The SEC’s complaint against Theranos and Holmes focused on alleged lies to investors who put money directly into the company. Those insiders were only part of the market for Theranos, though. To the extent the company’s multibillion-dollar valuation reflected investor demand for a stake in Theranos’ purportedly revolutionary – and widely publicized – technology for blood testing, it rested on “indirect” investors who bought shares in funds that actually owned Theranos stock.
Unlike the SEC, indirect investors can’t sue under federal securities laws. (Direct investors in private companies, of course, can bring fraud claims if they can show they relied on corporate misrepresentations.) But as I’ve previously reported, in the age of unicorn Silicon Valley startups, shareholder lawyers have developed a theory on how indirect investors can band together in class actions based on California’s corporate code.
via Will the Theranos ‘indirect’ investor lawsuit break new legal ground?.
