Ex-Theranos Official in SEC Fight Accused of Hounding Doctor

(Bloomberg) -- Former Theranos Inc. President Ramesh “Sunny” Balwani was blocked by a judge from collecting information from a health-care clinic that accused him of harassing a doctor there, a setback in his effort to defend himself against securities fraud allegations by regulators.

Balwani denies any harassing behavior, his lawyer, Stephen A. Cazares, told a federal judge during a hearing Wednesday in San Jose, California. The clinic called Balwani a “a morally bankrupt sociopathic liar” and said he physically and legally threatened the doctor. After the doctor explained her complaints to the judge, Cazares said the concerns are “unfounded.”

U.S. Magistrate Judge Nathanael Cousins rejected Balwani’s requests for information from the Fountain Hills Women’s Health clinic in Arizona -- namely, a comparative analysis of test results from Theranos and another provider -- saying they imposed “both a financial cost but also an invasion to the privacy of patients.”

Both Balwani and former Theranos Chief Executive Officer Elizabeth Holmes were sued by the U.S. Securities and Exchange Commission and criminally charged with fraud. Holmes settled the SEC’s claims against her.

Theranos, the now-defunct blood-testing startup, was once valued at as much as $9 billion. It unraveled amid what prosecutors describe as a massive fraud masterminded by Holmes and Balwani to dupe investors, doctors and patients.

Balwani is in high-gear readying his defense for both the civil and criminal cases, according to court filings, questioning witnesses and collecting documents in Michigan, Texas, New York and California, as well as from state and federal agencies including the U.S. Food and Drug Administration.

The hearing Wednesday was called after the Arizona clinic wrote a letter to the court complaining about Balwani’s conduct. The clinic said the information he seeks, including laboratory results and records, is private patient data. The clinic is refusing to release the information in either the SEC or criminal case.

Cazares told Cousins that the information he wants from the clinic is essential to attack the SEC’s claims that Balwani misrepresented to investors the reliability and accuracy of Theranos test results.

Fountain Hills reportedly compared Theranos blood test results against those of another provider. Whether the comparison works as evidence for or against Balwani, Cazares told the judge, his client needs it to mount his best defense.

Fountain Hills attempted “to arrive at some sort of conclusion of whether Theranos’s tests were accurate,” Cazares said. The clinic’s data is especially important because the test comparisons were apparently done within days, not months, of each other, he said. “That comparison isn’t available to Mr. Balwani anywhere else.”

Privacy laws don’t get in the way of Balwani’s request because health-care providers can disclose even protected patient information under an existing court order in the case, Cazares argued.

The doctor, Nicole Sundene, participated in the hearing by phone. She told the judge that Balwani came to her clinic and harassed her after an early Wall Street Journal report about Theranos, adding that Balwani is seeking “sensitive, reproductive” information protected by patient privacy.

“I don’t think my patients have any bearing on this case,” Sundene told the court. “And I will not subject them to any breaches in their privacy,” she said. “I cannot.”

Susan LaMarca, a lawyer for the SEC, told Cousins that the Balwani’s request for a comparative analysis performed by Fountain Hills came as a surprise. The SEC hasn’t "plowed through" the clinic’s data because it isn’t relevant to the civil fraud claims, she said.

Federal prosecutors are seeking to pause the SEC’s suit against Balwani, arguing that his pretrial information-gathering requests have exceeded the boundaries of the civil litigation and jeopardize the criminal case against him and Holmes. A hearing on the request is scheduled for June.

The criminal case is U.S. v. Holmes and Balwani, 18-cr-00258, U.S. District Court, Northern District of California (San Jose). The SEC case is Securities and Exchange Commission v. Ramesh Sunny Balwani, 18-cv-01603, U.S. District Court, Northern District of California (San Jose).

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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