Elizabeth Holmes Trial Begins: Fraud v. Failure

By Charlie McCarthy

Elizabeth Holmes, the infamous founder of Theranos, is on trial for criminal fraud in the United States District Court’s Northern California District Court in San Jose, California.[1] Ms. Holmes has garnered incredible media interest, evidenced by the various books and documentaries detailing the rise and fall of her company and public image.[2] Additionally, the result of the trial could have lasting implications in the “move fast and break things” Silicon Valley start-up culture.[3] In 2003, Ms. Holmes was a 19-year-old Stanford dropout when she founded Theranos Inc., a consumer technology startup focused on delivering at-home blood testing. Ms. Holmes was able to raise approximately $724 million in capital from venture capitalists and individual investors such as Rupert Murdoch (Chairman of News Corp.), Betsey DeVos (former Education Secretary), the heirs of Sam Walton (founder of Walmart), Carlos Slim (Mexican Tycoon), and Robert Kraft (owner of New England Patriots)[4]. Notably, former secretary of state Henry Kissinger and former secretary of defense Jim Mattis served as board members of her company.[5]

In 2015, investigative journalists revealed massive inconsistencies in both the company’s blood testing capabilities and financial representations to investors resulting in Theranos shutting down its labs in 2016 and ceasing all operations in 2018.[6] Ms. Holmes and her previous business and romantic partner, Ramesh “Sunny” Balwani, were both indicted on 12 counts of wire fraud and conspiracy to commit wire fraud in 2018.[7] Mr. Balwani will be tried separately in January 2022.[8] The prosecution accuses Ms. Holmes of committing fraud by misleading investors, business partners, and the media about her company’s blood testing machines.[9] The defense has argued that Ms. Holmes did not lie to investors but instead was naive in her business decisions and  negatively influenced by Mr. Balwani.[10] Although fascinating from a Silicon Valley cultural perspective, the case rests not on the facts about what happened with the company but simply on Ms. Holmes’ intent throughout the company’s history.[11]

During opening statements, Robert Leach, an assistant US Attorney, concisely stated, “This case is about fraud, about lying, and about cheating to get money.”[12] He highlighted how the rejection from Pfizer and Schering-Plough to work with Theranos put the company in dire financial straits, which led Holmes to lie to Walgreens, investors, and patients about the capabilities of Theranos’ blood tests.[13] Mr. Leach’s theory of his prosecution is centered on proving Ms. Holmes intentionally lied to investors to raise hundreds of millions of dollars. The prosecution has already brought forward two witnesses that testified that Ms. Holmes lied to investors, business partners, and patients to keep her business moving forward. [14]

Ms. Holmes’s lawyer, Lance Wade, countered the prosecutions claims of criminal fraud through his theme of “failure is not a crime.”[15] Mr. Wade described Holmes as a selfless pauper who spent nearly fifteen years trying to build a company to help others.[16] In his opening statement, he stated to the jury, “She never sold a single share of stock … She passed on every opportunity to sell. On chances to make hundreds of millions of dollars. She was motivated by mission, not money.”[17] Mr. Wade’s argument is captivating but lacks any legal footing.[18] The prosecution only needs to prove Ms. Holmes deceived people with the intent of furthering her business and eventually making money.[19]

The trial is set to last until mid-December, with various witnesses expected to take the stand.[20] If convicted, Ms. Holmes faces a maximum sentence of 20 years in prison, fines, and restitution for each wire-fraud count.

The first day of the trial stayed true to the Hollywood-esque storyline and featured three unknown Holmes look-alikes sitting highly visible in the public gallery. The women wore Ms. Holmes’s signature Theranos CEO look: black suit, black shirt, and black shoes. I suspect the look-alike spectacle will not be the only oddity in a saga that continues to leave the public asking questions.

(This is a developing story with an expected three-month-long trial)[21]

[1] Rachel Lerman & Gerrit De Vynck, Elizabeth Holmes’s defense says mistakes, not malice, led to the collapse of Theranos, Wash. Post (Sept. 8, 2021), https://www.washingtonpost.com/technology/2021/09/08/elizabeth-holmes-theranos-trial-updates/.

[2] Id.

[3] Rachel Lerman, Elizabeth Holmes’s court date puts Silicon Valley’s ‘fake it till you make it’ culture on trial, Wash. Post (Aug. 31, 2021), https://www.washingtonpost.com/technology/2021/08/31/theranos-elizabeth-holmes-trial-silicon-valley/.

[4] John Carreyrou, Theranos Cost Business and Government Leaders More Than $600 Million, W.S.J. (May 3, 2018), https://www.wsj.com/articles/theranos-cost-business-and-government-leaders-more-than-600-million-1525392082.

[5] Lerman & De Vynck, supra note 1.

[6] Zaw Thiha Tun, Theranos: A Fallen Unicorn, Investopedia (June 16, 2021), https://www.investopedia.com/articles/investing/020116/theranos-fallen-unicorn.asp.

[7] Erin Griffith, The Trial of Theranos’s Elizabeth Holmes Opens, N.Y. Times (Sept. 8, 2021), https://www.nytimes.com/2021/09/08/technology/theranos-opening-statements.html.

[8] Id.

[9] Sara Randazzo, The Theranos Trial: Elizabeth Holmes, the Charges, and What Else to Know, W.S.J. (Sept. 15, 2021), https://www.wsj.com/articles/the-theranos-trial-elizabeth-holmes-the-charges-and-what-else-to-know-11625865236?mod=searchresults_pos2&page=1.

[10] Adam Lashinsky, The Elizabeth Holmes Trial: The defense wins the opening round, Business Insider (Sept. 10, 2021), https://www.businessinsider.com/elizabeth-holmes-trial-theranos-founder-defense-wins-opening-round-2021-9.

[11] Lerman & De Vynck, supra note 1.

[12] Lashinsky, supra note 10.

[13] Id.; Lerman & De Vynck, supra note 1.

[14] Sarah Randazzo et al., Elizabeth Holmes Trial: Theranos Gave Investors Rosy Picture of Revenue, Witness Says, W.S.J. (Sept. 14, 2021), https://www.wsj.com/articles/prosecution-witnesses-in-theranos-trial-to-support-claim-elizabeth-holmes-lied-11631591536?mod=article_inline.

[15] Lashinsky, supra note 10.

[16] Id.

[17] Id.

[18] Id.

[19] Id.

[20] Randazzo, supra note 9.

[21] Sarah Randazzo, Elizabeth Holmes Trial: Ex-Employee Says She Was Rebuffed in Attempt to Raise Alarms, W.S.J. (Sept. 15, 2021), https://www.wsj.com/articles/elizabeth-holmes-trial-ex-employee-testifies-theranos-cut-corners-11631720459?mod=hp_lead_pos3.

Image source: https://www.washingtonpost.com/technology/2021/09/15/elizabeth-holmes-trial-erika-cheung