So there's an open question about when he knew about this fraud. But clearly he didn't have a problem staying on even after it became public knowledge.
And there's also this:
In 2012, for instance, Holmes began talking to the Department of Defense about using Theranos’s technology on the battlefield in Afghanistan. But specialists at the D.O.D. soon uncovered that the technology wasn’t entirely accurate, and that it had not been vetted by the Food and Drug Administration. When the department notified the F.D.A. that something was amiss, according to The Washington Post, Holmes contacted Marine general James Mattis, who had initiated the pilot program. He immediately e-mailed his colleagues about moving the project forward. Mattis was later added to the company board when he retired from the service. (Mattis says he never tried to interfere with the F.D.A. but rather was “interested in rapidly having the company’s technologies tested legally and ethically.”)
https://www.vanityfair.com/news/2016/09/elizabeth-holmes-the...
So he was told by the DOD that it didn't work after he initiated a pilot program for Theranos.. and continued to push it internally.