Business

Theranos investors say they were pressured to abandon lawsuit

Elizabeth Holmes, founder and CEO of Theranos, speaks at the Fortune Global Forum in San Francisco, Monday, Nov. 2, 2015. (AP Photo/Jeff Chiu)
ASSOCIATED PRESS FILE/2015
Theranos Inc., which was founded by Elizabeth Holmes, faces multiple suits by investors who claim they were misled about the company’s blood-testing technology.

WILMINGTON, Del. — Theranos Inc. investors accused the company of threatening to file for bankruptcy protection if they don’t agree to give up their rights to sue the firm over its flawed blood-testing business.

Officials of Partner Investments LP and two other funds, which invested more than $96 million in Theranos preferred shares, said a lawyer representing the privately held medical-testing company suggested it would seek Chapter 11 protection if the investors won’t abandon their lawsuit and accept more equity instead.

The allegation was made in a court filing unsealed Tuesday in Delaware Chancery Court. Theranos officials have disputed the investors’ claims, saying they discussed the exchange offer with investors before the suit was filed. Tali Mackay, a spokeswoman for Theranos, didn’t immediately respond to a request for comment Wednesday.

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Having said it will no longer sell tests to consumers after running into trouble with US regulators, Theranos and chief executive Elizabeth Holmes are fighting for the company’s life. It’s facing multiple suits by investors who claim they were misled about the technology and want their money back, and it is refocusing on research.

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Theranos officials agreed Tuesday to pay more than $4.8 million to settle the Arizona attorney general’s consumer fraud claims tied to flawed blood tests it performed on state residents. On April 17, the company agreed to a two-year ban on operating blood-testing laboratories to resolve Medicare claims filed by government regulators at the Centers for Medicare & Medicaid Services.

The scandals over faulty blood tests forced the company to shut its labs and fire 340 workers last year. Walgreens Boots Alliance Inc. pulled out of agreement to have Theranos do blood testing in some of its stores and sued its partner for $140 million in damages.

Theranos officials in September 2016 first talked to investors about the offer to give preferred shares to those who pledge not to sue over the testing scandals, according to the investors suing in Delaware.

Partner Investments officials said they discovered that Theranos officials engineered the share offer in a way that would make it impossible for the funds to obtain “any recovery” as part of its bankruptcy filing. The bankruptcy threat unfairly forced the funds to have to choose between accepting the “coercive” share offer or pressing ahead with their “meritorious” suits, Partners’ lawyers said in the filing.

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The unnamed Theranos attorney “sent the unmistakable message” that the company “will declare bankruptcy before plaintiffs can recover in the fraud action,” lawyers for the funds said in court filings.

A Delaware judge temporarily barred Theranos on April 11 from going forward with the share-exchange plan, according to court filings. A hearing on whether the exchange plan can proceed is scheduled for June 26.

In a newly unsealed letter, Theranos’s lawyers said Partners was mischaracterizing the exchange offer as a way to deprive the investors of their rights by forcing the fund to choose between pressing ahead with its lawsuit and risking no recovery in a bankruptcy or accepting the shares, which include “an enhanced preference in the event of liquidation.”

Partners officials sued Theranos in October in Delaware accusing the California firm of duping them about its performance and technology to get the $96.1 million investment and filed another suit in the same court earlier this month to block the exchange-offer deal.