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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.

Cases: 482902

Reported Deaths: 9425
CountyCasesDeaths
Harrison33063488
Hinds31021589
DeSoto30610358
Jackson23687348
Rankin21340370
Lee14909220
Madison14166271
Jones13404227
Forrest13160240
Lauderdale11601305
Lowndes10443176
Lamar10214130
Pearl River9098221
Lafayette8241137
Hancock7514112
Washington7102150
Oktibbeha6964124
Monroe6514164
Neshoba6475201
Warren6464164
Pontotoc630393
Panola6250126
Marshall6126123
Bolivar6115144
Union574186
Pike5613136
Alcorn537290
Lincoln5303131
George471472
Scott459196
Leflore4476140
Prentiss446779
Tippah446480
Itawamba4444100
Adams4416116
Tate4394101
Simpson4335112
Wayne433066
Copiah431787
Yazoo423386
Covington415792
Sunflower4148104
Marion4099104
Leake397586
Coahoma3957100
Newton370875
Grenada3556104
Stone350860
Tishomingo336289
Attala325387
Jasper314162
Winston304691
Clay296473
Chickasaw287065
Clarke282190
Calhoun266141
Holmes262187
Smith250649
Yalobusha221047
Tallahatchie220450
Walthall211058
Greene209045
Lawrence206833
Perry199953
Amite198452
Webster196542
Noxubee178939
Montgomery172454
Jefferson Davis168342
Carroll162137
Tunica153334
Benton142535
Kemper138640
Choctaw127026
Claiborne126834
Humphreys126637
Franklin116728
Quitman103926
Wilkinson101936
Jefferson91333
Sharkey63020
Issaquena1926
Unassigned00

Alabama Coronavirus Cases

Cases: 789054

Reported Deaths: 14022
CountyCasesDeaths
Jefferson1115991765
Mobile708511234
Madison49865633
Shelby36274315
Baldwin36242495
Tuscaloosa33931548
Montgomery33190678
Lee22680220
Calhoun21211410
Morgan19816335
Etowah19300462
Marshall17680274
Houston16823386
St. Clair15442305
Cullman14602258
Limestone14581188
Elmore14480264
Lauderdale13520281
Talladega12958236
DeKalb12199237
Walker10588330
Blount9720157
Autauga9667137
Jackson9385158
Coffee8882175
Dale8609173
Colbert8534184
Tallapoosa6673181
Escambia6591121
Covington6452167
Chilton6385144
Russell607255
Franklin5795101
Chambers5416134
Marion4800120
Dallas4705189
Clarke463279
Pike462397
Geneva4413117
Winston425895
Lawrence4117108
Bibb409381
Barbour347270
Marengo326285
Monroe320053
Butler318290
Randolph305956
Pickens305274
Henry301858
Hale292685
Cherokee289855
Fayette279673
Washington245448
Crenshaw238470
Cleburne235851
Clay228565
Macon220158
Lamar197743
Conecuh182046
Lowndes170758
Coosa170235
Wilcox159736
Bullock149243
Perry136537
Sumter124536
Greene121443
Choctaw73427
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