On January 3rd, a federal jury convicted Elizabeth Anne Holmes, 37, founder of Theranos, on four of 11 charges that she conducted fraud schemes against investors while running the company.
The verdict caps a download for the former star of Silicon Valley who was once declared as “the world’s youngest self-made female billionaire” by Forbes Magazine, “This CEO is out for Blood,” and “next Steve Jobs.”
At the 15-week trial, Holmes testified in her defense, showed regret for missteps, and stated that she never intended to mislead anyone. She further accused her former boyfriend and deputy at Theranos Inc, Ramesh “Sunny” Balwani, of abusing her, allegations he has denied.
Nine wire fraud and two conspiracy to commit wire fraud have been filed against Holmes; an indictment brought three and a half years ago (1).
She was found guilty of three of the nine frauds and one of two conspiracies. She was acquitted for defrauding patients and committing wire fraud.
A jury of 12 people took 50 hours over a week of deliberations to reach a verdict. Each count faces a maximum jail sentence of 20 years; however, according to former prosecutors, such a stiff sentence is rare in white-collar fraud cases.
According to reports, prosecutors can pursue new trials for the undecided counts (2). Legal experts say such a course is improbable because it could jeopardize Balwani’s upcoming trial on identical allegations of misleading patients and investors about their startup’s blood-testing capabilities.
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It Was One of the Most High-Profile Criminal Case in Years in the US
Notably, it is rare for the US government to put a fraud prosecution of a tech executive and put them on trial, especially in the fake-it-until-you-make-it Silicon Valley culture.
According to prosecutors of Theranos’s case, Holmes’s hype and hubris went beyond norms, and she exposed investors and patients to harm by hawking faulty technology.
“She chose to be dishonest with her patients and investors; it was a callous and criminal choice,” said Jeff Schenk, assistant US attorney, in his closing arguments to the jury.
In 2018, Holmes had also settled separate civil securities fraud charges by the SEC, Securities and Exchange Commission. She had paid a 500k USD penalty and was also banned from being a director or officer of any public company for ten years without denying or admitting the allegations.
As we mentioned, the verdict of Elizabeth Homes stands out because of its rarity. Only a few tech executives are ever charged with fraud in history, and even fewer as convicted. If sentenced to jail, Holmes would be the most notable female executive to serve time since Martha Stewart in 2004, convicted of lying to investigators about a stock sale (3).
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The Foundation of Theranos
Holmes founded the company Real-Time Cures to “democratize healthcare.” She had described her fear of needs behind her motivation and sought to perform blood tests with only small amounts of blood.
When she had pitched the idea to reap a huge amount of data from a few blood droplets from the tip of a finger, Phyllis Gardner, her medicine professor at Stanford, told her that her idea was unlikely to work. He explained that it was impossible to do what Holmes claimed could be done. Other medical experts and professors had also agreed to it (4).
However, Holmes did not relent and convinced Channing Robertson, her advisor and dean at the School of Engineering, of her idea.
In the same year, she renamed her company Theranos (therapy and diagnosis), Robertson became her company’s first board member and introduced Holmes to VCs.
By December 2004, Holmes had minted 6 million USD funds (5). And Theranos secured over 92 million USD in VC by December 2010 (6). Holmes was introduced to George Shultz, a former secretary of state, and he joined the board of directors after a two-hour meeting (7). Over the next three years, Holmes was recognized for forming the “most illustrious board” in US corporate history (8).
It is also worth noting that until September 2013, Holmes ran Theranos in a stealth mode with no company website or a press release (9). However, the media increased in 2014 when Holmes appeared in Forbes, Fortune, and Inc covers. By the end of the year, Theranos was valued at 9 billion USD and secured over 400 million USD funds (10). Holmes’s name appeared in over 18 US patents and 66 overseas patents (11). In 2015, she established agreements with Capital BlueCross, Cleveland Clinic, and AmeriHealth Caritas to use Theranos technology (12).
“Here was a photogenic and telegenic young woman posing as a female Steve Jobs. She narrated a fascinating story that everyone wanted to believe,” recalled Silicon Valley historian Margaret O’Mara (13).
However, Holmes’s tall tales started to unravel in 2015, soon after hitting a 9 billion USD valuation, when John Carreyrou, a Wall Street Journal reporter, started an investigation into the validity of Theranos’s tests.
Holmes asked Rupert Murdoch, owner of the journal and one of the investors in Theranos, to prevent the publication of Carreyrou’s story when the reporter went to her for comment.
“You went to the owner of The Wall Street Journal to quash the story,” asked Robert Leach, an assistant US attorney during the trial. “I did,” Holmes replied.
Regardless, the story was published, and dozens more followed (14, 15). It led to the collapse of Theranos, taking Murdoch’s 125 million USD investment with it.
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Takeaways for Authorities
The mixed verdict of Holmes suggests that jurors believed prosecutors’ evidence that showed how Holmes lied to investors about her company’s technology for money and fame.
They were not swayed by her defense, blaming others for issues with Theranos and accusing her co-conspirator Balwani of abusing her. Also, they were not persuaded by the prosecutors’ case that she had defrauded patients.
Earlier this week, jurors told the court that they were deadlocked on three charges of defrauding investors. While judge Davila pushed the jurors to continue their deliberations, they could not agree.
The verdict came during a frantic period for the tech world, with investors hot for deals, often overlooking potential red flags about the company they were investing in. Some experts have also warned about more disasters like Theranos (16).
In recent years, we have seen many tales of startups, from the bungled IPO of WeWork to the aggressive strategies of Uber (17). However, it has not slowed the money flow towards founders spinning tales of their business success and charming their investors. While many downfalls managed to capture the public’s attention, none led to any criminal charges.
According to a report from the New York Times, the Justice Department under the Biden administration has started to focus on white-collar crimes.
“We will urge prosecutors to be bold; the fear of losing should not deter them,” stated Lisa Monaco, the deputy attorney general, in a recent speech (18).
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Takeaways for Entrepreneurs
The conviction of Homes also sends a message to other executives and founders to be careful about their statements to the public and their investors.
“It emphasizes the significance of distinguishing the truth and optimistic projections, and they need to keep it clear in their minds,” stated Jessica Roth, a law professor and former federal prosecutor.
Holmes seems to have gained prominence by mimicking disruptive Silicon Valley heroes like Steve Jobs and a playbook that turned companies like Tesla, Apple, Facebook, and Google into some of the most valuable companies worldwide (19).
In doing so, Holmes garnered the attention of top business leaders, heads of state, and wealthy families with idealistic plans to disrupt the healthcare industry. Holmes traveled around the globe in private jets, receiving several awards and glowing cover stories in prominent magazines.
However, she crossed into fraud when she lied about the types and number of tests Theranos could do and their accuracy while raising funds and securing business deals.
“What she did is a crime on the main street and in Silicon Valley,” stated Leach in the opening comments made at the start of the trial.
In addition, the case’s evidence also outlines Holmes’ role in faking demonstrations, falsifying validation reports, overstating finance, and misleading claims about contracts.
Prosecutors argued that Holmes’ actions led investors to lose hundreds of millions of dollars and patients to receive unreliable test results.
“At several forks in the road, Holmes chose the dishonest path,” stated John Bostic, an assistant US attorney in closing arguments.
In her defense, Holmes’ lawyers tried to discredit testimonies of whistleblowers, attacked investors for not doing proper due diligence, and asserted that Holmes’ failure was not a crime.
Holmes alternated between accepting accountability for certain missteps while deflecting blames of other issues to colleagues.
She stated she believed that Theranos’s tests worked and relied on the expertise of more qualified people that run the company’s lab. She used her charm to sell jurors the same version of the future that helped her win investors, media, and world leaders a few years ago.
“I wanted to talk about what Theranos could do in a year, or ten years from now one. I wanted to talk about the possibilities.,” stated Holmes.
According to Roth, Holmes’s argument that her optimistic projections were not different from other Silicon Valley contradicted the evidence of the government being consistent with conventional fraud cases.
“If other executives and founders are engaged in any deceit that was alleged and proven by considerable pieces of evidence, they need to be concerned,” she stated.
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Takeaways for Venture Capitalists
The case is significant because of the greater harm it has done. It also reflects how often investors put little to no due diligence before joining a company or pouring their money on it.
It is emerging as a huge issue in the tech world. The ironic situation is that Theranos is not even a tech company; it is a medical device company that is a highly regulated space (20).
As we have mentioned, the verdict of Holmes offers many lessons and insights for the startup world. There has been a FOMO among investors leading them to give young people a significant chunk of money, credibility, and power for something they can’t even deliver at the end.
While many experts believe that it would have a wider impact on the overall startup funding, others also suggest that there won’t be an issue for other founders while raising money.
However, we believe there may be some big behavioral changes among investors, especially if any big market correction happens this year.
Investors may back away for a while; However, we believe it won’t be the case now.
We will have to wait and see how this year unfolds for major startups to gain more insights. Until then, stay tuned with us!