- Elizabeth Holmes aspired to be Steve Jobs,
but it turns out that she's more like Bernie Madoff.
In 2003, a 19-year-old college dropout
named Elizabeth Holmes founded a company called Theranos
that promised to revolutionize blood testing.
She claimed to have invented a machine
that could run more than 200 tests
on just a few drops of blood taken from a finger prick.
She wanted to sell diagnostic tests directly to consumers.
Holmes was very persuasive.
She gave a TED Talk, where she promoted Theranos
by calling it the most disruptive technology
in the history of medicine.
- Yet, in the United States today,
healthcare is the leading cause of bankruptcy,
and the lack of it the leading cause of the suffering
associated with finding out too late
in the disease progression process
that someone you love
is really, really sick.
- Silicon Valley investors treated her like a rockstar.
Walgreens quickly became a corporate partner.
Major investors included Rupert Murdoch, the Walton family,
and the family of former Education Secretary Betsy DeVos.
Holmes' big promises attracted some of the biggest names
in American government and foreign policy.
Bill Clinton was charmed by her,
and Joe Biden praised her efforts.
Secretaries of State Henry Kissinger
and George Shultz joined the board of directors.
Former Secretaries of Defense James Mattis
and William Perry joined, too.
The company raised nearly $1 billion in funding.
With the prospect of eliminating many lab tests
and their associated costs,
there seemed to be nothing stopping Theranos
from becoming a mega player in the biotech industry.
Its highest valuation was an eye-popping $9 billion.
But Walgreens, Murdoch, the US foreign policy establishment,
and the other investors ignored a very important principle
in investing and life.
If something seems too good to be true,
it probably is too good to be true.
(dramatic music)
As it turns out, there's no way to run hundreds
of sophisticated diagnostic tests on a few drops of blood.
Despite all the evidence that Holmes knew
her testing machine would never work,
a federal jury convicted her on just four
of the 11 charges against her,
three for wire fraud against investors,
and one for conspiracy to commit
wire fraud against investors.
One juror said it was tough to convict her,
because, quote, "She was so likable.
"She had such a positive dream."
And it's a dream that they think
she honestly still believes in.
But as you can see, there's probably a reason
why Jennifer Lawrence, Katie Holmes,
and Amanda Seyfried are all practicing
their most charming and coldblooded stares.
So today, we're going to talk
about the Elizabeth Holmes trial.
Why did the jury find her guilty?
Why did they acquit her on the other charges?
And how much did Holmes help herself
by testifying in her own defense?
So let's start with the problems with Theranos,
which have been well-chronicled at this point.
Blood analysis is one of the most important
areas of medicine.
The two main players in the field,
Quest Diagnostics and Laboratory Corporation of America,
generate over $75 billion a year in revenue.
Theranos promised to upend this regime
by eliminating blood draws, vials, large needles,
and lengthy waiting periods.
What if you could just go to Walgreens, buy a testing kit,
and screen yourself for high cholesterol,
kidney disease, or even cancer?
Wouldn't that be great?
You'd save time, money, get diagnosed faster,
and lives would be saved,
and that was the heart of the Theranos project.
But there was just one problem with this vision.
Most blood tests could not be done
with just a few drops of blood.
There aren't enough molecules for detection.
One of Holmes' professors had rejected her early ideas
for biotech companies on the basis
that the science and technology could not exist.
The professor, Phyllis Gardner, later said
that she found the conversations concerning,
because Holmes refused to accept
that some ideas were not possible.
She said, quote, "The hubris of that just drove me insane."
But Holmes dropped out in 2004, and went on her own way,
aggressively selling her ideas to investors.
Her company name Theranos is a combination
of therapy and diagnostics.
And while Holmes never submitted any of her inventions
for any kind of peer review, that didn't matter
to another Stanford professor, Channing Robertson.
He said that the minute he heard her idea
about a diagnostic test from a pin prick,
he felt he was, quote,
"Looking into the eyes of Steve Jobs, or Bill Gates."
Steve Jobs was, of course, the person
that many company founders wanted to emulate.
Jobs created his own persona, dressing only in black,
and promoting himself as an eccentric genius.
Holmes took note of this, and created her own mythos
that was trying to piggyback on Jobs.
She wore a black turtleneck and black suit every day.
She had an intense stare that became famous,
and we might laugh about this now,
but according to Tyler Shultz, a Theranos employee,
investors like his grandfather, George Shultz,
were mesmerized by this act.
But then came the whistleblowers.
In 2014, Tyler Shultz emailed Holmes to complain
that Theranos had doctored research,
and ignored failed quality control checks.
Several other employees had also raised concerns
about the company's science.
George Shultz was 95 at the time,
and Holmes called him immediately to warn him
that she would get revenge on his grandson
if he took his complaints any further.
Tyler, though, anonymously contacted
New York State's Public Health Lab,
and filed a complaint alleging that Theranos had manipulated
a process known as proficiency testing
relied on by federal and state regulators to monitor
the accuracy of lab tests.
Theranos' lawyer, David Boies,
who later joined the board of directors,
surprised Tyler at his grandfather's house,
informing him that the company was suing him
for violating the terms of his NDA.
And while Tyler was the first person to raise concerns
about Theranos to outside regulators,
he wouldn't be the last.
In 2015, "The Wall Street Journal" published
a series of articles exposing
the Theranos testing machines as frauds.
By then, Holmes had been appointed
to the Harvard Medical Board
alongside her old professor, Phyllis Gardner.
Gardner spoke with "The Wall Street Journal"
about her belief that Holmes was a fraud,
and sure enough, regulators soon discovered
that Holmes' Edison machines frequently failed
quality control checks.
That means they produced unreliable test results.
Theranos eventually told regulators that it voided
all test results from Edison machines for 2014 and 2015,
as well as some other tests
that ran on conventional machines.
The Edison machine turned out to be a lemon.
Theranos claimed that its test
for one sexually transmitted infectious disease was
sensitive enough to detect the disease 95% of the time.
But when these results were submitted for validation,
it showed sensitivities of between 65% and 80%.
At the time, Walgreens was partnering with Theranos
to provide in-store testing centers
at 40 Walgreens locations.
But when Walgreens realized the scope of the problem,
they sued Theranos for $140 million.
Walgreens eventually claimed that Theranos voided
11.3% of all blood test reports that the company provided
to customers of Walgreens stores.
But instead of acknowledging the problems
with the Edison machine, Theranos fabricated the results,
while continuing to market the company to investors
as world-changing technology.
During the trial of Elizabeth Holmes,
prosecutors showed a presentation
that she had made to the board of directors saying
that 10 of the 15 largest pharmaceutical companies
in the world had validated the Theranos results.
This was a lie.
The US Centers for Medicare and Medicaid Services
investigated Theranos, and banned Holmes from operating
a medical lab for two years.
The US Securities and Exchange Commission,
the SEC, charged Holmes
and former Theranos President Sunny Balwani with fraud,
and barred Holmes from serving as a director,
or officer of a public company for a decade.
So that brings us to the criminal case itself.
Holmes was indicted on 11 felony charges in 2018.
The charges included wire fraud against investors,
wire fraud against patients, and conspiracy.
And federal prosecutors painted Holmes as a charlatan
who knew her technology didn't work.
They said she was obsessed with fame and fortune,
and prosecutors presented evidence
that when Theranos realized its test results
were not accurate, the company substituted tests
from regular blood draws, making it look
as if the tests were from blood droplet tests,
rather than traditional blood draws
and conventional machines.
But the strongest evidence showed
that Holmes exaggerated the company's involvement
with potential partners.
Prosecutors demonstrated that Holmes lied
about having deals with drug companies
like Pfizer and the US military.
Holmes even added the logos of Pfizer
and Schering-Plough to lab reports
that she used in her presentation to investors
and Walgreens executives.
But these companies hadn't actually validated
any of Theranos' systems.
But the defense put on a case as well.
Holmes testified for seven days,
presenting herself as a visionary woman
in a male-dominated field.
Holmes told the jury that she still believed
that Theranos was on the verge of proving
its technology worked.
She blamed her ex-partner, Sunny Balwani,
for misleading regulators about the tests.
Holmes told the jury that the two had
secretly lived together,
and that Balwani abused her throughout the relationship,
and Balwani himself will go on trial later this year.
And Holmes attempted to raise a good faith defense
to the wire fraud charges.
Although good faith is a defense to wire fraud,
an honest belief in the ultimate success
of the enterprise is not in itself a defense,
and the judge instructed the jury that if they believe
that she acted in good faith in her representations,
then she could not also have acted
with an intent to defraud.
So let's dig into the elements of wire fraud
and the conspiracy charges that she faced.
Holmes was eventually convicted of three counts
of wire fraud and conspiracy to commit wire fraud.
18 USC 1343 is the wire fraud statute.
It states, "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,"
yada, yada, "shall be fined under this title,
"or imprisoned not more than 20 years, or both."
So the prosecution had to prove four elements,
first, that she knowingly participated
in some sort of scheme to defraud and obtain money,
or property from other people.
Expressions of opinions, aspirations, or goals,
or general subjective claims can't be used as a basis
to find that someone made a false,
or fraudulent representation.
This is an important point,
and one we'll come back to when we talk
about the jury's conclusion
that she didn't defraud consumers,
probably because some jurors said that she believed
that she had positive goals.
But the second prong is that the statements made
as part of the scheme have to be material.
Statements tend to be material
if they have a natural tendency to influence,
or are capable of influencing a person
to part with their money.
The third prong is that the government needed to show
that Holmes acted with the intent to defraud,
that is that she had the intent to deceive,
and cheat someone out of their money, or property.
And then the fourth prong is that Holmes used
interstate wire communication to carry out
an essential part of the scheme.
And the jury found that Holmes' misrepresentations
influenced investors to send money to Theranos,
and that her presentations actively intended
to defraud investors by making them believe
that Theranos had big government contracts
and private partnerships that would produce
a high rate of return on their investment.
And the jury also found that Holmes had agreed
with other people to perpetrate this scheme on others.
That's why she was convicted
of a conspiracy to commit wire fraud as well.
The prosecution had lots of evidence
that Holmes concocted test results to convince investors
that the science behind her test was sound.
In a 2014 "Forbes" article, Holmes said that Theranos,
quote, "Does not buy any analyzers from third parties,"
and that was absolutely a lie.
Theranos presented results conducted
on these third-party analyzers
during their presentations to investors,
and it's highly likely that the jury thought
that these lies were material,
and that they convinced investors to part with their money.
And the three counts represented a total
of about $142 million in fraud.
But the jury deadlocked on three additional
wire fraud counts related to investments
from three Theranos investors, Alan Eisenman,
Chris Lucas of Black Diamond Ventures,
and Bryan Tolbert of the Hall Group.
Prosecutors now have to decide
whether they are going to retry her
on those three counts, because the jury hung,
so they couldn't come to a decision
on those particular counts.
But Holmes and Balwani were also accused
of conspiring to commit wire fraud
in violation of 18 USC 1349.
The DOJ charged Balwani and Holmes with making
materially false and misleading statements to investors.
The government alleged that the duo, quote,
"Made materially false and misleading statements
"to investors and failed to disclose material facts."
This included telling investors
that the company's proprietary analyzer was accurate,
when in truth, it had serious accuracy problems,
performed a limited number of tests,
was slower than some competing devices,
and could not compete with larger conventional machines
in high-throughput, or the simultaneous testing of blood
from many patients.
Holmes and Balwani promised investors a return
on their investment in the hundreds of millions of dollars,
while knowing that the company would only gross
a few hundred thousand dollars in 2014 and 2015.
Prosecutors proved that Balwani and Holmes faked
test results during live presentations for investors,
and the DOJ also said that Holmes told investors
that the Walgreens partnership would be expanding,
when in reality, Walgreens was already moving
to end the partnership.
Balwani and Holmes told investors
that the Theranos technology had already been deployed
by the US military on the battlefield in Afghanistan,
which was untrue.
General Mattis testified that they were not being used
by the military.
When the jurors spoke out after the verdict,
two of them said that the jury ranked witnesses
according to their believability,
and that they rated Mattis as the witness
with the highest credibility, not surprising.
Mattis said that he wanted the military to do a test program
with Theranos analyzers, but the tests never happened.
Balwani and Holmes told investors
that they didn't need FDA approval for the machines
and tests when they already knew that they needed clearance
from the FDA.
And the two also allegedly lied to the media,
and then used the articles and news segments containing
their lies to promote Theranos to investors.
And to find Holmes guilty of the conspiracy charges,
the jury had to believe that she hatched a plan
to commit wire fraud in partnership with Balwani, or others.
If the jurors thought that she just went along with Balwani
because of their partnership,
that probably wouldn't have risen
to the level of conspiracy.
But what about the other charges of fraud
for crimes perpetrated against patients?
The jury actually acquitted Holmes of wire fraud
and conspiracy to defraud patients.
So let's talk about why that likely happened.
During the four-month trial, the prosecution devoted
very little time to proving this part of the case.
The patients who purchased Theranos tests only testified
for about one hour in total.
The government accused Holmes
and Theranos of making material misrepresentations
about its Edison machine in advertisements.
The ads mostly targeted physicians.
The prosecution argued that these ads induced
hundreds of patients to pay Theranos, or Walgreens,
for blood tests and test results,
which obviously wouldn't have worked.
The government said Balwani and Holmes told doctors
and patients that Theranos could provide accurate, fast,
reliable, and cheap blood tests and test results,
but they already knew that Theranos technology was
in fact not capable of consistently producing accurate
and reliable results.
This was the alleged wire fraud,
because Theranos used interstate electronic wires
to purchase advertisements intending
to induce individuals to buy the tests in Walgreens,
and stores in California and Arizona.
And the prosecution had evidence that Theranos placed
advertisements in Walgreens and on TV
with their total marketing effort slightly over $1 million.
But at the same time, the prosecutors didn't have
the same kinds of direct communications
between Holmes and individual patients
as they did between Holmes and investors.
And theoretically, patients only used Theranos tests
because they were referred by their physicians.
So it's possible the jury might have believed
that there were too many intermediaries between Holmes
and the individual patients
and doctors to conclude that Holmes actually influenced
the patients themselves.
And the defense argued that the prosecution needed to show
that Holmes really intended to defraud these patients.
Arguably, her company gave patients inaccurate test results,
but inaccurate test results alone don't necessarily meet
the criteria for an intent to defraud.
The prosecutors needed to prove beyond a reasonable doubt
that Holmes knowingly participated in, devised,
or intended to devise a plan to defraud these patients.
And as we talked about earlier,
generally, opinions, aspirations, goals,
or subjective beliefs can't be used as a basis to find
that someone made a false, or fraudulent representation.
And the jurors who spoke out after the verdict said
that they believed Holmes when she said
she never intended to defraud patients.
And juror number six, Wayne Katz, an Emmy-winning TV writer
for a 1990s show called "Tiny Toon Adventures,"
was inspired by Holmes' testimony.
Quote, "We respected Elizabeth's belief in her technology,
"in her dream.
"We thought, 'She still believes in it,
"'and we still believe she believes in it.'"
He's saying that she had a subjective belief,
even to this day, that she was helping her patients,
not hurting them.
Katz said that the jury quickly decided to acquit Holmes
on all four counts of fraud against patients.
The jury thought Holmes was one step removed
from the patients, so that they were not directly defrauded.
Of course, this was also somewhat contradictory,
since Katz also opined that everything ran through Holmes.
But this is just what you often get from jurors
who are grappling with difficult questions of law.
Mike Kew, juror number 11, said
that although the panel thought Holmes' credibility was low,
they also believed that she was genuine.
But what happens next?
Each of the four counts that Holmes was convicted of carries
a maximum sentence of 20 years in prison.
So theoretically, she could get 80 years in prison,
but this will be reduced
and modified by the federal sentencing guidelines.
Several former prosecutors think
she'll probably get less than 20 years in prison,
especially as a first-time offender,
and the high-profile nature of the case
and the scope of the fraud probably suggest
that she won't exactly get a slap on the wrist, though.
That's because the federal sentencing guidelines require
the judge to consider the magnitude of the lies
and how much money the investors lost,
and the fact that she was CEO.
In these kinds of white collar crimes,
the more money that is pilfered,
the more prison you could get,
and $140 million is quite a lot,
though Holmes may be able to sway the judge
for less prison time by pointing to her relative youth,
her capacity for change,
and the allegations of abuse at the hands of Balwani,
and there will almost certainly be a very hefty fine.
The government can retry her
on the other wire fraud charges, but that seems unlikely.
The government has already spent significant resources
and time on the case,
and they got a conviction on four counts carrying
a serious prison sentence.
So that may be enough, particularly in light
of the upcoming Balwani trial,
which is also probably going to be an expensive prosecution.
So it turns out that Theranos was a fraud
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