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When does hype cross the line into illegal activity?

That’s the big question animating criminal and civil probes into Theranos, the once high-flying Silicon Valley startup that aimed to revolutionize medical testing by developing technology that could perform an array of lab tests with just a few drops of blood.

The company, once valued at $9 billion, has faced sharp questions about the validity of its tests. Federal regulators have proposed banning CEO Elizabeth Holmes from the blood-testing industry for two years because of problems in a Theranos lab that have not been resolved.


Now, the Securities and Exchange Commission and the US attorney’s office for the Northern District of California are investigating Theranos for possibly misleading investors about its activities and the power of its technology.

Here’s what we know so far about the government investigations — and what you should expect next:


What’s Theranos being accused of now?

Nothing, yet. The SEC and federal prosecutors are taking a close look at the company but have not filed any charges. Theranos says it’s “cooperating fully with all investigations.”

Companies hype their products all the time. How is that illegal?

Legal experts make a distinction between puffery — rosy projections and vague marketing terms such as “breakthrough” — and false promotional statements to investors.

A statement to investors could cross the line because it misrepresents the facts, or because it omits key facts, according to Gabriel Nugent, an attorney who represents health care companies in criminal and civil investigative matters.

For example, just a few weeks ago the SEC brought fraud charges against Massachusetts biotech company AVEO Pharmaceuticals for allegedly failing to tell investors how concerned the Food and Drug Administration was about its experimental drug for kidney cancer. Regulators say that AVEO concealed “the critical fact” that the FDA had recommended a second clinical trial for the drug to address concerns about patient deaths.

In Theranos’s case, the company is unlikely to get into hot water simply for telling investors that its signature “Edison” blood analysis machines are amazing and revolutionary — even if they prove to be duds.

But the company could be in trouble if it raised money by telling investors that the machines could be used, or were being used, to run lab tests that the technology was actually incapable of handling.

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“It’s often a hard line to draw, but [at the] end of the day, what the regulators are going to be looking for is: Is this something we can prove to be false?” said Ariel Neuman, a former federal prosecutor who now represents companies and individuals facing government probes and prosecutions, among other clients.

What happens if investigators find evidence of hype that crosses the line?

It wouldn’t be good for Theranos or Holmes.

When potentially incriminating evidence is found, companies often settle with investigators before charges are brought. But the Department of Justice has increasingly placed an emphasis on holding individual executives accountable.

“That puts some pressure on companies in resolving this” to cut a deal that involves punishing — or pushing out — its C-suite executives, according to Thomas Cullen, a former federal prosecutor who now represents individuals and companies in white-collar investigations in health care, among other fields.

If either investigation leads to charges, things get even more serious.

If the SEC brings a formal case against Theranos, the company could face hefty fines, and its executives could be barred from certain financial activities. If the Department of Justice’s probe leads to a criminal indictment for securities fraud or another crime, the company could face fines — and its executives could face jail time.

Does it matter that Theranos is a private company?

To a degree. Private companies like Theranos don’t have to disclose as much as public ones, but they get no special privileges when it comes to misleading investors. The real difference is in the punishment: Public companies can face some additional penalties for deceiving investors, legal experts told STAT.

Can Theranos fix things by proving its technology works?

The company has been notoriously shy about sharing detailed scientific data about its blood tests. The American Association for Clinical Chemistry said this week that Holmes would present information about Theranos’s work at the AACC conference in early August. She’s also scheduled to answer questions “to further clarify the science, accuracy, and reliability” of Theranos technology, according to an AACC press release.

But it’s unclear how much data she has, or whether it will lay to rest concerns that Theranos misled investors.

Can Holmes and her company survive this latest blow?

It’s too early to tell. When these sort of investigations conclude without action, or are resolved in a settlement, companies typically stay afloat just fine. But Theranos is under fire from so many angles right now that these investigations could severely compromise the company’s ability to raise more money and maintain existing partnerships.

Don’t expect to get an answer any time soon. These investigations can take months.