Alphabet's Verily covered up HIPAA violations, whistleblower says in lawsuit

Alphabet's health tech subsidiary, Verily, faces a previously unreported federal lawsuit from a former executive alleging unauthorized use of over 25,000 patient health records and subsequent cover-ups of HIPAA violations. The executive claims he was terminated after exposing these breaches, which Verily allegedly confirmed internally but then concealed, even misrepresenting HIPAA compliance in contract renewals with major clients. A federal judge recently denied Verily's motion to dismiss the suit, which the company denies as meritless. This legal challenge adds to Verily's history of operational struggles despite significant funding, potentially impacting its ongoing efforts to secure new capital.

Analysis

Alphabet's health-tech subsidiary, Verily, faces significant legal and reputational risk from a lawsuit alleging the unauthorized use of over 25,000 patient records and a subsequent cover-up of these HIPAA violations. The allegations, which Verily denies, are particularly damaging as they claim the company knowingly concealed breaches while renewing contracts with major clients like Highmark Health, Walgreens, and Delta. A federal judge's denial of Verily's motion to dismiss signals that the litigation will proceed, increasing the potential for further negative disclosures and associated legal costs. This governance crisis occurs at a critical juncture for Verily, which, despite raising over $1 billion, has a history of strategic pivots and is reportedly restructuring to secure a new funding round. The lawsuit not only threatens Verily's immediate fundraising efforts and long-term viability but also casts a shadow over Alphabet's broader ambitions in the health sector, where data privacy and trust are paramount.

Key Decisions for Investors

• Investors in Alphabet (GOOGL) should monitor the Verily lawsuit for developments that could indicate broader governance or data privacy failures within the 'Other Bets' segment.
• The allegations create a significant headwind for Verily's planned funding round, and investors should consider the potential for a write-down or strategic pivot for this subsidiary.
• Assess the potential for reputational contagion to Alphabet's core businesses, as regulators and the public may heighten scrutiny of its data handling practices across all health and AI-related initiatives.
• Holders of client stocks such as Delta (DAL) and Walgreens (WBA) should watch for any disclosures regarding customer data impact or changes to their vendor relationship with Verily.