Indirect Theranos Investors Can’t Sue as Class, Judge Says

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By Jennifer Bennett

Investors who bought membership and ownership interests in venture capital groups that purchased Theranos stock can’t bring a class suit against the company, a federal magistrate judge said.

The indirect investors can’t sue Theranos Inc. as a class because five of their six claims lack common issues that predominate over members’ individual issues, according to a May 31 U.S. District Court for the Northern District of California opinion. The investors also sued Theranos CEO Elizabeth Holmes and former chief operating officer Ramesh “Sunny” Balwani.

Theranos is “pleased” with the ruling because it moves the company “a step closer to resolving its outstanding legal issues,” Michael Mugmon, a Wilmer Cutler Pickering Hale and Dorr LLP partner who represented the company, told Bloomberg Law. Cooley LLP, representing Holmes, didn’t have a comment. The other parties’ attorneys didn’t immediately respond to requests for comment.

Investors sued after reports surfaced alleging that Theranos, Holmes, and Balwani lied about the company’s “revolutionary” blood test product in a publicity campaign aimed at investors, according to the November 2016 complaint. The company’s product didn’t work, leading to the company’s collapse, the complaint said.

The Securities and Exchange Commission in March settled securities fraud allegations with Theranos and Holmes, but its case against Balwani is ongoing. Holmes agreed to give up majority control and reduce her equity in the company, the SEC said.

One of the requirements for class certification is that the class members’ common issues predominate over their individual issues. Five of the investors’ six claims involve some element of reliance, making those claims more about members’ individual issues, U.S. Magistrate Judge Nathanael M. Cousins said. The investors can’t get a presumption of reliance because they didn’t show all investors relied on the publicity campaign, according to the court. Additionally, the market for Theranos stock was too inefficient for the fraud-on-the-market theory of reliance to apply, the court said.

Common issues predominate with respect to the investors’ sixth claim, which alleges market manipulation, the court said. However, the investors still didn’t show that a class action was the superior process for resolving their claims, the opinion said. Instead, “the marginal benefits of certifying this narrow class do not outweigh the class’s overall weaknesses,” the court said. The would-be class members still have the option of bringing their claims against Theranos individually.

Davis Wright Tremaine LLP and Ross Aronstam Moritz LLP represented Balwani. Attorneys with Robbins Geller Rudman and Dowd LLP and Hagens Berman Sobol Shapiro LLP represented the investors.

The case is Colman v. Theranos Inc. , 2018 BL 194946, N.D. Cal., No. 16-cv-06822-NC, class certification denied 5/31/18 .

To contact the reporter on this story: Jennifer Bennett in Washington at jbennett@bloomberglaw.com

To contact the editor responsible for this story: Seth Stern at sstern@bloomberglaw.com

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