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January 4, 2022

Former Theranos CEO Elizabeth Holmes found guilty of fraud

Daily Briefing

    Elizabeth Holmes, the founder and former CEO of Theranos, on Monday was found guilty on four of 11 counts of fraud charged against her, a ruling that some experts say sends a message to founders and executives at other tech startups.

    Background

    Theranos came to prominence for its claim to have invented blood testing technology that could accurately detect medical conditions with only a small amount of blood drawn from a pricked finger. However, many of the company's claims fell apart under scrutiny.

    Ultimately, the Securities and Exchange Commission (SEC) in 2018 announced that it had charged Theranos, as well as Holmes and Ramesh "Sunny" Balwani, former president and COO of Theranos, with deceiving investors "through an elaborate, years-long fraud in which they exaggerated or made false statements about the company's technology, business, and financial performance."

    The Department of Justice (DOJ) in 2018 indicted Holmes and Balwani on two counts of conspiracy to commit wire fraud and nine counts of wire fraud over their alleged involvement in Theranos' schemes to defraud doctors, investors, and patients.

    The indictment alleged Holmes and Balwani participated in a multimillion-dollar scheme to defraud potential investors using direct communications, financial statements, marketing material, models, statements to the media, and other information. It also alleged Holmes and Balwani encouraged and convinced physicians and patients to use the company's blood testing laboratory services through such advertisements and solicitations, despite knowing that "Theranos was not capable of consistently producing accurate and reliable results for certain blood tests," DOJ said.

    Specifically, the indictment claimed that "Holmes and Balwani knew" the company's blood testing technology "in truth, had accuracy and reliability problems, performed a limited number of tests, was slower than some competing devices, and, in some respects, could not compete with existing, more conventional machines," DOJ said.

    Holmes found guilty on four counts of fraud

    During Holmes' trial, dozens of witnesses testified that Holmes was aware of the deficiencies within the company and withheld that information from both investors and board members.

    Ultimately, the jury found Holmes guilty of defrauding investors as well as conspiracy to defraud investors and three counts of wire fraud. She was found not guilty of conspiracy to defraud patients and not guilty on two other patient-related charges, as well as one count of lying in paid advertisements.

    The jury was unable to reach a verdict on three counts of deceiving individual investors, and Judge Edward Davila said he intends to call a mistrial on those counts.

    Each count of wire fraud carries a maximum 20-year prison sentence, and the sentences will likely be served concurrently, the New York Times reports.

    Balwani, meanwhile, faces the same charges in a trial that is scheduled to begin in February.

    Comments

    According to Jessica Roth, a law professor at Cardozo School of Law and a former federal prosecutor in the Southern District of New York, Holmes' conviction sends a message to startup founders and executives that they should be careful about what they say in statements to both investors and the public.

    The ruling "shines a light on the importance of drawing a distinction between truth and optimistic projections—and keeping that clear in one's mind," Roth said.

    Meanwhile, George Demos, a former SEC prosecutor and adjunct law professor at the UC Davis School of Law, said the ruling is "a significant win for the government and sends a powerful signal to Silicon Valley that fraud cannot masquerade as innovation."

    "This is a verdict that should matter not just to Silicon Valley but to the people who celebrate it, invest in it, and use its products," Margaret O'Mara, a tech industry historian and professor at the University of Washington, said. "[Holmes] was made possible by a Valley business culture that celebrated and encouraged very young, marginally experienced people." (Garde, STAT News, 1/3; Griffith/Woo, New York Times, 1/3; O'Brien, CNN, 1/4)

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