Posted by on November 28, 2016 9:38 pm
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Categories: American International Group Boots UK Business Department of Justice DOJ Economy Elizabeth Holmes Finance Henry Kissinger Holmes Reality Securities and Exchange Commission Theranos United States Department of Justice Venture capital Walgreens Wall Street Journal

In what is not the first lawsuit (and certainly won’t be the last) by naive shareholders to go after former unicorn darling-turned-fraud Theranos, its founder Elizabeth Holmes, and COO Ramesh Balwani, the co-founder of prominent dot com investment bank Robertson Stephens, Robert Colman, accused Theranos and Holmes of making false and misleading claims about its operations and technology while soliciting money from investors.

The pioneering Silicon Valley deal maker invested in the blood-testing company in late 2013 through venture-capital fund Lucas Venture Group, according to the lawsuit. The suit was filed in federal court in San Francisco and seeks class-action status. The WSJ first reported of the legal action.

In the lawsuit Colman says that he agreed to invest in Theranos after Lucas Venture Group founder Donald A. Lucas wrote in a Sept. 9, 2013, letter that Theranos invited the venture-capital firm to purchase $15 million in stock. As the WSJ adds, Lucas said it was part of a “follow-on extension” of a funding round that began in 2010, the lawsuit states. On the same day in 2013, Theranos and Walgreens announced in a joint news release what they called “a long-term partnership to bring access to Theranos’ new lab testing service through Walgreens pharmacies nationwide.” Walgreens is now a unit of Walgreens Boots Alliance Inc.

From the filing:

Companies owe a duty to potential investors to be open and honest. Even non-public companies are bound by this principle of frankness no matter how sophisticated their potential investors might be. Specifically, those who solicit investments for a company should not make statements that are designed to reach potential investors that are materially false, misleading or incomplete. Those who make statements to investors must believe them to be true and complete, have a reasonable basis for their belief, and exercise reasonable care and not know of any untruth or omission.

Plaintiffs bring this action because Theranos, Inc. (“Theranos”), Chief Executive Officer Elizabeth Holmes (“Holmes”), and former President and Chief Operating Officer Ramesh “Sunny” Balwani (“Balwani”) flaunted these simple rules. To them, being honest and forthright was an obstacle to their goals. Instead, beginning in July 2013, Theranos, Holmes and Balwani set in motion a widespread publicity campaign whose purpose was raising billions for Theranos and themselves and to induce investors to invest in Theranos. They told the public, knowing and intending that their statements would reach potential investors, that they had perfected “a proprietary” and “revolutionary technology” over the past ten years that would change the world of laboratory testing.

Holmes claimed that Theranos’ proprietary technology could take a pinprick’s worth of blood, extracted from the tip of a finger instead of intravenously, and test for hundreds of diseases—a remarkable innovation that was going to save millions of lives and, in a phrase that Holmes often repeated, “Change the world.” Based on this story, Defendant also claimed that this technology had been vetted or was being vouched for by clinics, pharmaceutical companies, experts, regulators and an all-star board of directors. And they announced that the technology was immediately being rolled-out by one of the nation’s largest drug store chains, Walgreens.

Holmes honed her story to near perfection. She gave hundreds of interviews in which she promoted her narrative about Theranos’ revolutionary technology. She bolstered that story by  attracting to the Theranos Board of Directors luminaries like Henry Kissinger and George Schultz. Holmes adorned the covers of Fortune, Forbes and other publications and promoted her message there and elsewhere. She also amassed a net worth of around $9 billion.

The truth—there was no revolutionary technology. On October 15, 2015, the Wall Street Journal (WSJ) shocked the investing world with a story that Theranos was “struggling” with turning this technology into a reality. According to the WSJ, Theranos’ employees were “leery about the machine’s accuracy” and the machine was being used for a tiny number of tests. The article also reported that some doctors didn’t trust the test results they were receiving. While Theranos vigorously attacked and denied the WSJ article and follow-on media reports—calling them “factually and scientifically erroneous and grounded in baseless assertions by inexperienced and disgruntled former employees and industry incumbents”—those reports have turned out to be largely true. Reportedly, Theranos is under investigation by the United States Department of Justice (U.S. DOJ) and the Securities and Exchange Commission (SEC).

According to the WSJ, Colman, who has retired from investment banking and lives in Idaho, declined to comment through his lawyer. Theranos and Lucas Venture Group didn’t immediately respond to requests for comment. Walgreens declined to comment. The lawsuit also includes a second plaintiff, Hilary Taubman-Dye, who alleges that she bought Theranos shares on the online exchange SharesPost Inc., which acts as a broker for shares of private companies.

Taubman-Dye allegedly agreed to buy Theranos stock at a price of $19 a share in August 2015. She tried to cancel the transaction after The Wall Street Journal published in October 2015 its first article detailing problems at Theranos. At the time, Theranos, founder Elizabeth Holmes and an unidentified third party all had a legal right of first refusal giving them a chance to buy any shares an investor chose to sell in a secondary transaction, the suit alleges.

The full lawsuit is presented below

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