First Investor Sues Theranos for Fraud; More Likely to Join Queue

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A San Francisco-based hedge fund that invested $96.1 million in Palo Alto-based Theranos Inc. is suing the blood-testing company, according to The Wall Street Journal. Partner Fund Management LP invested in Theranos in 2014. The firm, among other investors that collectively funneled hundreds of millions of dollars into Theranos, largely remained silent as the startup withered under increasing scrutiny during the past year, The Journal said.

Partner Fund Management is suing @Theranos for fraudulently inducing them to invest Click To Tweet

“Through a series of lies, material misstatements, and omissions, the defendants engaged in securities fraud and other violations by fraudulently inducing PFM to invest and maintain its investment in the company,” the fund said in a letter to investors that was obtained and reviewed by The Journal.

The suit comes less than a week after Theranos announced that it would be shutting down its blood-testing facilities, including all of its Wellness Centers and clinical labs, and laying off about 40% of its workforce.

Instead, Theranos will focus solely on its technology, namely the miniLab platform it introduced in August at a scientific conference. Embattled Theranos founder and CEO Elizabeth Holmes was in Philadelphia back then to speak about her company’s future, and very little about its controversial past, to a large and skeptical crowd at the American Association for Clinical Chemistry.

Holmes’ presentation focused on the new miniLab product–a laboratory in a box that can perform cell counts and DNA tests–which Theranos has under development to provide a variety of diagnostic tests from only a few drops of blood. The product, which is about the size of a desktop printer, has not yet been submitted to the Food and Drug Administration for approval.

She presented study data demonstrating how the miniLab’s performance in blood tests matched or exceeded the performance of existing devises used to detect cholesterol levels, herpes and the Zika virus. Theranos said it intends to submit the miniLab study results, and its interpretation of those results, for peer review.

The miniLab, Holmes said at the conference, supports the mission she had when starting the company in 2003 after dropping out of Stanford University. That mission is to make diagnostic tests that are less expensive and effective, and require just a small finger prick to get a blood sample.

“This is an inflection point for our company and a new chapter as we introduce our technologies to the world,” Holmes said. “We will work as hard as it takes to realize our vision.”

But the product hype didn’t impress all that many in attendance because they were hoping for large amounts of independently reviewed data that validated the company’s blood-test results, according to Business Insider.

“We are fortunate to have supporters and investors who believe deeply in our mission of affordable, less invasive lab testing, and to have the runway to realize our vision,” Holmes said last week.

The company’s business model was based on offering more than 100 simple blood tests at a cost much lower than at traditional blood labs, in addition to developing its own technology to test that blood, which Holmes had emphasized would need to be drawn in only very small amounts.

In the past year, however, Theranos’s aspirations to be a one-stop shop have been derailed, with the company having to void two years’ worth of tests. The government agency that regulates clinical labs found that Theranos’s Northern California lab posed, “immediate jeopardy to patient health and safety,” according to Business Insider.

According to The Journal, PFM’s suit alleges:

  • That Theranos said it could do more forms of its finger-prick blood tests than it actually could,
  • That the company overstated how much it had submitted to the Food and Drug Administration, and
  • That the company couldn’t uphold its partnerships with companies like Walgreens, which ended its partnership with Theranos back in June, closing 40 Wellness Center locations.

Theranos’s brief response is that, “The suit, filed by a hedge fund, is without merit and Theranos will fight it vigorously. The hedge fund is engaging in revisionist history, making claims that are not rooted in facts. The company remains committed to its mission and is appreciative of its strong investor base that understands and continues to support those efforts.”

Steve’s Take: Here we go again. Last week I wrote a piece questioning whether Ms. Holmes was going to receive the Phoenix award for rescuing Theranos from the ash heap of Wall Street crash/burn startups or the Pinocchio award for chronic fibbing about the company’s products.

Or is she descending further, almost surreally, into the realm of what late-night talk-show comedian Stephen Colbert calls “truthiness;” ideas which “feel right” or “should be true.” Ideas like a machine with all the phenomenal capabilities of the Theranos miniLab.

The lawsuit by Partner Fund Management is under seal, but the hedge fund has confirmed the legal action against Theranos and The New York Times reviewed a letter sent to PFM investors alleging that “a series of lies, material misstatements and omissions” led to its investment in Theranos.

Theranos’s investors have remained largely, and strangely silent since The Journal began publishing a series of damning reports over the past year questioning the legitimacy and accuracy of the company’s technology.

Holmes was a Stanford dropout at age 19. And likened by some to a female Steve Jobs by dressing almost exclusively in black turtlenecks, she convinced investors to pour hundreds of millions of dollars into her company, eventually reaching a $9 billion valuation. Holmes won over tech media, telling reporters she would revolutionize the blood-testing industry with Theranos’s proprietary Edison device, which she claimed would be able to conduct diagnostic tests with a single pinprick.

Last week I said I’ll wait for the scientific evidence about miniLab, because at least in the field of medicine, the day that “truthiness” reigns over science and its penchant for cold, hard facts is still a long way off.

Now, of course, the opening legal salvo from Partner Fund Management may render moot Ms. Holmes’ Phoenix pivot with miniLab. The hedge fund isn’t waiting for that act to play out.

Steve's Take: PFM is jumping the queue of investors who have lost their appetite for @Theranos Click To Tweet

It’s getting at the front of the queue of those investors who have lost their appetite for more claims of future glory for Theranos with its new, revolutionary and, oh, I almost forgot–profitable–product. They’re grabbing for whatever might be left after the company’s debtors precede them as the first group to get their claws on company assets–if, that is–Holmes’ Phoenix act proves to be another flop.

Time will tell; but the clock is ticking, the fans are restive and it’s fourth and ninety-five.

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