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.

936_MW_P36_Profile_Bottom
Elizabeth Holmes

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.

What happened next?

The huge surge of publicity Holmes was fted 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 inthe 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 aboutits technology, even at a time when its CEO was becoming a celebrity, should have been a big warning sign to investors.

Recommended

Companies are doing better than expected – but for how long?
Stockmarkets

Companies are doing better than expected – but for how long?

Markets have wobbled as Europe goes back into lockdown and the US holds off on further stimulus. But companies in the UK are reporting better than exp…
29 Oct 2020
Great frauds in history: Carlton Cushnie’s befuddling Ponzi scheme
People

Great frauds in history: Carlton Cushnie’s befuddling Ponzi scheme

Carlton Cushnie set up a finance company which was valued at an estimated £230m, but made only one trade finance loan in its existence, which actually…
28 Oct 2020
Being unpopular can make life easier for companies – just ask BP and HSBC
Investment strategy

Being unpopular can make life easier for companies – just ask BP and HSBC

When you're as hated as banking and the oil sector, it doesn't take much to pull off a nice surprise. John Stepek explains what that means for investo…
27 Oct 2020
Robin Geffen: dividend cuts aren't all down to Covid
Stockmarkets

Robin Geffen: dividend cuts aren't all down to Covid

The seeds of recent dividend cuts and cancellations were sowed many years ago, says veteran investor Robin Geffen.
25 Oct 2020

Most Popular

The Bank of England should create a "Bitpound" digital currency and take the world by storm
Bitcoin

The Bank of England should create a "Bitpound" digital currency and take the world by storm

The Bank of England could win the race to create a respectable digital currency if it moves quickly, says Matthew Lynn.
18 Oct 2020
Don’t miss this bus: take a bet on National Express
Trading

Don’t miss this bus: take a bet on National Express

Bus operator National Express is cheap, robust and ideally placed to ride the recovery. Matthew Partridge explains how traders can play it.
19 Oct 2020
Three stocks that can cope with Covid-19
Share tips

Three stocks that can cope with Covid-19

Professional investor Zehrid Osmani of the Martin Currie Global Portfolio Trust, picks three stocks that he thinks should be able to weather the coron…
12 Oct 2020