Tyler Shultz, former Theranos employee, and one of the most noteworthy whistleblowers of our time, has joined a long list of professionals who chose to take a stand and expose the fraudulent behavior of their employers. Theranos, a consumer healthcare technology startup once valued at $9 billion, met its downfall after allegations that the company’s primary technology was a fraud. Shultz was a vital source for The Wall Street Journal investigative reporter, John Carreyrou, who reported for the first time in 2015 that Theranos was using traditional blood-testing machines to perform its blood-testing services, instead of the company’s proprietary Edison devices, which were unreliable at best.
By March of 2018, the U.S. Securities Exchange Commission (“SEC”) charged Theranos’ CEO, Elizabeth Holmes for her part in the extensive fraud. Holmes agreed to a settlement with the SEC in which she would pay $500,000, forfeit majority voting control over the company by converting her super-majority Theranos Class B Common shares to Class A Common shares, return 18.9 million shares and be barred from serving as an officer or director of any public company for 10 years. In June 2018, Holmes was charged with nine counts of wire fraud and two counts of conspiracy to commit wire fraud. If Holmes is convicted, she faces a maximum sentence of two years in prison and a $250,000 fine. Additionally, she may be required to pay restitution for each count of wire fraud and each count of conspiracy to commit wire fraud.
According to the 2018 ACFE Report to the Nations on Occupational Fraud and Abuse, occupational fraud is initially detected by a tip, 40% of the time. It is important to note that occupational fraud is detected by internal audit 15% of the time and by external audit only 4% of the time. Further, over half of all tips that lead to the detection of occupational fraud are supplied by employees of the organization itself, 14% of which come from an anonymous source. This speaks to the fact that many individuals are afraid to come forward for fear that they will not be protected from retaliation and other potentially negative consequences. Although Shultz did not intend to become a whistleblower, his first-hand knowledge of the deceptive practices that Theranos was engaged in became a driving force behind exposing the truth to regulators, investors and the public.
If you need assistance with assessing or responding to fraud within your organization, please contact Joel Rosenthal at 412.697.5387 or [email protected] or Alyssa Brunatti at 412.697.5371 or [email protected]. For similar articles, visit Schneider Downs’ Our Thoughts On blog.
