The SEC said Theranos, Holmes and Balwani misled partners and investors about the company's technology, misrepresented revenue projections and falsely claimed it didn't need regulatory approval for its testing technology. Elizabeth Holmes and Ramesh "Sunny" Balwani made their first court appearance in U.S. District Court, where both pleaded not guilty to the charges.
Prosecutors claim that the pair defrauded investors, doctors, and patients while promoting and running their now disgraced blood-testing startup. The two allegedly knew there were "accuracy and reliability problems", and that it "could not compete with existing, more conventional machines", the US Attorney's office said.
The criminal charges came after Holmes in March settled civil fraud charges brought by the U.S. Securities and Exchange Commission under which she was barred from serving as an officer or director of a public company for 10 years.
The indictment alleges that the defendants used a combination of direct communications, marketing materials, statements to the media, financial statements, models, and other information to defraud potential investors.
Less than half an hour earlier Theranos, the Silicon Valley darling which had once been worth $9bn but which suffered a major fall from grace in 2015 and is now close to closure, revealed Ms Holmes had stepped down as chief executive, although would remain as chairman.
The DOJ said Friday that Holmes and Balwani could face up to 20 years in prison, and a $250,000 fine plus restitution for each count on which they're convicted. The company's general counsel, David Taylor, will take over as CEO. "The tests performed on Theranos technology, in addition, were likely to contain inaccurate and unreliable results".
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The indicment accuses Holmes and Balwani of engaging in a multi-million-dollar scheme to defraud investors, and a separate scheme to defraud doctors and patients. Balwani, who worked at Theranos from September of 2009 through 2016, had also served as chief operating officer and was a member of the board. The DOJ claims that Holmes and Balwani knew Theranos' product wasn't as effective as the company had been describing.
Holmes launched Theranos in 2003, spruiking the company as a cheaper and more efficient way for patients to test for life-threatening conditions, like cancer and diabetes, with just a few drops of blood from their fingers.
Lawyers for Holmes did not respond to requests for comment.
In a lengthy statement, Coopersmith said that Balwani did not commit fraud.