Major Theranos backer sues for securities fraud

A California hedge fund, one of Theranos’ major investors, has sued for securities fraud, throwing up another hurdle as the company switches gears to a new product while ditching the fingerprick blood testing tech that has landed it in hot water.

San Francisco-based Partner Fund Management backed the startup in 2014 with a $96.1 million investment. On Monday, the hedge fund filed a suit in Delaware Chancery Court,The Wall Street Journal reported, citing a letter to the fund’s investors. The suit claims Theranos participated in securities fraud, negligent misrepresentations and violations of the Delaware deceptive trade practices act, said a person familiar with the matter told the WSJ.

“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,” said the letter, which was seen by the WSJ. According to the letter, CEO Elizabeth Holmes and now-departed COO Sunny Balwani conned PFM into backing it by claiming that the startup had created “proprietary technologies that worked” and was en route to regulatory approval.

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The suit is “without merit” and its assertions “baseless,” Theranos said in a statement Tuesday. The company argues that it made the statements in question after PFM made its investment and so, the hedge fund cannot claim to be misled.

Once valued at $9 billion, Theranos boasted that its technology could accurately perform laboratory tests, ranging from herpes to cholesterol, using just a few drops of blood. But in October last year, a WSJ report exposed accuracy issues with Theranos’ tech, the first of a series of dominos to fall, leading the company to defend, distract from, and ultimately abandon its fingerprick blood tests.

Along the way, the company employed several tactics to defend the validity of its blood tests, including loading up a brand-new scientific advisory board with pathology and lab experts, forming a new compliance committee and voiding tens of thousands of test results obtained with its Edison testing machine. The Centers for Medicare and Medicaid slammed Theranos with sanctions this summer--which include banning Holmes from owning or operating a lab for two years--after investigating the company’s Newark, CA lab. Holmes has appealed the sanctions.

Much criticized for keeping its tech under wraps, Holmes finally deigned to present scientific data at the American Association for Clinical Chemistry’s annual meeting in August. But instead of explaining how its fingerprick blood tests worked, Holmes unveiled a totally new invention: the miniLab, which performs diagnostic testing in a “decentralized setting.”

At the time, industry watchers noted that marketing a device that doesn’t need to be used in a lab could be a way to keep Theranos alive if its owners and operators were banned from operating a lab. And just last week, the company confirmed it: after “many months” of reflection, Theranos elected to shut down its clinical labs and wellness centers and lay off about 340 employees so it could focus on developing the miniLab blood-testing system.

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