‘Move fast and break things’: the fall of Theranos and Elizabeth Holmes

The background

Back in 2014, Elizabeth Holmes was revered as a tech genius and the world’s youngest self-made female billionaire, with a net worth of $4.5 billion.[1] She was the CEO of Theranos, a revolutionary blood-testing start-up whose machines could supposedly detect serious medical conditions like cancer and high cholesterol using only a small amount of blood obtained from a single finger prick. [2] Many high-profile investors were drawn in by the promise of a simple, painless procedure rather than the more invasive procedure of extracting blood through a needle for accurate medical results for the masses. Theranos received more than $700 million from investors such as media mogul Rupert Murdoch. [3] Its board of directors included renowned politicians including Henry Kissinger and George Shultz, whose grandson Tyler Shultz later exposed the reality that Theranos was no more than an elaborately constructed falsehood. [4]

Things began to fall apart for Holmes in 2015, when a Wall Street Journal report revealed that Theranos used other companies’ machines to conduct the medical tests. The source of this revelation was Tyler Shultz, a former full-time employee at Theranos. Shultz became sceptical of the practices at Theranos labs when he discovered that the Theranos Edison device was far from the high-tech machine that it was marketed to be. Furthermore, he discovered that the quality control tests were being run on non-Theranos devices. Despite the fierce opposition of his grandfather George Schultz, Tyler got in contact with the former Wall Street Journal reporter John Carreyrou to reveal his damning discoveries. [5] As depicted in the Emmy award winning Hulu series The Dropout, it was the explosive accounts of Tyler Schultz and his co-worker Erika Cheung that triggered the freefall of Holmes’ billion-dollar empire.

By 2016, Theranos was the subject of a formal investigation conducted by the US Food and Drug Administration, Centres for Medicare and Medicaid Services and the Securities and Exchange Commission. Theranos shut down its labs and wellness centres by October 2016. Holmes and her executive Sunni Balwani were ordered to surrender financial control of Theranos, pay a $500,000 fine and return 18.9 million shares of stock investments in Theranos. Shortly afterwards, Holmes and Balwani were charged with twelve counts of wire fraud and two counts of conspiracy to commit wire fraud by the Department of Justice. [6]

US v Elizabeth Holmes, US v Ramesh ‘Sunny’ Balwani

The principal charge against Holmes and Balwani was wire fraud, a criminal offence under federal US law, where electronic communication is used to defraud another person. [7] According to the indictment on June 14th 2018, Holmes and Balwani are alleged to have used advertisements to mislead doctors and patients to use Theranos’ blood testing devices, knowing full well that the devices were not capable of producing accurate results. Furthermore, the indictment alleges that Holmes and Balwani misrepresented the nature of Theranos’ business operations to induce potential investors to fund Theranos.[8]

The court’s verdict was delivered in January 2022 where Holmes was found guilty of wire fraud against investors and conspiracy to defraud investors. However, she was acquitted in relation to the charge of defrauding doctors and patients. On the 18th November 2022, Holmes was sentenced to 11 years in federal prison. Balwani was found guilty of two counts of conspiracy and ten counts of wire fraud in July 2022. His sentencing hearing will take place on the 7th December 2022, where he faces a maximum of twenty years in prison. [9]

Significance of the Theranos Scandal

For Investors

Though the Theranos case remains one of the most high-profile scandals in the history of Silicon Valley, Elizabeth Holmes is just one figure who capitalised on the secretive corporate culture of the industry, where the mantra ‘fake it till you make it’ is widely practised. As explained by defence lawyer Jack Sharman, the Silicon Valley business model values an ‘aggressive, optimistic’ representation of the product or service to attract investors, which takes precedence over the attainment of concrete evidence to support such claims. An individual who can subsequently fulfil their promises is hailed as a ‘visionary’ and the fact that their earlier representations were fraudulent at the time they were made is long forgotten. In short, it seems the truth is secondary to marketing strategies. [10]

The divergence between the legal standard in US federal and state law and the business culture of Silicon Valley is palpable. Under US federal and state laws, companies are obliged to disclose all material information about the company to the potential investor. The value of the investment depends on the financial condition of the company itself, and the outside investor is not in a position to take the initiative and independently ascertain the financial risks of the investment without prior disclosure from representatives of the company. Therefore, the overarching Anglo-American principle of ‘caveat emptor- buyer beware’ does not apply in relation to dealings between an entrepreneur and a potential investor in US law. [11] US law actively imposes a duty upon the entrepreneur to hand over truthful information in pre-contractual negotiations with a potential investor.

The federal crime of fraud laid against Holmes and Balwani goes further than a failure to disclose material information; it concerns intentional dishonesty with the purpose of taking away an investor’s legal right to their property. [12] Their convictions confirm that no amount of charisma, charm and persuasion can evade accountability under the law. In the aftermath of this case, it is expected that legal counsel to Silicon Valley entrepreneurs will remind their clients to execute their duty of disclosure appropriately when conducting pre-contractual negotiations with a potential investor. [13]

For Patients

However, in relation to the charge of defrauding doctors and patients, the outcome of US v Elizabeth Holmes may be interpreted as only a partial success. In an interview with CNBC, Tyler Shultz reinforced his view that the normalisation of overblown promises where entrepreneurs ‘move fast and break things’ does not work in the business of healthcare, where patient’s lives are at stake. Though the guilty verdict of defrauding investors clearly condemns Holmes’ approach, Shultz expressed his dissatisfaction with the fact that Holmes had been acquitted of defrauding doctors and patients. [14]

The multi-millionaire investors laid down a fraction of their total net worth for Theranos, yet it was the lives of average working-class end-users of the device that was compromised. For instance, one of the many victims reported receiving a false outcome that indicated she was having a miscarriage, although two different labs confirmed that her pregnancy was healthy. [15]

Yet, when presented with the entire collection of admissible evidence, the jury could not be convinced beyond reasonable doubt that Holmes was guilty of defrauding doctors and patients. Within the court of public opinion, the verdict seems to treat the interests of patients as a secondary consideration. Given that Theranos was a company that raised money to fund a healthcare service, it seems that the business of healthcare has been diluted to binary profit calculations.

From the Hulu series, the Dropout, Elizabeth Holmes (Amanda Seyfried) meets a cancer patient (Susan Moore Harmon)

For Female Entrepreneurs

Theranos was built around the carefully constructed personality of Elizabeth Holmes. The downfall of the company and of the woman at the centre has triggered conversations on what this means for the status of female entrepreneurs. Lara Stemple, an assistant dean at UCLA law argues that Holmes’ conviction has illustrated that women are capable of running multi-layered corporations and should be held accountable when such operations run into the ground. [16] Whilst the conviction confirms that Holmes was capable of running a complex operation, it also confirms that she was incapable of running an operation that fulfilled its promises. LA journalist Ann Friedman writes that Holmes has set women back, as it has been publicly demonstrated that a female entrepreneur at the height of her industry was a liar. [17]

It is reported that aspiring female entrepreneurs still face comparisons to Holmes, particularly those specialising in health and pharmaceutical sectors. [18] Though the Theranos scandal has undoubtedly stained views of female entrepreneurs, it is not certain that such prejudice will continue to exist in the next decade ahead, given that the current entrepreneurial environment could be easily changed by the arrival of the next big thing.

The fall of Theranos ultimately destroys the narrative that the ‘fake it till you make it approach’ is a viable option in the business of healthcare. Holmes’ conviction serves to remind entrepreneurs of their obligations to potential investors. The damning verdict confirms it is time for a change in attitude towards corporate responsibility in Silicon Valley.

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[1] Forbes.com Profile: Elizabeth Holmes [Online] Available at: https://www.forbes.com/profile/elizabeth-holmes/?sh=2c4d7bdb47a7 (Accessed: 3rd December, 2022)

[2] Hartmans, A., Jackson S., Cain A., Haround, A., Lee, L.  The rise and fall of Elizabeth Holmes, the former Theranos CEO found guilty of wire fraud and conspiracy, who was sentenced to more than 11 years in prisonBusiness Insider Available at: https://www.businessinsider.com/theranos-founder-ceo-elizabeth-holmes-life-story-bio-2018-4 (Accessed 3rd December, 2022)

[3] Ibid. 1

[4] Allyn, B. Theranos Whistleblower celebrated Elizabeth Holmes verdict by ‘popping champagne’ npr.org Available at: https://www.npr.org/2022/01/05/1070474663/theranos-whistleblower-tyler-shultz-elizabeth-holmes-verdict-champagne (Accessed 3rd December, 2022)

[5] Ibid.

[6] Ibid. 1

[7] Justia.com Wire Fraud Available at: https://www.justia.com/criminal/offenses/white-collar-crimes/wire-fraud/(Accessed 3rd December, 2022)

[8] Justice.gov U.S. v. Elizabeth Holmes, et al. Available at: https://www.justice.gov/usao-ndca/us-v-elizabeth-holmes-et-al (Accessed 3rd December, 2022)

[9] Paul, K. Holmes verdict an indictment of Silicon Valley’s ‚fake it till you make it‘ ethos Available at: https://www.theguardian.com/technology/2022/jan/04/elizabeth-holmes-verdict-analysis (Accessed 3rdDecember 2022)

 [10] Ibid.

 [11] dfi.wa.gov The Role of Disclosure in a Securities Offering Available at: https://dfi.wa.gov/small-business/role-of-disclosure#:~:text=Both%20federal%20and%20state%20laws,order%20to%20make%20an%20informed(Accessed 3rd December, 2022)

 [12] keglawyers.com Review of securities fraud, SEC violations and defenses Available at: https://www.keglawyers.com/securities-fraud#:~:text=%C2%A7%201341%20wire%20fraud%20statutes,to%20a%20stock%20or%20bond. (Accessed 5th December, 2022)

 [13] Ibid. 9

 [14] CNBC Television, Theranos whistleblower disappointed that Holmes found not-guilty for defrauding patients Available at: https://www.youtube.com/watch?v=WAZUMk1msVg (Accessed 3rd December, 2022)

 [15] Goodkind, N. False HIV results, marriage, and cancer diagnosis- the Theranos patients Elizabeth Holmes was found not guilty of defrauding Available at: https://fortune.com/2022/01/04/theranos-elizabeth-holmes-human-cost-fraud-faulty-blood-test-patients/ (Accessed 3rd December, 2022)

 [16] Stemple, L. Elizabeth Holmes’ conviction is actually a win for women Available at:  https://slate.com/news-and-politics/2022/01/guilty-verdict-in-elizabeth-holmes-trial-is-a-win-for-women.html (Accessed 3rd December, 2022)

 [17] Friedmann, A. How will the fall of Theranos’s Elizabeth Holmes affect women leaders? Available at: https://www.elle.com/culture/tech/a20954081/how-will-the-fall-of-theranoss-elizabeth-holmes-affect-women-leaders/ (Accessed 4th December, 2022)

 [18] Griffith, E. They still live in the shadow of Theranos’s Elizabeth Holmes Available at: https://www.nytimes.com/2021/08/24/technology/theranos-elizabeth-holmes.html (Accessed 4th December, 2022)