Last week brought more bad news for private blood testing company Theranos Inc., as San Francisco-based Partner Fund Management L.P. (“PFM”) launched a suit claiming that it was duped into making a $96.1 million investment in Theranos in February 2014. The complaint, filed in Delaware Court of Chancery, alleges common law fraud, securities fraud under California’s Corporations Code, and violations of Delaware’s Consumer Fraud Act and Deceptive Trade Practices Act, among other things, against Theranos, its Chief Executive Officer, Elizabeth Holmes, and its former Chief Operating Officer, Ramesh Balwani.
Speaking last week at the SEC’s and Rock Center’s Silicon Valley Initiative at Stanford Law School, SEC Chair Mary Jo White cautioned Silicon Valley’s start-up companies regarding their potential lack of internal controls. In particular, she warned that unicorns—nonpublic start-up companies valued north of one billion dollars—may warrant special scrutiny into whether their corporate governance and investor disclosures are keeping pace with their growing valuations. Ms. White repeatedly warned that the prestige of obtaining “unicorn” status may drive companies to inflate their valuations.