Theranos Sued for Fraud by Hedge Fund
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UPDATED: Dec 3, 2016
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The California-based hedge fund, Partner Fund Management, has sued Theranos, alleging that it deceived PFM in order to receive a nearly $100 million investment from the fund in 2014.
Theranos’ Claims of Revolutionary Medical Diagnostic Technology
Theranos is a consumer health technology company that was founded in 2003 by Elizabeth Holmes. Its mission statement is “to make actionable information accessible to everyone at the time it matters most. By doing so, Theranos is working to facilitate the early detection and prevention of disease and to empower people everywhere to live their best lives.”
Theranos claimed that it could carry out more than 200 medical tests with its Edison devices, using only a few drops of blood from a finger prick. This technology promised to revolutionize medical diagnostics with its cheap and easy finger prick tests.
In 2014, private investors purchased stakes in Theranos that implied a valuation of $9 billion for the company. Since that point, Theranos has been investigated by numerous federal agencies that determined that the company’s “revolutionary” blood technology did not work.
The investigations showed that Theranos’ Edison tests for testosterone failed quality-control checks 87 percent of the time. A test to help detect prostate cancer failed 22 percent of the time. A test to detect the hormone Prolactin failed 47 percent of the time.
Following the investigations, the Centers for Medicare & Medicaid Services (CMS) revoked Theranos’ CLIA certificate, suspended its approval to receive Medicare and Medicaid payments for hematology or laboratory services, and prohibited it or its CEO from owning, operating, or directing a lab for at least 2 years. Theranos is currently appealing that decision. However, the company has also shut down all of its clinical facilities, labs, and Wellness Centers.
Partner Fund Management LP, a San-Francisco based hedge fund that had invested $100 million in Theranos, sued Theranos in Delaware Court of Chancery.
PFM explained the lawsuit in a letter to its investors: “Through a series of lies, material misstatements, and omissions, the defendants engaged in securities fraud and other violations by fraudulently inducing PFM to invest and maintain its investment in the company.” PFM is a 12-year-old hedge fund that manages $4 billion in assets. It has never before been involved in a lawsuit.
Theranos responded to the lawsuit on its website
A San Francisco hedge fund has filed a civil suit against the company over its investment. The suit is without merit, the assertions are baseless, and the plaintiff 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. This wholesale reliance on post-investment statements, therefore, negates the claim that the plaintiff was misled.
In addition to the PFM lawsuit, Theranos is under investigation by the Securities and Exchange Commission and the U.S. Attorney in San Francisco for allegedly misleading investors and regulators about the performance of its devices.