I added this report to the Nooz this morning, but wanted to say a few words about the grand finale of L’Affaire Theranos. It’s unusual for techies and white-collar entrepreneurs like these two to be charged, must less convicted, and I’ve been fascinated by the trial after reading the book mentioned below.
The facts are detailed in a Wikipedia article “Theranos“, but if you want an investigative reporter’s account of what went on, read the fabulous book Bad Blood: Secrets and Lies in a Silicon Valley Startup (2018) by John Carreyrou, whose reporting for the Wall Street Journal blew the Theranos fraud wide open. It’s a page-turner, and you’ll be amazed how Elizabeth Holmes (and Ramesh “Sunny” Balwani) conned millions of dollars out of gullible donors by convincing them they had a machine that could analyze dozens of conditions from just a capillary tube of blood. People gave millions without asking for evidence, and they lost it all.
Holmes, of course, was indicted and convicted of four of the eleven charges against her, including three counts of wire fraud and one count of conspiracy to commit wire fraud (on the other charges she was either found not guilty or there was no verdict). She’s been free on half a million dollars bail since her January conviction, and will be sentenced in September. She faces 20 years in prison and a $250,000 fine for each count, though she’ll undoubtedly get a much lighter sentence than that. She testified on her own behalf during the trial, and part of her defense involved the claim that she was psychologically abused by Balwani. I don’t think that claim helped her much.
Balwani, her partner in fraud—and for a time in romance—was convicted yesterday on all 12 counts of fraud (10 counts of wire fraud and two counts of conspiracy to commit wire fraud) and faces the same sentences per charge as did Holmes. The sentences for each perp will probably run concurrently, and they’ll probably get pretty much the same sentence. Balwani will be sentenced this coming November; in the meantime he’s free on a $750,000 bond. Balwani didn’t testify in his trial, and only two witnesses testified in his defense.
Since Carreyrou began reporting the scandal in the Wall Street Journal, that paper has had the best coverage of the trials, though he’s no longer with the paper. Here’s yesterday’s report of the Balwani verdict (click to read):
A few bits that were new to me:
Mr. Balwani’s lawyers argued he wasn’t in charge at Theranos, and the responsibility for the company rested with Ms. Holmes. He used investor money as promised, to build the company, they said, and invested his own money to help the startup succeed. Mr. Balwani’s verdict shows how the government, in its second time prosecuting the case against the Theranos executives, appeared to have buttoned up its arguments following Ms. Holmes’s trial, which had a more mixed result.
Most notably, the jury in Mr. Balwani’s case found him guilty on all counts related to defrauding patients—counts for which Ms. Holmes wasn’t convicted, an outcome that disappointed patients affected by Theranos’s faulty technology. A jury of seven women and five men deliberated for about 32 hours before reaching the verdict.
. . .Mr. Balwani’s conviction may affect the sentencing given to Ms. Holmes. The judge likely will want to give similar sentences to both because of their near-identical crimes, said Andrey Spektor, a defense attorney and former federal prosecutor in the Eastern District of New York. Any leniency he shows Ms. Holmes—who is 38 years old and had a baby last year—he will have to also show Mr. Balwani, or risk looking unfair, Mr. Spektor said.
“If he gives her a big break he is going to think, how will it look if he sentences Balwani differently,” said Mr. Spektor.
Balwani even incriminated himself:
Crucially, he was responsible for the lab when in 2015 a federal regulatory inspection uncovered serious deficiencies that would eventually lead to Theranos closing its blood-testing facilities. Adam Rosendorff, another former lab director, testified that Mr. Balwani controlled which employees had access to the lab, managed the laboratory resources, and hired and fired lab employees. He was more involved in the operations of the lab than Ms. Holmes, Dr. Rosendorff said.
Prosecutors showed a text message Mr. Balwani sent Ms. Holmes in July 2015: “I am responsible for everything at Theranos. All have been my decisions too.”
The article details the nature of the fraud, involving both deceived investors and patients, and you can get the details in the WSJ or on Wikipedia. Here’s how much the pair were worth at their peak (now they have a net worth of zero):
At its peak, Theranos was valued at more than $9 billion, 10th-largest at the time among venture-capital-backed startups. Mr. Balwani’s stake was worth $500 million for a time, and Ms. Holmes’s was worth $4.5 billion. They never sold their shares.
Their on-paper wealth was propelled by claims that their technology could cheaply and quickly run more than 200 health tests using a proprietary device that required just a finger prick of blood. In a partnership, Theranos offered the tests to patients at Walgreens pharmacies.
The trials have shown a different reality. The company managed to use its proprietary finger-prick blood-testing device for just 12 types of patient tests. Those results were unreliable. At its lab, Theranos secretly ran another 27 blood tests on commercial devices from other companies that it altered to work with tiny blood samples.
In the end, I don’t think that Holmes and Balwani, just because they’re white-collar criminals and tech entrepreneurs, should get a light sentence. Not only did they in effect steal millions of dollars, knowingly bilking people out of immense sums of money, but a reasonably long sentence may deter others contemplating similar frauds. (My fellow determinist Gregg Caruso, though, thinks that “deterrence” should not be a motive in criminal justice” because it uses people as a means rather than an end.)
Now, dear readers, what do you think are appropriate sentences for Holmes and Balwani?
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Holmes in 2014:
Balwani:
Read this book (click image to go to Amazon link):
I hope the sentencing includes some prohibition on future solicitation of investments, and creates some significant community service for them after release. 5 – 10 years incarceration?
It’s standard practice to include such a prohibition in the Judgment & Commitment order federal district courts enter at sentencing in such cases. Plus, both defendants will be required to serve a period (likely five years) of supervised release after they complete their terms of imprisonment. If either defendant violates any condition, he or she could be subject to reincarceration.
15 to 20 years each plus millions in fines to help refund those who were conned by these two.
BobTerrace: “…plus millions in fines…”
If, indeed, all of their wealth was on paper, and they now have a net worth of zero, it’s difficult to see how a restitution order (which is what I assume you mean–fines are something else) will actually help any victims. Just more paper.
I should mention that I have a drawer full of million-dollar verdicts against perpetrators of various frauds. Never collected on any of them.
I don’t expect the restitution to be paid , but let it hang over their heads for life.
An order of restitution is required in such cases; the ability to collect the restitution owed is a different matter, of course.
While the defendants are serving their terms of supervised release following their sentences, they will be required to maintain employment and to make monthly payments. But that could be a long way off and constitute a mere pittance toward what they owe.
Scott Galloway compared what Holmes did to what other entrepreneurs have done. Her scam was relatively mild compared others who squandered more of their investor money and came away richer and unpunished.
https://www.profgalloway.com/tell-me-a-story/
I didn’t read the book but did watch the HBO documentary and The Dropout. The documentary is sparse on the inside story of what Holmes and Balwani were thinking as only they really know. The Dropout portrays them as somewhat cartoonish figures presumably for entertainment value. Both come off as dumber than I suspect the real-life versions are. Even the title seems to imply that Holmes didn’t really know what she was doing, perhaps being led astray by dastardly scientists. I find that extremely hard to believe.
I have no idea what their sentences should be but definitely not slaps on their wrists. It should serve as a warning to others not to take the route that these two did. Or, if some startup finds themselves in a similar situation, they need this precedent to warn them away from taking it too far. “Remember Theranos” needs to pop into their minds.
Bad Blood is a great book. One thing that comes across in the book is how slimy the law firm of David Boies behaved. They routinely threatened and bullied whistleblowers who tried to disclose the fraud that was happening. In my view David Boies is equally guilty of defrauding investors.
The Dropout on Hulu is definitely worth watching.
Agreed, a lengthy sentence is necessary to deter, just as it is for bank robbery. By the way, I don’t regard them as “tech entrepreneurs” since there was no tech behind the company, it was all fraud.
And, out of interest (given the other “free will” post today), for anyone answering the question about sentence length, if you believed in libertarian free will, how do you think your answer would be different? Can you put a number on it, and why?
[My answer: my sentence length would not differ.]
The research on sentencing indicates that the deterrence effect is minimal. Most people who commit crimes such as this think that they won’t get caught. Many crimes are committed on the spur of the moment (think domestic homicides) and it is only after the fact that they think about consequences (hence murder-suicides).
There also is not deterrence affect associated with the severity of the sentence, which is why the majority of countries no longer have capital punishment.
So in most cases the sentence is simply punishment. So the question here is, given the crime, what is the appropriate punishment? I have no idea.
I suspect that the kind of crimes Holmes and Balwani committed allow for adequate contemplation as to consequences. The deterrence effect of long sentences might be much greater than for, say, theft or murder. It also will focus the minds of future enablers of this kind of crime, the investors. After all, entrepreneurs can’t commit this kind of crime without gullible investors.
Under the federal sentencing guidelines, closely related counts — counts that “involv[e] substantially the same harm” — are grouped together and treated as a single count of conviction. Under the guideline applicable to fraud cases, USSG section 2B1.1, there are a number of factors that impact the offense level, but the primary driving factor is the amount of the financial loss caused by the crime. [See the loss table set out at section 2B1.1(b)(1).]
Holmes could face an additional upward adjustment in her offense level for obstruction of justice if the sentencing judge finds that she perjured herself in her trial testimony. Since SCOTUS’s 2005 decision in Booker v. United States, the federal sentencing guidelines are advisory rather than mandatory, and a sentencing judge retains discretion to vary up or down from the range set by the guidelines. Given the amount of money lost by investors and the harm suffered by patients, I expect Holmes and Bulwani will wind up with high sentencing-guidelines ranges, and I’ll be very surprised if they don’t wind up with much more than slaps on the wrist. Double digits, I’m betting.
I’m not sure what my thoughts are on the ideal sentencing, but I’m just glad that they were able to keep Theranos from getting hold of all six of the Inferinity Stones.
(Liked because I presume you meant to type Infinity Stones.)
(Oh, disregard my previous comment. Upon rereading I see what you did there. I am not worthy. 🙇♂️)
If figured if Thanos + “er” goes to “Theranos”, then Infinity Stones plus “er” goes to “Inferinity Stones”. It’s stupid, I know.
Not stupid, genius! Again I bow to you. BTW, if you haven’t already, view the Drinker’s video on the recently-released Thor movie.
I’m nervous to watch his video. I see from his headline that he did NOT like it (I think he said “hot garbage”), and that’s disappointing. He’s usually right, though.
There’s also a pretty good docuseries on Hulu entitled “The Dropout “.
Though these two are crooks and deserve hard sentences, to me the investors are equally at fault. They were extraordinarily gullible, and they bear some responsibility for making Theranos as big a fraud as it was. That gullibility is the most shocking thing about this scandal. I hope that investors learn a lesson here.
If ignorance and stupidity were criminal offences, we’d probably all be in jail. I didn’t follow any of this in great detail but I haven’t heard anything about the investors complicity. I don’t remember it being even hinted in any of the shows. After all, there would be no motive for an investor to cover up their own losses but still stay invested.
Lou Jost is completely correct. This is capitalism, and profits are not guaranteed. You gamble, you
accept the outcome. This is white collar crime and nowhere near the terrible inhumane gross acts of Ghislaine Maxwell. In Holmes’ case, all she did was lift money from gullible people who were already rich and just wanted more. As Brecht said, is it worse to rob a bank than to found one? But Maxwell destroyed the lives of fragile innocent teen-age girls, who are suffering for their entire life. If she only gets 20 years, then Holmes should get less, much less. I cant really feel sorry for the super rich who
have millions already and gamble in order to get more. But seeing Maxwell’s victims is truly tragic.
She deserves a longer sentence. Holmes? maybe ten years so the public wont complain too much.
Sorry, but crimes against people are worse than crimes against pocketbooks.
No question Maxwell’s crimes are far worse. However, the bilked rich investors are not the only victims of Theranos’s fraud. There are also the many legitimate startups that didn’t receive investment. And there’s the pall the episode puts over future investment in the medical analysis field.
I hope that David Boies may get some heat for his actions with Theranos. He began to represent Theranos and, as some have mentioned, he bullied, threatened and sued former Theranos employees to prevent them from blowing the whistle on the company. At the same time, he joined the board of Theranos. Much of his compensation was in the form of company stock. He therefore had several conflicts of interest: in threatening Theranos employees, he was protecting the value of his shares. Also, as a member of the advisory board, he had a financial interest in keeping their stock price up. Shouldn’t his actions here be scrutinized?
It sounds like Boies was no more diligent in pursuing the truth about Theranos’ technology than were their investors. After all, accepting stock in payment means he really did believe that they would win. Even if he believed they were guilty but that he could win the argument in court, which is no crime, it doesn’t mean the stock would continue to be valuable.
I think the line between enthusiastic pursuit of a solution and crime is that easy to determine as many people think. A startup is expected to talk in rosy terms about its future potential. Exactly where that turns into fraud is not so easy to see before it all falls apart. Theranos was perhaps just a lot farther out over their skis, as they say, than most startups and also had a really big public profile.
I’ve found the Theranos story fascinating, in part because it fits in with what I’ve learned about the appeal of Alternative Medicine. A popular theme was the Lone Genius with an amazing insight — think Dr. Hahnemann & homeopathy (dilutions are stronger!), or Daniel David Palmer & chiropracty (innate intelligence!) People have a tendency to think that human health should be intuitive.
Combine that with a worship of technology-as-magic and Silicon-Valley-as-Hogwarts and an undergraduate with no real knowledge solves a problem by Dreaming Big.
I remember the interviews with Holmes’ professor who dismissed her idea by telling her it was completely implausible. The laws of physics don’t work that way. Holmes later used her criticisms as an example of the Old Guard not believing in innovation. Her investors & the public ate it up. Yeah, hope and hard work conquer the hidebound hegemony of the scientific establishment! The results prove it.
No. The laws of physics really don’t work that way. The results were faked.
Actually, the Theranos fake could only work because what they were trying to do was not that far-fetched. The field of microfluidics had already made progress before Theranos. Here’s a short article on the subject. There are others:
https://www.theverge.com/22834348/theranos-blood-testing-innovation-drop-holmes
Also check out Wikipedia’s page on the “Lab on a chip” concept:
https://en.wikipedia.org/wiki/Lab-on-a-chip/
Perhaps the most damaging consequence of the Theranos crime is the dampening effect it had on such research and development.
On an adjacent note, I can recommend the Netflix series Inventing Anna, which is based on the true story of another con artist who seemed to believe her own con.
The odious Holmes’ lawyers will try to make hay of this, since her pretend defense is that she was a poor widdle victim of Balwani.
I’m glad Balwani was convicted. But if Holmes is not likewise convicted, we’ll have a problem.
Both Holmes and Balwani have been convicted. The question now is what their punishment will be.