Firm, tarred by scandal, will pay creditors its remaining cash
Theranos Inc., the blood-testing company accused of perpetrating Silicon Valley’s biggest fraud, will soon cease to exist.
In the wake of a high-profile scandal, the company will formally dissolve, according to an email to shareholders. Theranos will seek to pay unsecured creditors its remaining cash in coming months, the email said.
The move comes after federal prosecutors filed criminal charges against Theranos founder Elizabeth Holmes and the blood-testing company’s former No. 2 executive, alleging that they defrauded investors out of hundreds of millions of dollars and defrauded doctors and patients.
The executives have denied the charges and face a coming criminal trial.
The dissolution process was precipitated by the fact that Theranos breached a covenant governing a $65 million loan it received from Fortress Investment Group last year. Under the loan terms, Fortress was entitled to foreclose upon the company’s assets if its cash fell beneath a certain threshold.
In the email to shareholders, sent Tuesday, Theranos General Counsel and Chief Executive Officer David Taylor said the company is trying to negotiate a settlement with Fortress that would give the New York private-equity firm ownership of the company’s patents but leave its remaining cash—estimated at about $5 million—for distribution to other unsecured creditors.
Under a liquidation process known as “an assignment for the benefit of creditors,” getting that remaining cash to the unsecured creditors could take six to 12 months, Mr. Taylor said in the email. Most of Theranos’s two-dozen remaining employees worked their last day on Friday, Aug. 31. Only Mr. Taylor and a handful of support staff remain on the payroll for a few more days.
The action followed a failed bid to sell the company. Over four months, investment bank Jefferies Group LLC reached out on Theranos’s behalf to more than 80 potential buyers, and executed nondisclosure agreements with 17 of those parties, the email said, adding: “We assisted those parties with diligence and had numerous follow-on conversations.”
The big-name investors who poured money into Theranos will get nothing. All told, investors in Theranos have lost nearly $1 billion.
Theranos’s founder and chairman, Ms. Holmes, and her ex-boyfriend, Ramesh “Sunny” Balwani were indicted on nine counts of wire fraud and two counts of conspiracy to commit wire fraud in June. Mr. Balwani was Theranos’s president and chief operating officer until he retired from the company in May 2016. If convicted, they each face a maximum sentence of 20 years in prison and a fine of $250,000, plus restitution to those found to have been defrauded, on each count.
The indictments followed months of reporting by The Wall Street Journal that raised questions about the company’s technology and practices.
Ms. Holmes sought to disrupt the blood-testing business. At the height of her fame, the Stanford University dropout claimed to have invented groundbreaking new technology that could run the full range of laboratory tests on just a drop or two of blood pricked from a finger.
On the strength of her claims, Theranos rolled out its vaunted finger-stick blood tests in Walgreens stores in California and Arizona and rocketed to a valuation of more than $9 billion, making Ms. Holmes a billionaire and media celebrity. Her bold talk and black turtlenecks drew comparisons to Steve Jobs. The pharmacy chain has said it was misled by Theranos about its technology and prospects.
But as the Journal revealed in a series of articles beginning in October 2015, Theranos’s blood-testing device was unreliable and the company used it for just a fraction of the more than 240 tests it offered to consumers. Behind the scenes, it performed the vast majority of the tests with commercial analyzers purchased from other companies.
Theranos become a symbol of the excesses of the current technology boom. Its failure was dramatic and painful for many. A biochemist who worked at Theranos for eight years committed suicide in 2013 after becoming distraught by its culture of fear and secrecy and its lack of progress with its technology, according to his widow. Tyler Shultz, a grandson of former Secretary of State George Shultz and the first employee to blow the whistle to a state regulator about what he saw as troubling practices, became estranged from his grandfather, a Theranos director.
The roster of Theranos investors—most of whom poured money into the company after its commercial rollout in Walgreens stores in late 2013—included the Waltons, heirs to Walmart Inc. founder Sam Walton; Atlanta’s Cox family; the family of Secretary of Education Betsy DeVos; and Rupert Murdoch, executive chairman of 21st Century Fox and of News Corp , the Journal’s parent company. Each invested $100 million or more in Theranos—investments that are now worthless.
Source: WSJ