactured by others," the SEC said.
It further alleged that the company claimed its products were deployed by the US Department of Defense on the battlefield in Afghanistan and on medevac helicopters. In fact, its technology was never deployed by the US Department of Defense.
"Investors are entitled to nothing less than complete truth and candour from companies and their executives," SEC Enforcement Division co-director Steven Peikin said.
"The charges against Theranos, Holmes, and Balwani make clear that 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."
The SEC said if Theranos is acquired or otherwise liquidated, Holmes would not profit from her ownership until over US$750 million is returned to defrauded investors and other preferred shareholders.
"As a result of Holmes' alleged fraudulent conduct, she is being stripped of control of the company she founded, is returning millions of shares to Theranos, and is barred from serving as an officer or director of a public company for 10 years," SEC Enforcement Division co-director Stephanie Avakian said.
"This package of remedies exemplifies our efforts to impose tailored and meaningful sanctions that directly address the unlawful behaviour charged and best remedies the harm done to shareholders."
The settlements with Theranos and Holmes are subject to court approval. Theranos and Holmes neither admitted nor denied wrongdoing. "The company is pleased to be bringing this matter to a close and looks forward to advancing its technology," Theranos' independent directors said in a statement.