Lawyers: Elizabeth Holmes Could Still Serve Time In Prison

Forbes 7 months ago

In this Nov. 2, 2015, file photo, Elizabeth Holmes, founder and CEO of Theranos, speaks at the Fortune Global Forum in San Francisco. On Wednesday, March 14, 2018, the Securities and Exchange Commission filed charges against Holmes and her company for defrauding investors. (AP Photo/Jeff Chiu, File)

By Ellie Kincaid and Michela Tindera

Elizabeth Holmes agreed to settle with the SEC on fraud charges that she deceived investors to raise $700 million for her blood-testing company Theranos. She and the company didn't admit or deny the allegations, but lawyers say she could still face jail time if prosecutors decide to pursue her.

“She could very well serve time,” said Elliot Lutzker, the chair of New York City commercial law and government relations firm Davidoff Hutcher & Citron’s corporate group who has decades of experience handling non-criminal matters with the SEC. “She is subject to criminal charges because she outright lied.” Theranos declined to comment for this story.

The SEC complaint alleges that 34-year-old Holmes misrepresented Theranos’ revenue, the capabilities of its blood-testing machines, their need for FDA approval, and more.

The SEC charges themselves are not criminal but civil, and the SEC can’t give jail time. But the U.S. Attorney’s Office of the Department of Justice may take a look at the case and decide to bring criminal charges, said Miriam Baer, Brooklyn Law School professor and white collar crime expert.

"If you have a large fraud that deceives the public then certainly that would be a kind of factor that might suggest that criminal charges are forthcoming," said Baer. However, she noted that for a criminal case the burden of proof is higher and prosecutors will need to determine whether Holmes was acting recklessly or if she had intent to deceive her investors.

In settling with the SEC, Holmes agreed to pay a $500,000 fine, return 18.9 million Theranos shares, give up her voting control of the company, and will be barred from serving as an officer or director of a public company for a decade. She and the company didn’t admit or deny the SEC’s allegations. The settlement doesn’t mean that the U.S. Attorney’s Office can’t bring its own charges, Baer said.

Whether Holmes could get locked up would also depend on what criminal charges she faces, if any. Based on the size of a $700 million fraud, Baer said, U.S. recommended sentencing guidelines “would almost certainly involve jail time."

“The SEC clearly made an example out of her,” Lutzker said. “I can’t see any compelling reason why the Justice Department wouldn’t bring a case.”

“It’s clearly a wake-up call to all unicorns,” he added.

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