Major Investor Puts Another Nail in Theranos’ Coffin

Theranos Inc. CEO Elizabeth Holmes

On Monday afternoon, a San Francisco-based hedge fund filed a fraud lawsuit against Theranos Inc. and its CEO accusing the struggling startup of deceiving it into making a $100 million investment.

Reportedly, Theranos made use of “lies, material misstatements, and omissions” to trick Partner Fund Management LP into investing in the company and maintain its investments.

PFM wrote a letter to its own investors explaining the situation. According to the letter, Theranos CEO Elizabeth Holmes and another top executive lied about the development of “proprietary technologies that worked” to get the funds.

In response, the Palo Alto, Calif.-based company described the suit as being “without merit” and pledged to fight back “vigorously.” The startup also thanked the rest of shareholders, who understand the company’s mission.

The Scandal

Reportedly, Theranos shareholders invested nearly $800 million in the company. But it is the first time a major investor becomes vocal after last year’s scandal related to faulty blood tests.

The company’s CEO did say that the technology needed only a few drops of blood for dozens of tests. This single statement pushed the company’s valuation to $9 billion two years ago. But the bulk of test results were at least questionable and relied on conventional devices which prompted a wave of criminal and civil investigations into the matter.

Ever since the scandal, the company reassured investors in various ways. It said it was working with regulators on the issue. Also, it announced it would focus on new technology that will make blood testing cheaper and pain-free. Last week, Holmes thanked shareholders for enabling the startup to realize its “vision.”

But PFM’s lawsuit comes as a hard blow to the firm’s pivot plan.

Details of the case are kept secret under the Delaware County’s rules and the letter did not throw more light on the specifics. People familiar with the matter said the hedge fund seeks to recover damages associated with its investment and lawsuit costs.

PFM-Theranos Business Relationship

In early 2014, the hedge fund poured $96.1 million into the startup, sources said. As of now, PFM manages over $4 billion. Even though it is focused on publicly traded securities, sometimes it places some cash in promising companies such as Theranos.

Sources also said Holmes and ex COO Sunny Balwani first contacted PFM in late 2013. Reportedly the two executives told the fund the new tech could deliver many more tests than it was able to.

PFM also said the firm lied about why it sought the Food and Drug Administration’s approval and about obligations in a contract with Walgreens. The drugstore giant agreed to host some of the startup locations, but it dropped the deal this summer.

PFM now accuses Holmes, Theranos, and Balwani of securities fraud, trade practice act infringements and misinterpretations, and many more. The media couldn’t reach Balwani for comment.

Delaware Court of Chancery confirmed PFM filed the lawsuit Monday. PFM wrote in the letter it is the first time it entered a legal battle. But it added that it did it for the sake of its investors.

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