Court Upholds Fraud Claims in Investor Class-Action Lawsuit Against Theranos, CEO Elizabeth Holmes and Other Officers
In 2016, Hagens Berman Sobol Shapiro LLP began its investigation of possible securities law violations by Theranos, Inc. and its management on behalf of investors in Theranos financing rounds.
The firm’s initial investigation indicated that Theranos may have made significant misrepresentations about the state of the company’s technology and operations when it solicited investments. On Oct. 6, 2016, the Wall Street Journal reported Theranos would shut down its blood-testing facilities and dismiss more than 40% of its employees after regulators banned Theranos CEO Elizabeth Holmes from owning or operating a lab for two years.
The firm’s lawsuit sought to represent indirect investors using a presumption of reliance argument for alleged violations of California securities and competition laws for hiding failures of its blood testing technology, allowing investors to show they were collectively impacted by Theranos’ misstatements due to the effect on the company’s stock price.
During the case, U.S. Magistrate Judge Nathanael M. Cousins accusing Holmes’ counsel of playing “litigation games” and hiding discovery, and denied Theranos’ and other defendants’ request to stay the case. That same month, Holmes and former Theranos Chief Operating Officer Ramesh “Sunny” Balwani were indicted on charges they defrauded investors and doctors with blood-testing technology they knew didn’t work.
In his decision denying Holmes' request for a stay, Judge Cousins also gave weight to the interests of the proposed class and investors in other securities offerings, which “supports having more daylight on what occurred in this alleged fraud, and supports that daylight coming sooner rather than later."
While the court initially denied class certification for the indirect investor group, on June 14, the firm filed a motion, making a renewed request for class certification.
In July of 2018, Hagens Berman’s attorneys secured a confidential settlement with Theranos, ending the suit. The settlement also allowed for continued public access to depositions, video and exhibits and provided that Judge Cousins retain jurisdiction over future litigation over public access to deposition transcripts, video and exhibits, that may arise from Hagens Berman’s case.
procedural history of the case
On Nov. 8, 2016, Plaintiffs filed this putative class action to recoup their investments, which Defendants fraudulently obtained through the above-mentioned misrepresentations. Two investors filed lawsuits around the same time and alleged the same overarching misrepresentations.
On Oct. 13, 2017, Partner Investments, L.P., PFM Healthcare Master Fund, L.P. and PFM Healthcare Principals Fund, L.P. (collectively, “Partner Plaintiffs”) filed a complaint (“Partner Litigation”) against Defendants seeking to recoup their $96.1 million investment. The Partner Plaintiffs alleged that Defendants:
[L]ied that, amongst other things, the Company had developed a proprietary technology that worked; that the Company’s proprietary technology was ready for commercial use to perfume nearly all laboratory tests on a few drops of blood drawn from a patient’s finger . . . [and] concealed the ugly truth about the commercial viability of their technology and methods . . . and ability to meet their rollout commitments.
On Nov. 15, 2016, Walgreens filed a complaint (“Walgreens Litigation”) against Theranos seeking to recoup its investment of $100 million in “innovation fees” and $40 million in a convertible note. The suit claimed that Theranos “purported to have developed disruptive technology that would make blood testing less invasive, faster, and far more accessible, effective, and actionable” and that it was ready to roll it out commercially.
In the present action, on Apr. 18, 2017, the Court denied Defendants’ motion to dismiss Plaintiffs’ claims for securities fraud in violation of Cal. Corp. Code §§ 25400(D) & 25500 (Count I); violation of California’s Unfair Competition Law, Cal. Bus. & Prof. Code § 17200 (Count III); fraud and deceit (Count IV); fraudulent concealment (Count V); constructive fraud (Count VI); and negligent misrepresentation (Count VII). The Court dismissed only the claim under California Corporations Code §§ 25401, 25501, holding that the requisite privity did not exist between Plaintiffs and Defendants. (ECF 63)
As investors began making claims for the fraudulent conduct and misrepresentations described herein, Defendants scrambled to absolve themselves of liability. Beginning in December 2016, Theranos began to settle with investors over these common claims. On Dec. 29, 2016, Theranos agreed to a contingent settlement with Keith Rupert Murdoch, which would finalize if Theranos settled with any another investor.
On Mar. 20, 2017, Defendants initiated a tender offer to funds that had directly invested in Theranos. Theranos offered those funds priority shares in exchange for a release of claims. Most of the funds accepted and released their claims. The Partner Plaintiffs, however, did not accept and, instead, moved to enjoin the settlement. Another sole purpose fund, Hall Black Diamond, did not accept the tender offer either.
On Apr. 29, 2017, after Theranos threatened bankruptcy, the Partner Plaintiffs filed an amended complaint and were days from taking the deposition of Defendants Holmes and Balwani. Presumably terrified of those depositions, Defendants settled.
Also in July/August, 2017, Theranos reportedly settled with Walgreens for approximately $30 million – 75% of the $40 million convertible note Walgreens had invested. Defendants, however, refused to disclose the full terms of that settlement to Plaintiffs.
In July, Defendants moved to limit the putative class to indirect investors – i.e., excluding funds that invested directly in Theranos but including persons who invested in Theranos through those directly-invested funds. Plaintiffs simultaneously moved to certify a mandatory limited fund class in order prevent the dissipation of Theranos’ limited funds, which Defendants were using to pay the Partners and Walgreens settlements. Defendants argued that they were not insolvent and owned a patent portfolio. In light of Defendants’ averments that the Company was not insolvent, the Court declined to certify a mandatory limited fund class. Plaintiffs then agreed that it was appropriate to limit the class to indirect investors, given that most of the direct investors/funds had released their claims through the tender offer/settlement. On September 6, 2017, the Court entered an order excluding certain direct investors from the putative class, while upholding the claims of the putative class of indirect investors, who – like both named Plaintiffs – invested through those directly-invested funds.
Plaintiffs filed an amended complaint on Jan. 5, 2018, which the Defendants answered on Jan. 19, 2018. On Feb. 16, 2018, Plaintiffs filed their class certification motion (ECF 177). On May 31, 2018, the Court denied Plaintiffs’ motion for class certification (ECF 240) finding too many differences amongst investors in different funds. On June 14, 2018, Plaintiffs filed a renewed motion for class certification, seeking certification of a narrower class consisting of investors in only three funds, and this motion remained pending.
On June 20, 2018, Defendant Holmes filed a motion to stay this action in light of the indictment of Ms. Homes and Mr. Balwani, returned on June 14, 2018. The motion to stay was argued on June 25, 2018 and denied, and the depositions of Ms. Holmes and Mr. Balwani were taken.
The Court has set the following schedule:
- Fact discovery to be completed by 7/16/2018
- Expert discovery to be completed by 8/15/2018
- Dispositive motions to be filed by 8/31/2018
- Pretrial Conference set for 12/5/2018 02:00 PM
- Jury Trial set for 12/10/2018 09:00 AM
On July 2, 2018, the parties entered into mandatory settlement negotiations, at the direction of the Court, in front of Magistrate Judge Elizabeth LaPorte. After performing due diligence with Defendants representations, yet standing by the allegations in the Complaint, Plaintiffs concluded that pursuing this case as a class action would not be cost effective, nor lead to any meaningful recovery to the proposed classes, and that actions by the Securities and Exchange Commission and the United States Department of Justice would remain the vindicate the public interest in the matters at issue in the Action. As a result, after consulting with Plaintiffs’ Counsel, Plaintiffs have concluded that the case should be resolved on an individual basis and dismissed.
On July 20, 2018, the Court entered the stipulation and order dismissing the case under Federal Rule of Civil Procedure 41(a)(1)(A)(ii).
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