(Bloomberg) -- Ramesh “Sunny” Balwani must turn over records of his stock trading, net worth and personal communications to U.S. securities regulators seeking to bolster their fraud suit against the former Theranos Inc. president.
The U.S. Securities and Exchange Commission won a series of contested rulings Wednesday as the evidence-gathering phase of the agency’s civil case draws to a close. U.S. Magistrate Judge Nathanael Cousins also handed a victory to Balwani, saying he was well aware that his decisions permeate a criminal prosecution against the former executive at the blood-testing startup and his higher profile co-defendant, former Theranos chief executive officer Elizabeth Holmes.
“There’s a criminal charge in this set of cases,” Cousins said as part of his decision allowing Balwani to interview a high-level official at the U.S. Food and Drug Administration. Balwani has “some constitutional rights that are already in place,” the judge said, and the criminal prosecution adds an “additional weight” in favor of permitting the interview.
But the judge went on to require Balwani to turn over details of his investment portfolio since 2015.
Legal experts said it appears the SEC is trying to show Balwani’s understanding of securities and required regulatory disclosures when he allegedly defrauded investors in his own company. That will make it difficult for Balwani to argue that investors didn’t care about the disclosures or what the SEC has branded as lies.
“They want to show that in his mind the type of information being withheld from Theranos investors was material information to him,” said Reed Kathrein, a lawyer who has represented Theranos shareholders who sued the company.
Theranos, the now-defunct blood-testing startup, was once valued at as much as $9 billion. It unraveled amid what prosecutors describe as a massive fraud masterminded by Holmes and Balwani to dupe investors, doctors and patients.
For Balwani, the bright spot Wednesday was winning permission to interview Jeffrey Shuren, a physician who oversees the FDA’s medical device regulatory program. Shuren supervised Alberto Gutierrez, who will be a key witness in the civil and criminal cases because the two men oversaw the 2015 surprise FDA inspection of Theranos.
Walter Brown, a lawyer for Balwani, said testimony from Shuren might be used to contradict government claims that his client misled investors when he told them FDA approval for Theranos blood tests wasn’t mandatory.
“Gutierrez called for an inspection, which happened,” Brown told Cousins. “Shuren had a different view.” The difference of opinion “supports our client’s reasonable belief of the type of path that we hear Dr. Shuren describing.”
Alison E. Daw, a lawyer for the FDA, said that while Shuren’s testimony might be “a feather in Mr. Balwani’s cap,” his arguments weren’t a “sufficient reason to subject a high-level employee to a deposition.”
Cousins said the deposition of Shuren will be limited to two hours on Dec. 6, the last day of pretrial discovery in the SEC case.
The magistrate said the SEC is entitled to learn Balwani’s net worth, though one of his lawyers, Amanda McDowell, argued that gives the agency and prosecutors an unfair “opportunity to size him up and assess his resources” to continue fighting on both fronts.
Cousins agreed with SEC lawyer Susan LaMarca’s argument that regulators need to know Balwani’s net worth now, before it changes too dramatically, to calculate a monetary penalty down the road or for settlement purposes. The judge also agreed that the SEC should have access to Balwani’s personal communications since he left Theranos, but limited its access to information exchanged with 10 individuals.
The criminal case is U.S. v. Holmes and Balwani, 18-cr-00258, U.S. District Court, Northern District of California (San Jose). The SEC case is Securities and Exchange Commission v. Ramesh Sunny Balwani, 18-cv-01603, U.S. District Court, Northern District of California (San Jose).
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