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Plaintiff: Theranos Used Shell Companies to Buy Outside Testing Equipment

Filings in a suit brought by its investors claim that Theranos, the embattled medical device company, formed shell companies to covertly buy commercial lab equipment. The documents, as reported by the Wall Street Journal, allege that the company used the equipment to conduct fraudulent demonstrations of its own blood testing technology.

The claims are partially based on depositions from 22 former Theranos employees. Other depositions in the same set of documents include claims that Theranos knowingly overstated the accuracy of its tests, and inflated its profit projections when dealing with investors.

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Some of the testimony quoted by the Journal suggests that secretly-purchased equipment may also have been used to conduct blood tests for customers, a practice uncovered by the Journal in 2015. Theranos at the time said it only used outside equipment temporarily while it worked to develop its own proprietary devices. The company achieved a valuation of $9 billion on claims that its technology would revolutionize the medical testing industry, but struggled to make that promise a reality.

The subsidiary that did the purchasing was known as Protegic Procurement Company. It is reported to have purchased equipment from outside companies including Seimens, which were then modified to run tests using the smaller samples that Theranos’ reputed technological advantage hinged on.

Theranos has responded, in part, that the purchases reflect common practice among companies developing new technology, and were not intended to be deceptive.

The depositions are part of a suit brought by Partner Fund Management, which invested just over $96 million in Theranos in early 2014. The suit claims that Theranos engaged in multiple deceptions in its communication with the Fund, though Theranos has countered that some of the evidence presented in the suit concerns communication after the investment was made.

Partner Fund and other aggrieved former investors also said this week that Theranos has threatened to declare bankruptcy unless they drop their claims.