Great frauds in history: Theranos and the millennial Madoff

Matthew Partridge explains the scam behind Theranos, a fake blood-testing company that raised $700m from investors.

Theranos was a technology firm founded by Elizabeth Holmes in 2003. Holmes dropped out of Stanford University to pursue her dream of devising a medical device that could perform blood tests using much smaller samples than other devices needed, cutting costs and reducing the need for painful needles. Another supposed benefit of the device she invented (named the "Edison") was that it was physically much smaller than standard machines, removing the need for samples to be sent to a central laboratory.

Between 2003 and 2014, Theranos raised $700m in money from venture capitalists and had an implied valuation of $5bn at its peak.

What was the scam?

The technology didn't work. Theranos was unusually secretive, forcing employees to sign non-disclosure agreements and refusing to publish scientific papers on its research. It was later revealed that, while Holmes was making bold claims about the company's potential, and agreeing a deal with pharmacy chain Walgreens, the company's flagship device was so useless that the firm's engineers were secretly buying machines from competitors and performing screens with these instead.

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What happened next?

The huge surge of publicity – Holmes was feted by the press as a new Steve Jobs – prompted journalist John Carreyrou to start asking questions. Richard Fuisz, who was engaged in a patent dispute with Theranos, put Carreyrou in touch with former employees, which led to a series of critical articles in The Wall Street Journal. Government regulators shut down Theranos's lab in July 2016 and Walgreens ended its partnership. By August 2018, the company had been wound up.

Lessons for investors

In March 2018 Holmes – recently dubbed a "millennial Madoff" by The New York Post – and COO Ramesh Balwani paid a fine of $500,000 and surrendered their remaining equity in the company to regulators.

The duo are being prosecuted for misleading investors. All the shareholders were wiped out in the bankruptcy, with any patents reverting to creditors. Rupert Murdoch lost $150m. The whole episode underlines that early stage technology investing can be extremely risky. The fact that Theranos was secretive about its technology, even at a time when its CEO was becoming a celebrity, should have been a big warning sign to investors.

Dr Matthew Partridge

Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.

He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.

Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.

As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.

Follow Matthew on Twitter: @DrMatthewPartri