Federal prosecutors are investigating whether the blood-testing company misled investors about the state of its technology and operations
|Elizabeth Holmes, founder and CEO of Theranos, in October. PHOTO: NIKKI RITCHER/THE WALL STREET JOURNAL|
Federal prosecutors have launched a criminal investigation into whether Theranos Inc. misled investors about the state of its technology and operations, according to people familiar with the matter.
Walgreens Boots Alliance Inc. and the New York State Department of Health have received subpoenas in recent weeks seeking documents and testimony about representations made to them by the Palo Alto, Calif., blood-testing company, some of the people said.
Walgreens has been Theranos’s main conduit to consumers since the companies announced a partnership in 2013 that now includes 40 Theranos wellness centers at drugstores in Arizona. The New York agency received an application from Theranos for a laboratory license in the state.
People familiar with the matter said the subpoenas seek broad information about how Theranos described its technologies and the progress it was making developing those technologies.
Investigators are also examining whether Theranos misled government officials, which can be a crime under federal law, some of the people said.
Such subpoenas don’t necessarily mean prosecutors are actively seeking an indictment. People familiar with the matter said the investigation is at an early stage.
In addition to the criminal probe, the Securities and Exchange Commission is examining whether Theranos made deceptive statements to investors when it solicited funding, according to people familiar with the matter. Theranos was valued at $9 billion in a funding round in 2014 and the majority stake of Elizabeth Holmes, the startup’s founder and chief executive, at more than half that.
In a statement, Theranos said: “The company continues to work closely with regulators and is cooperating fully with all investigations.”
SEC spokeswoman Judith Burns declined to comment, as did Justice Department spokesman Peter Carr and Abraham Simmons, an assistant U.S. attorney in San Francisco, where the federal investigation is being conducted.
Walgreens spokesman Michael Polzin also declined to comment. New York health-department spokesman J.P. O’Hare didn’t respond to requests for comment.
Since launching Theranos in 2003, Ms. Holmes has set out to revolutionize the blood-testing industry. Before the company made changes to its website earlier this year, the website cited “breakthrough advancements” that made it possible to run “the full range” of lab tests on a few drops of blood pricked from a finger.
In October, The Wall Street Journal reported that Theranos did the vast majority of more than 200 tests it offered to consumers on traditional lab machines purchased from other companies. The Journal also reported that some former employees doubted the accuracy of a small number of tests run on the devices Theranos invented, code-named Edison.
Theranos has declined to say how many tests or which ones it runs on commercial machines. The company has said its technology has the capability to handle a broad range of tests.
Federal officials began requesting information about Theranos in January and February, according to the people familiar with the matter. Those informal requests were followed by grand-jury subpoenas from a federal court in San Francisco in March, the people said. Agents from the Federal Bureau of Investigation and U.S. Postal Inspection Service are assisting in the investigation, the people said.
The news release issued when the Walgreens deal was announced said consumers “will be able to access less invasive and more affordable clinician-directed lab testing, from a blood sample as small as a few drops, or 1/1,000 the size of a typical blood draw.”
As part of the deal, Walgreens has invested at least $50 million into Theranos, according to people familiar with the matter.
In January, though, Walgreens notified Theranos that it intends to terminate the partnership unless the company quickly fixes problems found in a federal inspection completed in November at Theranos’s lab in Newark, Calif.
Last month, federal health regulators proposed banning Ms. Holmes from the blood-testing business for at least two years after concluding that the company failed to resolve what officials have called major problems found during the inspection.
U.S. health regulators have proposed banning Theranos founder Elizabeth Holmes and another executive for not doing enough to fix problems at the blood-testing startup. WSJ's Christopher Weaver joins Tanya Rivero to discuss. Photo: AP
Theranos spokeswoman Brooke Buchanan said the company has submitted a response addressing the concerns and hopes to avert the sanctions. The sanctions haven’t been imposed. If they are, Theranos can appeal.
The company began running some tests on Edisons in its California lab in late 2013, according to some former employees and the federal inspection report.
Theranos’s lab-license application in New York said the company planned to test patients’ blood on traditional lab machines and didn’t mention any proprietary testing devices, said someone with knowledge of the application.
Theranos also enrolled in the New York agency’s proficiency-testing program, in which regulators monitor a lab’s accuracy by sending it samples of preserved blood with known characteristics and asking the lab to test them.
If the lab’s results are in line with those reported by a peer group, it receives a passing grade.
In March 2014, a Theranos employee alleged to the agency in an email that Theranos was manipulating its proficiency-testing program by reporting back results obtained from traditional lab machines for some tests, instead of the Edison devices with which it was running those tests on live patient samples.
Theranos said it uses an alternative process for proficiency testing. The process “has been disclosed to and discussed with regulators,” said Ms. Buchanan, the Theranos spokeswoman. “Theranos’ proficiency testing process meets the regulatory requirements.”
State records show Theranos never obtained a New York license. The person with knowledge of the company’s application said it was shelved when Theranos’s lab director at the time wrote to the agency to inform it he had resigned and wanted his name taken off the application.
The SEC has been paying closer attention recently to ensuring that large private technology firms properly inform investors about their finances and valuations. In a speech at Stanford University late last month, SEC Chairwoman Mary Jo White said: “The risk of distortion and inaccuracy is amplified because start-up companies, even quite mature ones, often have far less robust internal controls and governance procedures than most public companies.”
—Jean Eaglesham contributed to this article.
By CHRISTOPHER WEAVER, JOHN CARREYROU and MICHAEL SICONOLFI
April 18, 2016 6:37 p.m. ET