Theranos Investors May Vie With SEC to Scavenge Unicorn Remains

(Bloomberg) -- First investors lost billions on Theranos Inc. Now they may end up fighting over the scraps with, of all things, the SEC.

With Silicon Valley still absorbing the dramatic near-collapse of the medical-testing startup once valued at $9 billion, investors are moving to recover what money they can.

The targets: the company’s remaining assets, including dozens of potentially valuable patents, and perhaps the personal fortune of its former president, Ramesh “Sunny” Balwani. But the investors may be in competition with the U.S. Securities and Exchange Commission and the lenders who are now keeping Theranos afloat.

Two weeks after Theranos founder and chief executive Elizabeth Holmes agreed to pay $500,000 to resolve the SEC’s claims that she committed a “massive fraud" on investors, a lawsuit filed on behalf of shareholders who helped raise $724 million for the private company is at a critical juncture.

At a hearing in federal court in San Jose, California, set for Wednesday, Robert Colman and Hilary Taubman-Dye will argue that they deserve the chance to recover what they can for a group of about 200 indirect Theranos investors, who like them bought stakes in the startup through investment funds.

The bigger question is how much money is realistically left to get back, their lawyer acknowledged in an interview.

Test Results

The meteoric rise of Theranos hinged on a promise that its machines could perform myriad tests with a single drop of blood. Holmes and her chief deputy were later accused of lying for years about their technology, snookering the media, and using the publicity to get investors to hand more than $700 million to prop up the closely held company.

The company eventually had to retract or correct the results of tens of thousands of medical tests. By the end of 2017, it was on the verge of bankruptcy, until it got a loan to see it through another year, according to the SEC.

The investors claimed in a recent court filing that “Theranos is rapidly running out of money, and it is committing more financial resources to its lawyers than to developing a replacement for its discredited technology.”

Balwani’s Assets

They’re also suing Holmes and Balwani. The investors’ lawyer, Reed Kathrein, said that while he doesn’t think Holmes has much left since the SEC settlement, which also required her to give up control of the company, he believes Balwani -- who is fighting the SEC’s claims and denies any wrongdoing -- has assets that they can pursue, pointing to a recent report by STAT that put his wealth at almost $100 million.

“We may be in competition with the SEC over those assets,” Kathrein said. He also acknowledged that the loan Theranos is subsisting on is secured by its patent portfolio, and investors “may be second in line” for those assets.

Balwani maintains that he worked hard to maximize stockholder value in Theranos, investing millions of dollars of his own money into the company, loaning it millions more, taking a modest salary for his six years as president and never attempting to sell his own stock, according to a statement by his lawyer, Jeffrey Coopersmith.

“Sunny devoted years to working exclusively with Theranos, giving up the opportunity to pursue other, potentially lucrative opportunities based on his past professional success,” Coopersmith said.

John Dwyer, a lawyer for Holmes, declined to comment on the case. Michael Mugmon, a lawyer for Theranos, didn’t respond to phone and email messages seeking comment. The SEC settlement didn’t include an admission of guilt. A criminal probe is ongoing, and the prosecutors’ office in San Francisco declined to comment on its status.

Theranos has contended that the investors were sophisticated enough to know what they were getting into -- Colman co-founded the once-prominent Silicon Valley investment firm, Robertson Stephens. The startup also argues the lawsuit creates a "simplistic and false narrative" that its technology never worked.

The company is fighting Kathrein’s bid for class-action status, saying the investors Colman and Taubman-Dye want to represent came to the company in circumstances too different for them to proceed in the lawsuit as a single, unified group.

U.S. Magistrate Judge Nathanael M. Cousins previously excluded about three dozen direct shareholders from the case.

The case is Colman v. Theranos, 16-cv-06822, U.S. District Court, Northern California (San Francisco).

To contact the reporter on this story: Joel Rosenblatt in San Francisco at jrosenblatt@bloomberg.net.

To contact the editors responsible for this story: Elizabeth Wollman at ewollman@bloomberg.net, Peter Blumberg

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