The Theranos story - Part IV

Our blog series “The rise and fall of Theranos” follows an ambitious biotechnology founder, Elizabeth Holmes, on her mission to revolutionize medicine and healthcare. Over the course of a decade, Holmes built up the company, all the while promising a revolution in blood-based diagnostics. After an investigation by the Securities and Exchange Commission in 2018, the entire scheme collapsed and Holmes and one of the company’s executives, Ramesh “Sunny” Balwani, were charged with massive fraud.

Now facing eleven criminal charges linked to Theranos, Holmes is at the center of one of the most publicized trials of the last decade. Our last installment follows the first round of trial proceedings, which ended with the jury returning a guilty verdict on four of the eleven counts. Judge Edward J. Davila, who presided over the trial, is expected to sentence the fallen entrepreneur at a later date.

The now 37-year-old Elizabeth Holmes is charged with eleven counts for defrauding investors and faces up to 20 years in federal prison. Both Holmes and her ex-business partner and ex-boyfriend Ramesh “Sunny” Balwani have pleaded not guilty to the charges. 

During eleven weeks of testimony, the prosecution attempted to build its case around a plethora of emails, allegedly forged documents, excerpts from audio calls and a number of key witnesses. The prosecution’s case was that much of what Elizabeth Holmes told potential investors was incorrect or fraudulent and that she repeatedly ignored red flags raised by several employees of Theranos.

The Prosecutor’s Witnesses

Whistleblower Erika Cheung testified about her time with the company, initially joining Theranos because she was impressed with Holmes herself and the company’s mission. Cheung pointed out that despite obvious reliability issues with its tests, Theranos would go on to process many patient samples. “I was uncomfortable processing these patient samples,” she stated in court. “I did not think the technology we were using was adequate enough to be engaging in that behavior.”

Former Board Member Jim Mattis testified that he initially joined the board, excited at the prospect of using blood-testing devices on the battlefield. Despite is initial enthusiasm he eventually became disillusioned with Holmes since she refused to be transparent addressing the issues brought up by directors and staff.

A former lab director, Dr. Adam Rosendorff, discussed patient complaints and technical issues. He claimed that Holmes had been aware of the concerns but pressed onward with commercialization despite the high failure rate of tests and mounting concerns from both patients and physicians. 

Investors Didn’t do their Homework

Several other prominent investors revealed that their access to important information was limited. Holmes always took a central role in communicating with investors, creating validation reports, and went so far as to forge documents showing supposed stamps of approval from Theranos customers Pfizer and Schering-Plough.

Steven Burd, CEO of Safeway, testified about their 2010 negotiations for blood-testing devices. Multiple conversations took place between Safeway executives and Holmes, without any Theranos legal counsel present, and Burd stated that Holmes always appeared to be in charge even with Balwani present during the negotiations. By 2012 Burd had come to realize that the promised blood-testing device would be “nowhere near” as accurate as promised. Safeway concluded that the Theranos device would almost certainly not be ready for the agreed-upon rollout date. 

Other investors, such as executives from Walgreens, confessed to not having done their due diligence; they wanted to believe what Holmes was saying regardless of the lack of evidence. The fear of losing the edge or missing out on a breakthrough drove a lot of this investment, often from individuals and companies that lacked the relevant clinical expertise. Wade Miquelon, the former Chief Financial Officer of Walgreens, agreed to a deal with Theranos without ever getting to vet the technology up close.

In defense of Holmes, her lawyers argued that these investors took a calculated risk and consequently lost their money. The prosecution countered that even if some of the Theranos investors failed to conduct a proper due diligence, they were still being actively defrauded by Holmes. In conclusion, the prosecution argued that whether or not the investors did their homework was irrelevant to the wire fraud charge.

The testimony of former employee Daniel Edlin revealed that visits to the Theranos offices were carefully scripted to present a neat, curated image to guests. Theranos management would demonstrate their Minilab finger-stick blood-testing device - which in fact was not in used for routine testing - while shielding standard testing equipment from external visitors. Edlin’s testimony thus added to the prosecution’s case that Theranos’ management had intentionally misled investors.

Holmes Takes the Stand

To provide any semblance of a good defense, Holmes agreed to testify in the case. Much of her testimony blamed others, such as Theranos staff scientists who supposedly embellished the capabilities of the technology when they explained it to Holmes back in 2010. 

The Last Witness 

Roger Parloff was the final witness called to the stand. He testified that Holmes told him in 2014 that the company did not use third-party devices for blood testing, that Edison worked just as well as other gold-standard diagnostic labs, and that it was deployed in Afghanistan through the Department of Defense. All these claims were untrue, according to the evidence presented.

Holmes’ attorneys opened with the argument that the government’s case was insufficient, following up with requests to strike much of the testimony and evidence from the case. Their first witness, a paralegal named Trent Middleton, showed that Theranos had 149 patents issued since 2007 and had totaled $217.8 million in profit.

A former Theranos board member then took the stand, testifying that he was approached to become the Chief Operating Officer in 2016 but declined. He testified that he was impressed by Theranos even though he knew about the challenges and criticism it faced.

Holmes then took center stage at the trial, describing the beginnings of Theranos – starting from her time at Stanford. She revealed that she had been sexually assaulted at Stanford, forcing her to leave. She claimed that she fell for Sunny Balwani because he made her feel safe. According to Holmes, Balwani gained substantial influence over her, eventually dicating her lifestile and telling her how to run the company.

Holmes confirmed that Theranos never finalized their partnership with the US military but claimed ignorance of any shortcomings uncovered by scientists at the pharmaceutical company Schering-Plough, which had assessed Theranos’ technology. Holmes claimed that she never had any intention of misleading her investors and that she regretted her actions afterwards.

Holmes’ cross-examination showed that she tried to interfere with the Wall Street Journal investigators who focused on the control and massive equity that Holmes held at Theranos. She admitted some fault, stating: “I think I could have handled those communications differently." The cross-examination also revealed text messages between Holmes and Balwani, showing that Balwani warned Holmes of the laboratory problems and advised ways to fix them.