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Elizabeth Holmes' disastrous error

In 2004, Elizabeth Holmes was on top of the world. She'd left Stanford after her second year to join the ranks of Sil...

Posted: Mar 16, 2018 7:17 PM
Updated: Mar 16, 2018 7:17 PM

In 2004, Elizabeth Holmes was on top of the world. She'd left Stanford after her second year to join the ranks of Silicon Valley's next-generation start-up pioneers.

She was inspired by a lifelong fear of needles and a nagging conviction that there must be a better way to diagnose and prevent disease in the developed world.

And she was going to "disrupt" the health care system as we knew it, back before "disrupting" was even a thing.

Her company, Theranos, aimed to democratize health care by providing broader access to preventive care through proprietary blood diagnostic technology. Holmes boasted the ability to do an array of blood tests from a single finger pinprick and just a few drops of blood, and claimed it could do it better, quicker, and cheaper than traditional blood testing.

The possibilities for earlier diagnoses and even prevention of any number of genetic diseases were endless.

By 2015, with Theranos at a market valuation of $9 billion, Forbes dubbed her the "youngest self-made woman billionaire," and Henry Kissinger sat on her board. By all accounts, at the age of 32, she was the elusive Silicon Valley unicorn (albeit a unicorn in a perpetual black turtleneck).

She's now its latest persona non grata.

With the depths of her alleged deception now revealed in the Security and Exchange Commission's recently released 24-page complaint, some are left scratching their heads as to how she could have gotten away with it--that is, if the allegations in the complaint are true. The answer is pretty simple.

As a white-collar criminal defense attorney, I can tell you just how unremarkable this story is. Countless well-intentioned young entrepreneurs suddenly find themselves in way too deep, and don't know how to extricate themselves. And many craft such compelling stories to investors that the line between fact and fiction is blurred even in their own minds.

It doesn't happen overnight. Whether it's confidence or hubris or just unbridled ambition, many truly believe that their company will be the next big thing, that they can pay off their debts as long as they can close the next deal, and that all will be forgiven once their investors are rich.

By all indications, Holmes ardently believed that her company would change the world -- someday. And her promises to investors were consistent with the media image she was simultaneously cultivating for her company: that it was on the forefront of revolutionizing the diagnostics industry, breaking into new territory to drive change and quite possibly eradicate epidemics as we know them. Except, according to the SEC, she was lying to investors along the way.

According to the complaint, it began when technological challenges were kept secret from Theranos investors; pharmacy execs were misled by omission at first, rather than explicitly. Later, in an apparent effort to hide these setbacks, Holmes sent blood tests to third-party vendors using traditional blood diagnostic analysis because her own technology wasn't up to snuff.

Even as her business partnerships were falling apart and her technological innovations stalling, Holmes included financial information in Theranos investor binders projecting $1 billion in revenues for 2015, which, by that point, she knew could not be true, says the complaint.

In my experience, frauds like the one Holmes allegedly perpetrated are shockingly commonplace and are rarely hatched with co-conspirators and commenced with ill intent. Rather, they are backed into through a series of questionable business decisions, which in totality create a desperate situation. It's those who double down rather than admit defeat in those circumstances that end up in trouble with federal authorities.

It looks to me that Holmes had all the hallmarks of a double-downer.

As detailed in the complaint, over the course of a two-year scheme, Holmes and former Theranos President Ramesh "Sunny" Balwani allegedly lied about the capabilities of its proprietary technology, the extent of commercial and business relationships, its access to the Department of Defense, its status at the Food and Drug Administration, and the financial state of the company.

By the time the Wall Street Journal published a scathing investigation into the company's practices and Holmes' integrity, it was too late.

In 2017, Theranos settled a civil lawsuit with Walgreens for an undisclosed amount and reached a deal with investors in exchange for their releasing potential legal claims against the company.

In her settlement with the SEC action, subject to court approval, Holmes will be barred from serving as an officer or director of a public company for 10 years, will pay a $500,000 penalty, and will return the shares of the company she obtained through the fraud back to Theranos investors.

Criminal and regulatory prosecutions (like the SEC's) are often investigated on parallel tracks, with coordination and cooperation among various government agencies. I wouldn't be surprised if the United States Attorney's Office for the Northern District of California has an open criminal investigation against Holmes. As this story unfolds, Silicon Valley's one-time darling is now its cautionary tale.

Mississippi Coronavirus Cases

Data is updated nightly.

Confirmed Cases: 113876

Reported Deaths: 3238
CountyConfirmedDeaths
Hinds7850176
DeSoto685779
Harrison505083
Jackson445084
Rankin388186
Madison377993
Lee350779
Forrest299578
Jones287784
Washington255199
Lafayette245943
Lauderdale2418134
Lamar221238
Bolivar200177
Oktibbeha199354
Neshoba1831111
Lowndes176362
Panola169038
Leflore165187
Sunflower159749
Warren153655
Monroe147372
Pontotoc145819
Marshall139227
Lincoln138557
Pike137756
Copiah136236
Coahoma124736
Scott124729
Grenada121138
Yazoo120733
Simpson120449
Union116525
Tate114939
Leake114340
Holmes114160
Pearl River112259
Itawamba112125
Adams106743
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Wayne99821
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George97718
Covington95326
Marion93542
Tippah88121
Newton85227
Chickasaw83626
Tallahatchie83025
Winston82821
Tishomingo80041
Hancock79827
Attala78926
Clarke73450
Clay68321
Jasper67717
Walthall63627
Calhoun61912
Noxubee59617
Smith58916
Montgomery53523
Claiborne53316
Tunica52817
Yalobusha51914
Lawrence50714
Perry48623
Carroll47612
Greene46918
Stone46214
Humphreys42616
Amite42113
Quitman4196
Jefferson Davis40011
Webster37013
Wilkinson33520
Benton3255
Kemper32015
Sharkey28014
Jefferson27410
Franklin2373
Choctaw2046
Issaquena1074
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Alabama Coronavirus Cases

Confirmed Cases: 155915

Reported Deaths: 2674
CountyConfirmedDeaths
Jefferson22861374
Mobile14468314
Tuscaloosa10148139
Montgomery9875196
Madison915094
Shelby720462
Lee649665
Baldwin647569
Marshall433049
Calhoun418960
Etowah418749
Morgan403635
Houston369232
DeKalb330229
Elmore314852
St. Clair287142
Limestone276530
Walker272293
Talladega261035
Cullman235724
Lauderdale214841
Jackson210015
Autauga202330
Franklin202131
Colbert196731
Russell19233
Blount189325
Dallas186227
Chilton184132
Escambia171929
Coffee171710
Covington169929
Dale165451
Chambers133643
Pike132313
Tallapoosa130587
Clarke130017
Marion106229
Butler100140
Barbour9979
Marengo99222
Winston91313
Geneva8527
Pickens82417
Lawrence82131
Randolph81216
Bibb81114
Hale74930
Clay72912
Cherokee72614
Lowndes70328
Monroe64010
Henry6396
Bullock63717
Washington63412
Crenshaw60230
Perry5836
Wilcox56212
Fayette56113
Conecuh55713
Cleburne5438
Macon52920
Sumter47021
Lamar4665
Choctaw38812
Greene34216
Coosa2023
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