Theranos secretly bought lab equipment through a shell company, faked tests and inappropriately pumped up its financial outlook to investors, according to allegations in recently unsealed court documents, first reported by the Wall Street Journal.
Partner Fund Management LP, a hedge fund management firm which invested $96 million in Theranos filed the claim in Delaware Chancery Court on Monday, which was unsealed Thursday afternoon, laying out exactly what it asserts the once-hailed blood testing company had been doing to deceive the many investors, partners, customers and journalists who’d looked into the company’s affairs.
In the filings, PFM alleges Theranos ran “fake ‘demonstrations tests’ for prospective investors and business partners” using commercial devices instead of its one-drop blood testing technology.
The 66-page complaint goes on to accuse founder Elizabeth Holmes and former president and COO Ramesh “Sunny” Balwani of repeatedly and knowingly lying, “That, among other things, the company had developed a proprietary technology that worked; the company’s proprietary technology was ready for commercial use to perform nearly all laboratory tests on a few drops of blood drawn from a patient’s finger; and the company was on the cusp of receiving all necessary regulatory clearances and approvals.”
The allegations are based on the testimony of 22 former employees of the company who were deposed by lawyers of PFM and are part of a follow-up suit to the one the firm filed last October alleging Theranos had misled the hedge fund when it convinced it to add funds to the company coffers in 2014.
The new filings are a follow-up to another suit PFM filed earlier this month to block a deal Theranos had offered to investors to take equity, including some of founder Elizabeth Holmes shares if they promised not to sue.
PFM and two other investors now say Theranos has been pressuring them to drop the suit, suggesting they should accept more equity or the company would seek Chapter 11 protection, according to Bloomberg.
Theranos responded to these allegations in a statement on Monday, “The suit is without merit, the assertions are baseless, and the plaintiff is engaging in revisionist history.”
The company has since followed up further calling the document a “one-sided filing by one party to litigation” and saying these are “mischaracterizations” it would rather litigate in court than contest now.
Here’s the full statement from Theranos:
This is a one-sided filing by one party to litigation, and we will respond at the appropriate time in the appropriate forum. We disagree with much of what PFM alleges in its complaint. This is not, however, the time or place to contest their mischaracterizations of the record. We will litigate this case in court, where it belongs. What we will say now is that the items on which PFM focuses have nothing to do with why PFM invested, and they amount to a repackaging of allegations the media have already reported for nearly two years.
As for the tender offer: As previously disclosed, Theranos is in the midst of a tender offer involving its most significant shareholders. Elizabeth Holmes’ use of her own shares to recapitalize our C-2 and C-1 investors—and thereby prevent dilution to our other shareholders—is consistent with her longstanding, personal commitment to doing the right thing for the Theranos shareholder base. This tender offer has been in discussion between Theranos and its shareholders since July 2016. To date, more than 99% of C-2 and C-1 investors other than PFM have chosen to participate.
PFM, a multi-billion dollar hedge fund, opposes the transaction, and is asking the Court to stop the tender offer because it is “unfair” specifically and only to PFM. In response to PFM’s suit, the Court suspended the tender offer for a month in order to permit sufficient time for the court to review the transaction. PFM’s effort to enjoin the tender offer is meritless; their legal theories are self-serving and would harm the rest of the Theranos shareholders. The Company is vigorously opposing PFM’s new suit and looks forward to completing the transaction with its shareholders.
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