Theranos founder Elizabeth Holmes settles with SEC in alleged 'elaborate, years-long fraud'

PHOTO: Elizabeth Holmes, CEO of Theranos, attends a panel discussion during the Clinton Global Initiatives annual meeting in New York in this Sept. 29, 2015 file photo.PlayBrendan McDermid/Reuters, FILE
WATCH Silicon Valley billionaire charged with 'massive fraud'

Elizabeth Holmes -- the Stanford University dropout once hailed as the youngest self-made female billionaire who promised to revolutionize the health care industry -- has reached a settlement with the U.S. Securities and Exchange Commission (SEC) after the regulatory agency had charged her with "massive fraud.”

“Theranos Inc. announced today that the company and its CEO, Elizabeth Holmes, have resolved a previously disclosed investigation by the U.S. Securities and Exchange Commission (SEC) into the offer and sale of Theranos securities from 2013 to 2015,” her company said in a statement Wednesday.

Holmes, the founder and CEO of the Silicon Valley startup, and former president and chief operating officer Ramesh "Sunny" Balwani, who, according to the SEC, spent years claiming their company could diagnose hundreds of diseases with just a few pricks of blood, are accused of an “elaborate, years-long fraud in which they exaggerated or made false statements about the company’s technology, business, and financial performance” and “deceiving investors by making it appear as if Theranos had successfully developed a commercially-ready portable blood analyzer that could perform a full range of laboratory tests from a small sample of blood.”

PHOTO: Elizabeth Holmes, CEO of Theranos, attends a panel discussion during the Clinton Global Initiatives annual meeting in New York in this Sept. 29, 2015 file photo. Brendan McDermid/Reuters, FILE
Elizabeth Holmes, CEO of Theranos, attends a panel discussion during the Clinton Global Initiative's annual meeting in New York in this Sept. 29, 2015 file photo.

As part of the settlement, Holmes, 34, will pay a $500,000 fine. She has also agreed not to serve as a director or officer at any publicly traded company for the next 10 years and must return her $18.9 million shares of stock. Neither she nor Theranos has admitted any wrongdoing.

“The Theranos story is an important lesson for Silicon Valley,” Jina Choi, director of the SEC’s San Francisco regional office, said in a statement. “Innovators who seek to revolutionize 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.”

The SEC said in a statement, "The settlements with Theranos and Holmes are subject to court approval. Theranos and Holmes neither admitted nor denied the allegations in the SEC’s complaint.”

Theranos’ independent directors said in a statement Wednesday, “The company is pleased to be bringing this matter to a close and looks forward to advancing its technology.”

Meanwhile, the regulatory agency has filed a separate lawsuit against Balwani, 52, who left the company in 2016, saying in its statement, the “SEC will litigate its claims against Balwani in federal district court in the Northern District of California.”

PHOTO: Elizabeth Holmes, founder and CEO of Theranos, speaks at a conference at the Montage hotel in Laguna Beach, Calif., in this Oct. 21, 2015. Mike Blake/Reuters,FILE
Elizabeth Holmes, founder and CEO of Theranos, speaks at a conference at the Montage hotel in Laguna Beach, Calif., in this Oct. 21, 2015.

It’s unclear whether the SEC will reach a settlement with Balwani but his attorney Jeffrey Coopersmith issued a statement pushing back against the allegations, saying his client “accurately represented Theranos to investors to the best of his ability. He believed in the potential and mission of the company and its technology to promote transparency and benefit people by empowering them with access to their own health care information at a low cost.”

As for Holmes, Phyllis Gardner, a Stanford professor of medicine who spoke to ABC News last summer, recalled her coming in as a 19-year-old student in search of a mentor. Gardner said she remembers Holmes as someone who "loves attention" and who "really plays up to power."

ABC News visited the Theranos headquarters in Silicon Valley last summer. The building appeared mostly empty and ABC News was asked to leave the property by a security guard.

Back then, former Theranos employee Erika Cheung recalled an environment of unprecedented secrecy.

“I have not experienced anything, anything like working at Theranos," Cheung said. “And the level of secrecy and the amount of hiding that goes on.”

Cheung worked as a Theranos lab associate for seven months before leaving the company in 2015. She was so concerned about the efficacy of the tests being performed inside Theranos that she wrote a complaint, obtained by ABC News, to the federal Centers for Medicare and Medicaid Services.

She prefaced her letter by stating, "I’ve been nervous to send or even write this letter. Theranos takes confidentially and secrecy to an extreme level that has always made me scared to say anything."

Cheung's complaint was referenced in her deposition from a separate lawsuit investors brought against Theranos last year, which was settled for an undisclosed amount, despite the company’s being “confident that we would have prevailed at trial,” according to a May 2017 statement.