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What to learn from the recent Theranos fraud charges

On behalf of Brewer, Pritchard & Buckley, P.C. on Thursday, August 23, 2018.

On March 14, the SEC released details about the fraud allegations against Elizabeth Holmes and Ramesh Balwani of Theranos Inc. In the press release, the SEC states that the company and Holmes reached a settlement. One condition of this settlement is that Holmes must relinquish control and valuable shares in the company she founded for the next ten years. Meanwhile, Balwani awaits litigation.

No owner or leader wants to lose control over the business they positioned for success. For anyone managing or starting a company, it’s important to take note of where Theranos may have gone wrong.

White lies in the early days matter

Startups and young companies can prevent fraud charges by taking careful steps now. False promises in the beginning can lead to legal issues down the line. According to SEC officials, entrepreneurs should be honest about “what their technology can do today, not just what they hope it might do someday.”

In this case, Holmes and Balwani allegedly told investors that their blood analysis product could successfully run a much wider range of tests than it could in reality. Inventors must not claim that a product already has features which are not yet developed – even if they are likely to implement the feature soon.

How to communicate with investors

The issue with falsely representing a product is that it misleads investors and the media. In turn, investors may choose to contribute more money to the company than they might otherwise, which can unfairly inflate the company’s value.

When presenting to investors, business owners should exercise caution in several ways, including:

  • Estimate costs of production and returns realistically
  • Demonstrate the existing product accurately
  • Do not embellish the facts despite repeated rejection
  • Treat crowd-funding platforms with the same integrity given to high-value investors

Options for dealing with fraud charges

Holmes reached a settlement with the SEC, but this is not necessarily the only option. Some executives who face security fraud charges wish to defend themselves in court. There may be information missing from the allegations that could transform the situation. However, litigation can also contain a degree of risk.

Professionals facing fraud charges can discuss which option may be the most strategic with an attorney. There are many factors to consider including reputation, possible penalties and presenting evidence in defense.

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