Elizabeth Holmes, the disgraced founder of Theranos, the lab testing company that promised to revolutionize health care, and its former president, Ramesh Balwani, were indicted on Friday on charges of defrauding investors out of hundreds of millions of dollars as well as deceiving hundreds of patients and doctors.
The criminal charges were the culmination of a rarity in Silicon Valley — federal prosecution of a technology start-up. This one boasted a board stacked with prominent political figures and investors, and a startling valuation of $9 billion just a few years ago. In the fabled universe of overnight billionaires and unicorns, companies with billion-dollar valuations, Ms. Holmes had catapulted herself and her company into the buzz-filled world of “disrupters” by pledging to upend the health industry and give consumers control over their own care.
Both Ms. Holmes and Mr. Balwani pleaded not guilty to charges of wire fraud. Lawyers for Ms. Holmes could not be reached for comment, but a lawyer for Mr. Balwani said in a statement that his client was “innocent and looks forward to clearing his name at trial.”
The indictment was filed by the United States attorney’s office in San Francisco and came about three months after the Securities and Exchange Commission settled civil fraud charges against Ms. Holmes.
On Friday, Theranos also announced that Ms. Holmes, who founded Theranos in 2003 as a 19-year-old Stanford University dropout, stepped down as chief executive. She will be replaced by David Taylor, the company’s general counsel, according to a statement from the company, which did not respond to requests for additional comment.
In announcing the indictment, federal prosecutors highlighted the culture of Silicon Valley and the lure of exciting new ventures.
“Investors large and small from around the world are attracted to Silicon Valley by its track record, its talent, and its promise,” prosecutors said. “They are also attracted by the fact that behind the innovation and entrepreneurship are rules of law that require honesty, fair play, and transparency.”
Ms. Holmes and Mr. Balwani were accused of misleading the public and their investors by promoting devices and tests that not only did not work but also endangered lives. Ms. Holmes had drafted a spellbinding sales pitch and relentlessly pursued anyone — including her own employees — who doubted her new blood-testing machines.
“There is one cardinal rule in Silicon Valley that most people never realize,” said Paul Saffo, a longtime technology consultant, “and this is never ever breathe your own exhaust.”
“This is someone who is so deeply self-deluded by her optimism and faith in herself,” he said. “And delusion is contagious.”
The concept was irresistible: Theranos said it could take a few drops of blood from a simple finger prick to detect everything from H.I.V. to a diabetic’s A1C level. Relying on a proprietary technology to analyze the small quantities of blood, the private company offered a wide array of tests much more cheaply than existing blood tests.
It even partnered with Walgreens, the giant drugstore chain, to open up centers in Arizona and California. Theranos reached a settlement with Walgreens last August.
At its peak, Theranos attracted prominent venture capitalists like Timothy Draper, Ms. Holmes’s former neighbor, and Don Lucas, an early investor in Oracle.
Ms. Holmes, a charismatic executive who wore black turtlenecks and spoke passionately about her aim to remake health care, also assembled a star-studded board, including two former secretaries of state, George P. Shultz and Henry A. Kissinger, as well as two former United States senators. Gen. Jim Mattis, the current secretary of defense, also served on the board. He told Fortune magazine in 2014 that he joined the board because he was impressed by the strength of Theranos’s leadership.
In October 2015, Ms. Holmes appeared on the cover of Inc. magazine, next to the headline “The Next Steve Jobs.”
But a series of articles in The Wall Street Journal exposed the company’s testing as deeply flawed, and her story is now the subject of a book by the articles’ author, John Carreyrou, called “Bad Blood: Secrets and Lies in a Silicon Valley Startup,” and a forthcoming movie.
Wealthy investors collectively lost hundreds of millions of dollars, including Walmart’s Walton family, the media mogul Rupert Murdoch, as well as Betsy DeVos, the secretary of education, and her relatives.
In addition to misleading investors about the promise of the company, federal officials charged the two with encouraging patients and doctors to use the company’s blood tests in spite of knowing they “were likely to contain inaccurate and unreliable results.”
In 2016, federal regulators barred Ms. Holmes from owning and operating a laboratory for two years. Later that year, Theranos announced it was closing its lab and laying off about 340 employees, or more than 40 percent of its work force.
Last March, the S.E.C. charged Ms. Holmes with widespread fraud, accusing her of exaggerating — even lying — about her technology while raising $700 million from investors.
In announcing the charges, the S.E.C. said that Theranos and Ms. Holmes had agreed to a settlement, with Ms. Holmes agreeing to pay a $500,000 penalty. She and the company did not admit nor deny the allegations. Mr. Balwani did not settle, and planned to fight the allegations.
Theranos’s collapse has given pause to venture capitalists, but Lakshman Ramamurthy, a former official with the Food and Drug Administration and now the global regulatory lead at Foundation Medicine, is not certain investors have learned their lesson. Companies like Theranos, which offered little hard evidence that its tests worked to its investors, “have their own rules,” he said. “That hasn’t changed.”
“The Silicon Valley hubris remains,” Mr. Ramamurthy said.
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