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Theranos Attempts to Skirt Class Action Suit by Arguing Private Equity Group Investors Lack Standing

Leading Plaintiffs Robert Colman (“Colman”) and Hillary Taubman-Dye (“Dye”) have filed a class action suit in the United States District Court for the Northern District of California against Theranos (“Theranos”) and founder Elizabeth Holmes (“Holmes”).  Theranos is a biotech company founded in 2003 on the premise of developing and producing cheap and rapid biomatter testing capabilities. It quickly became a highly sought after investment opportunity, rapidly reaching a nine-figure valuation, with investors predicting enormous demand for cheap, accurate, and portable home testing devices. However, it has since been the subject of numerous legal actions, both criminal and civil, alleging that its representations about an exclusive and proprietary blood testing technology were entirely fraudulent, and that no such revolutionary technology existed. Similarly, in their Complaint, Colman and Dye accuse Holmes of personally enriching herself while spinning a story that her revolutionary technology would both save millions of lives and cut costs: “the truth—there was no revolutionary technology” the Complaint alleges.

In its Answer, Theranos asserts that the Plaintiffs have no standing because they never invested directly in Theranos, rather they invested in venture capital firms, LVG XI and Celadon Technology Fund, which in turn invested in Theranos. Theranos further contends that Colman and Dye did not purchase fractionalized shares that would have given them traditional shareholder rights such as voting power or legal recourse. The analogy Theranos provides is that if an individual invested in an Exchange Traded Fund (“ETF”), and one of the companies in which that ETF had holdings committed fraud, the investor would have no grounds for claims against the company because the investor does not own the underlying securities, only rights to their collective valuation through the ETF.

The Plaintiffs argue that this analogy is misleading, given that the investments made in LVG XI and Celadon Technology Fund were placed exclusively for the opportunity of investing in Theranos, and that these venture capital firms are not at all similar to mutual funds or ETFs. Instead, they are vehicles for allowing investors to have access to private offerings of sought after companies, such as Theranos. The Plaintiffs further assert, these types of venture capital funds act more as an intermediary for investors who have the intention of investing in a specific company, yet lack the capital or connections to gain access to it–so use firms such as LVG XI or Celadon Technology Fund to facilitate this process. Plaintiffs are additionally seeking class action certification, as they believe there are many similarly situated individuals who incurred losses. The outcome of this case could set a precedent for future claims to arise in the venture capital and private offering sphere of the securities market.

The attorneys at Lax & Neville LLP have extensive experience in successfully prosecuting claims on behalf of customers who have suffered losses as a result of investment and securities fraud.  If you are a victim of fraud, please contact Lax & Neville LLP today at (212) 696-1999 to schedule a consultation.