The U.S. Department of Justice asked a federal court last week to put a hold on the Securities and Exchange Commission’s case against former Theranos Chief Operating Officer Sunny Balwani, arguing that a stay in the case would prioritize their criminal case against him.
The Justice Department told the judge that Balwani should be prevented from using his pending SEC case to benefit his criminal case. His lawyers’ discovery demands in the SEC case have included requests that are only relevant to the criminal indictment’s allegations that he defrauded doctors and patients.
For example, Balwani subpoenaed parties that appear nowhere in the SEC’s complaint against Balwani or his response to the charges including competitor laboratories who also had contracts with Theranos partners Walgreens WBA, +0.32% and Safeway.
The subpoenaed parties are instead associated with doctors and patients interviewed by federal investigators and prosecutors in the criminal investigation, the DOJ says.
The SEC’s civil charges and the DOJ‘s criminal charges overlap but are quite different.
The SEC alleges Theranos founder Elizabeth Holmes and Balwani “deceived investors by, among other things, making false and misleading statements to the media, hosting misleading technology demonstrations, and overstating the extent of Theranos’ relationships with commercial partners and government entities, to whom they had also made misrepresentations.”
The SEC also alleged Balwani, Holmes and Theranos lied to investors about many aspects of Theranos’ business, including the capabilities of its proprietary analyzers, its commercial relationships, its relationship with the Department of Defense, its regulatory status with the U.S. Food and Drug Administration, and its financial condition.
The criminal indictment against Holmes and Balwani alleges six counts of wire fraud related to the financial scheme to defraud investors, too, but also alleges that the two defrauded doctors and patients.
The SEC’s complaint doesn’t make any allegations about criminally defrauding doctors or patients.
Holmes, who settled the SEC charges in March 2018, now argues via her attorneys that the SEC is part of the government’s prosecution and, therefore, that the government must give Holmes any documents obtained by the SEC in the course of Balwani’s civil discovery for her defense against the criminal charges.
The SEC supports the request for a hold in its case against Balwani, according to the DOJ’s motion.
The DOJ says Balwani may object to the stay on two grounds: that he will be unable to clear his name if the civil case is deferred and that he is unable to take discovery he would otherwise be entitled to.
The DOJ says both objections are moot, since Balwani has acted with the assumption that the criminal case would be resolved first and Balwani will be entitled to take whatever remaining discovery is permitted under the civil rules after the criminal case is resolved.