Doing Business | Innovations

October 12, 2016

Theranos Accused of Duping Investors in Tests, Performance

Theranos Inc. and founder Elizabeth Holmes were accused in a lawsuits of duping investors about the embattled medical-testing firm’s performance and technology in an effort to raise about $100 million in funding.
Elizabeth Holmes, founder and chief executive officer of Theranos

Elizabeth Holmes, founder and chief executive officer of Theranos

Partner Investments LP sued Theranos in Delaware state court Monday seeking to rescind a stock-purchase agreement in the wake of scandals involving the Palo Alto, California-based company’s blood-testing capabilities. The hedge fund claims Theranos officials lied about the firm’s performance to raise funding. Another set of Theranos investors sued Holmes and the company in the same court on Tuesday, their lawyers said.

The suits, the first in an expected wave of investor litigation against Theranos, came days after Holmes moved to close the firm’s blood-testing labs and fire 340 workers. The company has been plagued by questions about the accuracy and viability of its technology and is the subject of federal and state probes. In August, Theranos withdrew an emergency request for the U.S. Food and Drug Administration to sign off on its Zika-virus test after regulators found problems with how the firm gathered patient data.

“Theranos and its principals knowingly and repeatedly lied that they had developed proprietary technologies that worked, were on the cusp of receiving all necessary regulatory clearances and approvals, and concealed the truth about the commercial viability of their technologies and methods,” the hedge fund said in a statement.

Monday’s complaint in Delaware Chancery Court was filed under seal. Filings that accompanied the suit showed the fund, which does business as Partner Fund Management LP, accuses Theranos and Holmes of fraud as part of the case. The Tuesday suit was filed by the law firm of Kessler Topaz Meltzer & Check LLP, it said in a statement. The complaint couldn’t immediately be verified in court records.

‘Revisionist History’

Theranos said Monday in a statement that the Partner Investments suit is without merit, the company will fight it “vigorously,” and the hedge fund is engaging in “revisionist history.”

“Most of the company statements the plaintiff has cited in its suit were made after the time the plaintiff invested, and could not possibly have been the original basis for investment,” the company said Tuesday in a separate statement on its website. “This wholesale reliance on post-investment statements, therefore, negates the claim that the plaintiff was misled.”

San Francisco-based Partner Fund Management manages about $4 billion and made a $96.1 million investment in Theranos in February 2014, said a person familiar with the matter who asked not to be identified.

Holmes has said Theranos is shifting its business focus to the miniLab, a 95-pound diagnostic tool that can fit on a tabletop. The company generated questions in August when scientists and researchers gathered in Philadelphia to hear a presentation on Theranos’s blood-testing technology -- and instead got a product-launch pitch for the miniLab.

U.S. officials sanctioned Theranos and Holmes in July after finding systematic failures in lab testing that potentially jeopardized patients’ health. Holmes was banned for two years from owning or operating laboratories and the company lost its eligibility to get payments from federal health insurance programs for lab services.

The case filed Monday is Partner Investments LP v. Theranos Inc., CA 12816, Delaware Chancery Court (Wilmington).

Text by Bloomberg
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