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Theranos directors kept mum amid rising company missteps

May 30, 2017
  • Two ex-board members said they didn’t confront CEO Holmes
  • Depositions unsealed in settled investor cases in Delaware
Elizabeth Holmes

Photographer: David Paul Morris/Bloomberg

Two former Theranos Inc. directors said they didn’t think to question executives as allegations arose that the struggling startup used existing blood-testing technology rather than its heralded system to analyze samples.

Former U.S. Secretary of State George Shultz and retired U.S. Navy Admiral Gary Roughead, who served on Theranos’ board acknowledged that they failed to confront Chief Executive Elizabeth Holmes about the allegations because they believed her claims about the technology’s capabilities, according to court documents unsealed May 26 in Delaware.

“That’s what I assumed,” Shultz testified under oath April 4. “I didn’t probe into it. It didn’t occur to me.

Excerpts from the depositions were made public in an investor’s lawsuit accusing Theranos officials of misrepresenting the company’s performance and technology in order to raise $96 million in funding. Partner Management Fund LP agreed to settle its lawsuits in Delaware Chancery Court earlier this month for an undisclosed amount.

Theranos has been pushing to resolve claims challenging the validity of the company’s blood-testing technology. The Palo Alto, California-based startup agreed in April to pay Arizona more than $4.8 million to settle consumer-fraud claims over botched tests. The company also has agreed to a two-year ban on operating blood-testing laboratories to end a U.S. regulatory probe.

Viability Questions

Roughead, a former chief of naval operations who retired in 2011, testified in a March 24 deposition that he knew Theranos executives sometimes used other companies’ technology to analyze blood samples. He added that he didn’t know the extent of that internal practice until it was disclosed by the Wall Street Journal.

“It was not until some of the press reporting that I became aware there was extensive commercial analyzers in use,” Roughead said. Still, the revelations didn’t prompt him to go to Holmes and “ask her directly” about the viability of Theranos’ testing system, he said.

Susan Schendel, a spokeswoman at Stanford University’s Hoover Institution where Shultz and Roughead are fellows, said Tuesday in an email that both men were “unavailable for comment.”

Theranos spokeswoman Tali Mackay said Tuesday in an email that the unsealed deposition excerpts “represent a misleading version of the record.” The company “has taken significant strides to address past shortcomings” while continuing to develop its technologies, Mackay said.

The startup claimed it could run multiple blood tests on just a drop of blood at a fraction of the usual price. It was forced to close its labs after U.S. regulators found multiple failures to meet standards as concerns over the accuracy of its testing led to corrections of tens of thousands of patient results.

Holmes’ Hype

Tyler Shultz, George Shultz’s grandson who worked at Theranos, said in a March 6 deposition that Holmes over-hyped the company’s testing technology to the former Reagan administration official to gain a “business advantage.”

Holmes claimed “things that were just completely factually not true,” Tyler Shultz said. “The big ones are being able to run hundreds of blood tests from a single drop of blood.”

The CEO also erroneously led people to believe Theranos’ testing system could run multiple tests simultaneously, the younger Shultz added. “In reality, each device was calibrated to run one thing at a time.”

In excerpts from 22 unsealed depositions, former Theranos employees described a workplace ruled by secrecy and fear, where workers put in long hours trying to make the company’s testing system perform as advertised.

CDC Complaint

Erika Cheung, a Theranos lab worker, grew so nervous about the accuracy of test results that she wrote a letter to federal regulators outlining her concerns, according to a March 7 deposition.

“I’m ashamed of myself for not filing this complaint sooner,” Cheung wrote in her letter to the Centers for Disease Control that was referenced in the unsealed filings. The lab technician said she felt guilty because she didn’t trust the technology and “wouldn’t recommend my sister getting this test done.”

“I wouldn’t tell my mother to go in and get these tests done, like I had no business to say it was OK to run them on other people,” Cheung said.

The lab technician said in her deposition that company executives frequently demanded that staff “hide things from people.”

“We were constantly hiding things from all sorts of people, whether it was regulators or whether it was outside vendors or even people that would come in for demos,” she said.

The depositions were unsealed at the request of the Wall Street Journal, which reported on them earlier Tuesday.

Theranos still faces at least one other investor lawsuit in addition to claims from ex-partner Walgreens Boots Alliance Inc. that it was misled about the state of the company’s technology when providing blood testing in some of its Arizona stores.

The Walgreens case is Walgreens Co. v. Theranos Inc., 16-cv-1040, U.S. District Court for the District of Delaware (Wilmington).

https://bloom.bg/2qxYEmf

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