SAN JOSE, Calif. (CN) – Blood-testing company Theranos attempted to skirt a federal lawsuit Wednesday by arguing people who claim to have invested in the company aren’t actually investors and have no standing to sue.
U.S. Magistrate Judge Nathanael Cousins gave little indication of how he’d rule as he presided over a motion to dismiss hearing where plaintiffs in the lawsuit against Theranos said they do indeed have standing to sue.
Robert Colman and Hillary Taubman-Dye bought private shares of Theranos through two venture capital funds, LVG XI and Celadon Technology Fund, respectively, according to the initial complaint.
The pair say Theranos violated California’s securities law when it induced billions of dollars of private investment on the false premise that it had developed an exclusive and proprietary blood test that could determine the presence or absence of a myriad of diseases through a simple finger prick.
“The truth – there was no revolutionary technology,” Colman and Taubman-Dye say in their complaint.
They accuse Theranos CEO Elizabeth Holmes of personally enriching herself at the expense of investors like themselves by cooking up a story that this supposed revolutionary technology could save millions of lives while cutting costs.
Holmes said she had thoroughly vetted the blood test and attracted notable luminaries including George Schultz and Henry Kissinger to the board of directors, all with the express purpose of attracting major investment, the investors say.
Problems for Theranos surfaced in October 2015, when the Wall Street Journal reported the company was struggling to deliver on its promises of a revolutionary advance in testing technology and that several of the company’s employees did not trust the test’s accuracy.
Despite assurances from Holmes and other executives at the fledgling company, the reports have severely damaged Theranos’ reputation and spawned a series of lawsuits, including a contract action filed by Walgreens and other lawsuits similar to Colman and Taubman-Dye’s involving whether Holmes misled investors.
At Thursday’s hearing, Theranos attorney Christopher Davies said the case should be dismissed because Colman and Taubman-Dye never actually invested in Theranos. He said they instead invested in a venture capital firm which in turn bought private shares in the health science corporation.
“They lack standing,” he said of the two plaintiffs. “Despite what the plaintiffs are saying, these are not fractionalized shares.”
If someone bought an index fund with shares of different S&P 500 companies or a mutual fund, they would not be entitled to sue should one of those companies be found culpable for misleading investors, Davies said.
Paul Geller, attorney for the plaintiffs, said the analogy was misleading.
“This wasn’t a mutual fund available on the open market,” he said.
Instead, the investors employed venture capital funds for the express purpose of buying shares in Theranos because they believed the statements of Holmes and other high-level executives.
Whether Cousins allows the case to go forward will likely hinge on whether using the venture capital funds in this instance establishes a direct relationship between Theranos and the two jilted investors, a legal concept called privity.
The plaintiffs are seeking class certification and believe there are as many as 50 others with identical claims.
Cousins said he would pause other aspects of the case, including a schedule for discovery, until he rules on the motion to dismiss.
Geller works for Robbins Geller Rudman and Dowd based in Boca Raton, Florida.