Theranos Director Defends CEO, Says Investors Have Faith

  • Holmes `clearly equipped to be CEO,' board member Boies says
  • Blood testing startup is facing probes from SEC, U.S. Attorney

Theranos Adds SEC Investigation to Blood Test Scrutiny

Theranos Inc. board member David Boies defended Chief Executive Officer Elizabeth Holmes on Tuesday, saying she has the management and scientific skills to lead the blood-testing startup despite criminal and civil investigations of the company by U.S. authorities.

Boies, whose law firm Boies, Schiller & Flexner LLP is providing legal advice to Theranos, said in a telephone interview that the board hasn’t felt pressure from investors even as the company comes under scrutiny by state and federal agencies. The Palo Alto, California-based company said on Monday that it’s under investigation by the U.S. Securities and Exchange Commission and the U.S. Attorney’s Office in San Francisco.

Boies expressed confidence in Holmes, who dropped out of Stanford University to found Theranos. She is “clearly equipped to be CEO of the company, and I think she has demonstrated that not only through her scientific bones, but management skills,” Boies said.

Theranos is developing a technology that, according to the company, can run scores of diagnostic tests using only a few drops of blood. The startup has faced questions about whether the technology works after the Wall Street Journal cited former employees who said that it did not perform as the company claimed. The company has since stopped using its fingerprick tests while waiting for clearance from the U.S. Food and Drug Administration, said Brooke Buchanan, a spokeswoman, and is instead running tests on traditional lab analyzers.

Multiple Investigations

Along with the inquiries from the SEC and the U.S. Attorney, Theranos has been investigated by federal health regulators. Inspectors at the U.S. Centers for Medicare and Medicaid Services said Theranos wasn’t complying with lab standards, and has threatened the startup with sanctions, including banning Holmes from running a lab business. The company says it has responded to CMS’s concerns and is awaiting a final ruling from the regulatory agency.

“The marketplace and the scientific community will determine the company’s future, not what happens in the media,” Boies said. The company’s private investors are sticking by Holmes, he said.

“You have some investors who invested early and who have done very, very, very well with the company, where they could today sell their stock for 10 to 100 times what they bought it for,” Boies said. More recent investors are “very sophisticated” and “have faith in Elizabeth and the company’s intellectual property.”

Boies didn’t name the investors he was referring to. Theranos is closely held, and while investors in non-public startups can sometimes sell their stakes on private exchanges, the company has yet to announce an initial public offering that would allow widespread exits.

SEC Mission

While the SEC is known for policing fraud at public companies, the regulator has been increasingly focused on private markets, particularly fast-growing startups in Silicon Valley.

SEC Chair Mary Jo White said last month that investors should be wary of so-called unicorns -- private firms worth more than $1 billion -- because the ambition to reach a sky-high valuation may “drive companies to try to appear more valuable than they actually are.”

So far, Boies said, the SEC and the U.S. Attorney have not asked to interview company executives, and the company has only received document requests.

“The company continues to work closely with regulators and is cooperating fully with all investigations,” Theranos said Monday in a letter to its business partners, which include Walgreens Boots Alliance Inc. A Walgreens spokesman declined to comment.

Theranos Board

Boies is one of five governing directors of the company, including Holmes. Besides the directors, the company also has eight non-voting counselors who include former U.S. government officials. It has formed a separate scientific and medical advisory board staffed with physicians and researchers.

Holmes is scheduled to present data describing Theranos’s technology at the annual scientific meeting of the American Association for Clinical Chemistry in August. Theranos will release some data before the presentation, according to Boies.

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