Feds charge Theranos' Elizabeth Holmes with wire fraud

A federal grand jury has indicted Theranos CEO Elizabeth Holmes and former COO Sunny Balwani for several counts of wire fraud and conspiracy to commit wire fraud. The indictment, returned Thursday and unsealed Friday, comes three months after Holmes and Theranos settled fraud charges with the Securities and Exchange Commission.

Holmes and Balwani were charged with two counts of conspiracy to commit wire fraud and nine counts of wire fraud.

“[The] charges stem from allegations Holmes and Balwani engaged in a multi-million dollar scheme to defraud investors, and a separate scheme to defraud doctors and patients,” said the U.S. Attorney’s Office for the Northern District of California in a statement. “Both schemes involved efforts to promote Palo Alto, Calif.-based Theranos.”

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If convicted, the duo could face up to 20 years in prison and a fine of $250,000, plus restitution, for each count of wire fraud and for each conspiracy count, the prosecutor’s office said. While Balwani jumped ship back in 2016, Holmes stepped down as CEO on Friday. David Taylor, the company’s general counsel, will step into the CEO role, CNBC reported.

Once valued at $9 billion, Theranos rose to prominence with fingerprick blood-testing technology that it claimed could perform lab tests with just a few drops of blood. The startup teamed up with Walgreens in 2013 to offer its tests in the latter’s stores, a move that served as an early validator of Theranos’ work. But the drugstore giant jumped the gun on the deal—it did not fully validate Theranos’ tech and ended up losing about $50 million by investing in Theranos, ditching the partnership and suing the startup for misrepresenting the state of its technology.

“Holmes and Balwani used advertisements and solicitations to encourage and induce doctors and patients to use Theranos’s blood testing laboratory services,” the prosecutors said in the statement. The pair did so knowing Theranos’ fingerprick blood tests could not consistently produce accurate and reliable results.

RELATED: Theranos, Walgreens call it quits on $140M lawsuit

The indictment also accused them of using “direct communications, marketing materials, statements to the media, financial statements, models, and other information” to defraud potential investors. They claimed that their analyzer produced results that were more accurate and reliable, and could do it faster too, than conventional tests.

“Investors large and small from around the world are attracted to Silicon Valley by its track record, its talent, and its promise. They are also attracted by the fact that behind the innovation and entrepreneurship are rules of law that require honesty, fair play, and transparency. This office, along with our other law enforcement partners in the Bay Area, will vigorously investigate and prosecute those who do not play by the rules that make Silicon Valley work,” said FBI Special Agent in Charge John Bennett in the statement.

Holmes and Balwani both surrendered Friday to the FBI. They were released on $500,000 bond each and ordered to surrender their passports at the arraignment, CNBC reported.

In an emailed statement, Balwani's attorney, Jeff Coopersmith said his client committed no crime:

"In over 28 years of practicing law, as both a federal prosecutor and a defense attorney, I have never seen a case like this one, where the government brings a criminal prosecution against a defendant who obtained no financial benefit and lost millions of dollars of his own money. Mr. Balwani committed no crimes,” he said.

"Mr. Balwani looks forward to trial because he did not defraud anyone, and it will be an honor to defend him vigorously."

Here's an episode of FierceBiotech Radio that discusses how the biopharma environment lends itself to selling hype and securities fraud (it starts around 6:10, after a chat about drug pricing):