Billionaire Elizabeth Holmes, founder and chief executive officer of Theranos Inc. (Photographer: David Paul Morris/Bloomberg)

Theranos Criminal Case Is Broader Than Publicly Disclosed, Prosecutors Say

(Bloomberg) -- The government’s criminal fraud case against former Theranos Inc. Chief Executive Officer Elizabeth Holmes and former President Ramesh “Sunny” Balwani runs deeper than what’s been publicly disclosed, prosecutors said.

After a hearing Friday in San Jose, California, Holmes and Balwani lost a bid to block the Justice Department from combing through more than 200,000 company documents. The judge also ordered lawyers for both sides to work out a procedure by which protected and confidential documents are shielded from prosecutors.

U.S. Magistrate Judge Susan van Keulen rejected Holmes’s and Balwani’s request after the hearing. In her order, she also referenced undisclosed “charges and activities” in the government’s broad, ongoing investigation that may extend beyond the former Theranos executives.

The ruling could give prosecutors additional leverage at trial or in any plea deal, including any potential agreement by one defendant of the former couple to aid the prosecution of the other. Assistant U.S. Attorney John C. Bostic defended the government’s request for the Theranos documents, describing the June indictment of Holmes and Balwani as “just an event in the ongoing investigation,” rather than the culmination of the probe.

“This story is bigger than what’s captured in the indictment,” Bostic told the judge. Prosecutors may not yet have particular “targets,” he said, but the indictment “doesn’t capture all the criminal conduct” the investigation has uncovered.

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. Holmes settled a Securities and Exchange Commission civil suit, while Balwani continues to fight the agency.

The indictment filed against Holmes and Balwani in June and slightly revised in September points to many different directions prosecutors might be taking. It describes development and rollouts of the company’s now debunked blood tests in Palo Alto, California, and Phoenix, Arizona, and surrounding areas. The government said in a court filing Friday it plans to turn over more than 12 million pages of documents to Holmes and Balwani as part of pre-trial information sharing.

The more than 200,000 pages of information the parties fought over at Friday’s hearing include documents and emails at Theranos from 2016 to 2017. The files are potentially confidential, Jeffrey B. Coopersmith, a lawyer for Balwani who argued for both defendants, told the judge.

The information includes contracts with dozens of companies and institutions including GlaxoSmithKline Plc, Pfizer Inc., Celegene Inc., Novartis AG, Bristol-Myers Squibb Co., Merck & Co., AstraZeneca Plc, the Mayo Clinic and Stanford and Johns Hopkins universities.

Coopersmith said the government is abusing its investigative powers by using the grand jury to make demands for information long after the indictment was filed. They are hoping to “storehouse” information to use later at a criminal trial, he said, “saving up the acorns for winter, because they may find something.”

In her order, van Keulen said the investigation “concerning Theranos is far-reaching, extends beyond the subject matter of the current indictments, and may extend beyond these defendants.”

Because the scope of government’s criminal investigation includes “charges and activities” not included in the indictment of Holmes and Balwani, “the government’s use of the grand jury is not improper,” she ruled.

The case is U.S. v. Holmes and Balwani, 18-cr-00258, U.S. District Court, Northern District of California (San Jose).

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