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

Kieran Heinemann: the history of shareholder capitalism
Investment strategy

Kieran Heinemann: the history of shareholder capitalism

Merryn talks to Kieran Heinemann, author of Playing the Market: Retail Investment and Speculation in Twentieth-Century Britain, about the history of t…
17 Sep 2021
Why it pays to face up to your investment mistakes
Investment strategy

Why it pays to face up to your investment mistakes

Buying stocks can be a complicated business. But selling stocks can be tricky, too – even if you sell for the right reasons. Max King explains how to …
17 Sep 2021
A nightmare 1970s scenario for investors is edging closer
Investment strategy

A nightmare 1970s scenario for investors is edging closer

Inflation need not be a worry unless it is driven by labour market shortages. Unfortunately, writes macroeconomist Philip Pilkington, that’s exactly w…
17 Sep 2021
The UK jobs market is booming – what does that mean for investors?
UK Economy

The UK jobs market is booming – what does that mean for investors?

Unemployment in the UK is back to pre-pandemic levels, employers are desperate to hire more staff, and wages are rising. John Stepek looks at what tha…
14 Sep 2021

Most Popular

The times may be changing, but don’t change how you invest
Small cap stocks

The times may be changing, but don’t change how you invest

We are living in strange times. But the basics of investing remain the same: buy fairly-priced stocks that can provide an income. And there are few be…
13 Sep 2021
Two shipping funds to buy for steady income
Investment trusts

Two shipping funds to buy for steady income

Returns from owning ships are volatile, but these two investment trusts are trying to make the sector less risky.
7 Sep 2021
Should investors be worried about stagflation?
US Economy

Should investors be worried about stagflation?

The latest US employment data has raised the ugly spectre of “stagflation” – weak growth and high inflation. John Stepek looks at what’s going on and …
6 Sep 2021