The Scandal of Elizabeth Holmes

Elizabeth Holmes and Theranos: An incredible story and Fortunes & Fraud

One of the most dramatic and shocking examples of financial crime in US history, the story of Theranos and its founder (at one time a highly lauded and universally admired female entrepreneur) Elizabeth Holmes, is still making headlines today – as we wait for the sentencing of Holmes  (Nov 18, 2022)- who faces up to 20 years in federal prison for defrauding investors and fabricating biotechnology that millions believed in.

The Way Up

In 2003, when Holmes was only 19 years old, she founded Theranos (a word that is a combination of “therapy” and “diagnosis”), a health technology company that eventually claimed to have invented the diagnostic machine that could run a battery of comprehensive tests from just one or two drops of blood. Holmes claimed (in a 2014 cover story for Fortune magazine) that “more than 1,000 tests” could be run from just a very small sample of a patient’s blood – from just a fingertip pinprick. This breakthrough was a promising and welcome alternative for frequently tested hospital patients who needed a lot of blood drawn on a regular basis.  It was also touted as a simple and non-invasive method for children, the elderly, the chronically ill or any patients who were simply afraid to get blood drawn, or for whom this was an uncomfortable or painful process. This breakthrough technology excited investors and partner companies.

Unfortunately, it was all lies. In fact, the Theranos machine (called The Edison) was problematic and unreliable from the very beginning; the machine could only perform 12 tests at best, and – completely undermining the Theranos claims – it could only execute one test at a time, and the results of these tests were often wrong. Holmes continued to make false claims as she gathered investors and high-profile board members. False reports with recommendations from respected pharmaceutical companies were forged. When an in-store blood sample collection partnership with Walgreens was launched, Theranos collected the samples from Edison machines and sent the blood out to labs like Quest Diagnostics, pretending that the Edison had supplied the test results. It was an expensive venture: trying to make the imagined technology a reality, paying for tests from competitors, keeping ahead of journalists who were questioning the claims, and all the while getting more investors to keep the company afloat.

By the end of 2010, Theranos had more than $92 million dollars in venture capital. In 2011, George Shultz, the former Secretary of State agreed to join the board. The Walgreens partnership was announced in 2013; the company went public. Betsy De Vos, former Secretary of Education, invested $100 Million dollars with Theranos. The Board of Directors attracted other political heavyweights such as former Secretary of State Henry Kissinger, former U.S. Sens. Sam Nunn and Bill Frist, former secretary of Defense William Perry, and former Defense Secretary James Mattis. Holmes appeared on the covers of Fortune, Forbes, The NYT Style Magazine, and Inc. in 2014. That same year, Forbes recognized Holmes as the world's youngest self-made female billionaire. Theranos was valued at $9 billion and had raised more than $400 million in venture capital. By the end of 2014, her name appeared on 18 U.S. patents and 66 foreign patents.

In 2015, Theranos had over 800 employees. Holmes was appointed a member of the Harvard Medical School Board of Fellows and was named one of Time magazine’s “100 most influential people.”  Holmes received the “Under 30 Doers Award “from Forbes and was ranked number 73 in its 2015 list of "the world's most powerful women". She was named “Woman of the Year” by Glamour Magazine and received an Honorary Doctor of Humane Letters from Pepperdine University. Holmes was awarded the 2015 Horatio Alger Award, making her its youngest recipient in history. In addition to all this recognition during 2015, Holmes established agreements with the Cleveland, Capital BlueCross, and AmeriHealth Caritas to use Theranos technology.

The Way Down

Once all the lies started to unravel, the downfall of Theranos and Elizabeth Holmes was swift and brutal.

Wall Street Journal investigative reporter, John Carreyrou, carried out a secret investigation lasting several months. He spoke to company Whistleblowers and obtained company documents. Even though Holmes hired a team of lawyers to try and stop the publication of the article, claiming proprietary technology and company secrets would be compromised, the story was published in late 2015.

Holmes made numerous public appearances decrying the reporting as sham and sensationalistic. She proclaimed that she was changing the world and that this sort of opposition was from the voices of negative people who didn’t believe it was possible. 

In 2016 a federal agency, The Center for Medicaid and Medicare Services, banned Holmes from owning, operating, or directing a blood testing service for two years. Again, she appealed this decision but lost. The deal with Walgreens fell through, and the drugstore closed all its Theranos Wellness Centers (Walgreens had never even tested the machines before launching the program). In 2017, the state of Arizona filed a lawsuit alleging fraud for over 1.5 million misrepresented blood tests. Theranos settled and paid fines and attorney fees totaling $4.65 million.

In 2017 shareholders, who had filed a suit against Holmes and Theranos, dismissed litigation in exchange for shares of preferred stock and the condition that Holmes give up a portion of her ownership (Equity) in Theranos.

In March 2018, The SEC charged Holmes and her business (and romantic) partner, Ramesh “Sunny” Balwani, with fraud. The charges included: the company falsely claiming that Theranos technology was being used in combat situations by the Dept. of Defense, taking more than $700 million from investors for a product they knew to be false, and inflating its reported annual revenue stream by over $99 million in at least one year. Holmes settled with the SEC by relinquishing most of her company control, all her voting rights, returning almost 19 million shares of stock to the company, and paying a $500,000 fine.

On September 5, 2018, the company announced that it had begun the process of formally dissolving, with its remaining cash and assets to be distributed to its creditors.

But this was not the end – because in 2018 a federal charge was levied against Holmes and Balwani on multiple counts of “wire fraud” 

According to US legal code, Wire Fraud is:

Whoever, having devised or intending to devise any scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises, transmits or causes to be transmitted by means of wire, radio, or television communication in interstate or foreign commerce, any writings, signs, signals, pictures, or sounds for the purpose of executing such scheme or artifice, shall be fined under this title or imprisoned not more than 20 years, or both. If the violation affects a financial institution, such person shall be fined not more than $1,000,000 or imprisoned not more than 30 years, or both.

In other words, anyone trying to scam other people or groups through any form of communication can be punished with a maximum prison sentence of 20 years. If the scam involves a financial institution, the maximum fine is raised to 1 million US dollars and the prison sentence can be as long as 30 years.

Even though Elizabeth Holmes hired well–known lawyers who specialize in defending those accused of “white-collar crime”, the evidence, in this case, was overwhelming. From faked demonstrations of faulty technology to falsified finances, to misleading and lying to investors and the public… the fraud was profound. 

On January 3, 2022, Holmes was found guilty of four counts of defrauding investors. In the NY Times coverage, this case "came to symbolize the pitfalls of Silicon Valley's culture of hustle, hype, and greed". She faces a maximum sentence of twenty years in prison, and a fine of $250,000, plus restitution, for each count of wire fraud and for each conspiracy count. The sentences would likely be served concurrently thus an effective maximum of 20 years total. 

Lawyers, Lawyers everywhere

From the beginning of this tale to the very end, there is the need for lawyers on so many levels and in so many ways.

Filing patents, drafting agreements and contracts for collaborative ventures, taking a company public, representing claimants or defendants in legal disputes, filing for bankruptcy and the dissolution of a company, etc. Working as a lawyer for the SEC, the Dept. of Health and Human Services, or as a United States Attorney representing the Federal Government, one can help to defend the rights of victims and prevent future scams. Conversely, working for a private law firm in providing defense for those who are accused of a crime is a necessary service in ensuring our constitutionally protected rights. 

Want even more?

Read - Bad Blood: Secrets and Lies in a Silicon Valley Startup, 2018 book detailing John Carreyrou investigation of Theranos.  Watch - HBO documentary feature film, The Inventor: Out for Blood in Silicon Valley; and a Hulu miniseries called The Dropout.