RealMoney

Interested in growing your biotech portfolio? Before you do, dive into the sordid tale of Theranos, the biggest fraud in biotech, medical innovation and Silicon Valley history to date.

Elizabeth Holmes, the beleaguered CEO of Theranos, was once celebrated as a big success story and the world's youngest female billionaire. At its peak, Theranos was valued at $9 billion.

But all that came tumbling down after an investigation into the company revealed how it misled investors, crucial partners like Walgreens Boots Alliance (WBA) , patients and the public. John Carreyrou, The Wall Street Journal reporter whose book detailing his Theranos investigation was released on Monday, played a key role in uncovering the truth about the company. It resulted in dismantling of Theranos' partnership with Walgreens Boots Alliance and the shuttering of its blood-testing centers.

While Theranos settled with the U.S. Securities and Exchange Commission in March and Holmes agreed to pay $500,000 in fines, its legal troubles are far from over. There is a shareholder lawsuit seeking to recover their investments, as well as a separate SEC motion against former Theranos President Ramesh "Sunny" Balwani.

The book Bad Blood: Secrets and Lies in a Silicon Valley Startup, out this week, offers new details about several high-profile investors and partners the company has misled and how it all went so wrong.

"Theranos is in the same category as Enron and Tyco International. It's a reminder of how hard it can be to spot a fraud when big names are involved and the story sounds so compelling," said Real Money columnist James "RevShark" DePorre, who has been investing in biotechnology stocks for 20 years. "There is always a leap of faith in biotechnology investing, and the nature of private equity investing often leads to bigger leaps than would occur in a normal market setting."

'Massive Fraud'

Even though Theranos is a private company, regulators are now paying more attention to the entire sector.

On March 14, the SEC charged Holmes and Bulwani with "massive fraud," and accused them of "raising more than $700 million through an elaborate, years-long fraud in which they exaggerated or made false statements about the company's technology, business, and financial performance." Bulwani left the company in 2016.

In the book, Carreyrou details an alleged wide-ranging deception and how Theranos reputedly misrepresented its technology and duped retail giants like Walgreens as well as investors like Tim Draper, Rupert Murdoch, Robert Kraft and Greg McNeilly.

Having a Big-Name Partner Doesn't Guarantee Success

The promise of Theranos' technology was too alluring for many -- a small, portable,competitively priced diagnostic device that could run hundreds of tests from a small sample of blood in under an hour.

"It became a full-blown fraud when she went live with the tests at the Walgreens stores, knowing that the technology wasn't ready, that it didn't work," Carreyrou said in an interview with Real Money. "This is one of the most incomprehensible aspects of the story -- how did Walgreens not do its due diligence and not figure out that technology did not work?"

Once Walgreens started negotiating partnership with Theranos in 2010, it hired a lab consultant who tried to warn company executives, according to Carryrou. But Holmes and her then-boyfriend Bulwani told Walgreens that they didn't want him in meetings and weekly video calls any more, the reporter found.

"There was this 'fear of missing out' that dictated the way Walgreens behaved," Carreyrou said. "Walgreens was obsessed with the competition with its archrival CVS (CVS)  and was scared to death that Theranos would end its partnership discussions, turn around and do the deal at CVS."

Walgreens spokesman Michael Polzin said the company terminated its relationship with Theranos and is no longer working with the firm, without specifying a timeline.

The Board Matters

Theranos' board displayed some star power, but no one with actual laboratory-science expertise.

"I think from now on, (for) investors in biotech, especially older start-ups that have been around for a while, looking at the board is going to be important," Carreyrou noted.

The pouring of venture-capital funding into promising biotech start-ups has allowed them to stay private for years. But the SEC's latest steps indicate that regulators are paying more attention to companies in the sector whether they're public or not.

"The charges against Theranos, Holmes, and Balwani make clear that there is no exception from the anti-fraud provisions of the federal securities laws simply because a company is non-pubic, development-stage, or the subject of exuberant media attention," said Steven Peikin, co-director of SEC's Enforcement Division in a March statement.

Due Diligence

The biggest lesson for investors, of course, comes down to due diligence and doing their homework.

"Here was company that said they had figured out how to do myriad tests with a myopically small sample when all the big boys in the industry weren't even close to being able to do the same," said Bret Jensen, a biotechnology investor and Real Money columnist. "The lack of due diligence by Walgreens to confirm that this radical testing process actually worked was beyond the pale. Any half-assed investigative effort would have quickly turn up significant concerns."

Theranos did not respond to a comment request.