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6th March 2022

Fraud over failure

The story of Elizabeth Holmes’ fraudulent empire, Theranos

Elizabeth Holmes founded the blood testing start-up, Theranos, at the age of 19. At the age of 37, she was convicted of three counts of wire fraud and one count of conspiracy to commit wire fraud. The story of the time in between that is one of money, deceit and a culture of ‘fake it till you make it’.

How it began

In 2003, Elizabeth Holmes, a sophomore at Stanford University, founded Theranos. Holmes claimed to have developed proprietary devices which, “made it possible to run comprehensive laboratory tests from a few drops of blood that could be taken from a finger”. The blood was collected in a ‘nanotainer’, and was run through the ‘Edison’, a machine apparently capable of running over 240 blood tests to detect hormone and drug levels, viruses, and various disease markers. Based on this idea, Theranos grew to a value of $9 billion by 2014. At the same time, Holmes became a prominent figure in the tech world, being named the youngest self-made female billionaire by Forbes in 2015 and the ‘female Steve Jobs’ by Fortune magazine.

Elizabeth Holmes at the Fortune Global Forum 2015. Credit: Flickr @ FORTUNE Global Forum

A culture of secrecy

The truth was, however, that the Edison machine did not work. It could perform only a few of the 240 tests offered on the Theranos test menu. All the other tests were being performed on commercially available lab machines purchased from third party companies. This, of course, was kept a secret from the public, investors, partner companies and the federal agencies which regulate public healthcare. Holmes did not disclose how the Edison machines worked to investors and declined to allow government bodies to do their own tests to verify its accuracy.

The company operated in a culture of secrecy. They lied about the reliability and accuracy of the tests, diluted blood samples to produce enough blood for testing, and ran quality control tests on third party machines repeatedly until they passed. Employees were required to sign non-disclosure agreements. Those who did speak out were ignored, threatened with lawsuits for exposing ‘trade secrets’, or forced to resign to save their own conscience. One of these ‘whistle-blowers’, Tyler Schultz, was followed by private investigators hired by Holmes and subject to intimidation and threat of legal action for months.

Former Chief Scientist at Theranos, Ian Gibbons, warned Holmes that the tests were inaccurate, and that the technology wasn’t ready for public use. He too was ignored, and eventually committed suicide the night before he was due to testify in a lawsuit concerning the Theranos technology.

Holmes’s deceit was so effective that despite this, Theranos signed partnership agreements with several companies, including the supermarket chain, Safeway, the Cleveland Clinic, and Capital Blue Cross. In 2013, Theranos testing centres were opened in Walgreen stores, with blood tests being offered to patients despite not being approved for in-store testing by regulators.

The public were being used as test subjects, without knowing it. Most of the tests being performed required a venous draw with a syringe, not the finger pinprick advertised, much to the surprise of patients. Furthermore, the blood samples were being sent to a clinical lab in Paulo Alto to be tested on third party devices, not on the revolutionary Edison machines.

The truth exposed

How then, did Theranos fool the world? Many look to the powerful men Holmes aligned herself with for the answer. Theranos’s board members included the founder of Oracle, a former head of software at Apple, a former U.S. Secretary of State, a former Secretary of Defence, two former U.S. Senators, and the former director of the U.S. Centers for Disease Control and Prevention (CDC). These men had influence within the government, provided funding, and conferred much-needed credibility to Theranos. None, however, were experts in lab testing or healthcare.

Backed by these powerful figures, Elizabeth created an image of herself as a revolutionary entrepreneur, following in the footsteps of her idol, Apple CEO Steve Jobs. She dressed in black turtlenecks, like Jobs, never took vacations, like Jobs, and even decorated her office with Job’s favourite furniture.

This carefully curated image was shattered in October 2015, when The Wall Street Journal published an article exposing the ineffectiveness of the Edison machine, and the inaccuracies of its testing capabilities. With that article, Theranos’s downfall was set in stone.

The US Food and Drug Administration (FDA) banned use of the nanotainer, and the Centers for Medicare & Medicaid Services (CMS) conducted surprise inspections of Theranos labs, finding inaccurate blood testing which threatened patient health and safety. They subsequently revoked Theranos’s license to operate. In July 2016, Holmes was banned from the clinical testing industry for two years and by October of that same year, all Theranos’s labs and testing centres had been closed.

In July of 2018, Holmes stepped down as CEO of Theranos on the same day that she, along with Theranos’s COO and Holmes ex-boyfriend, Sunny Balwani, was charged with nine counts of wire fraud and two counts of conspiracy to commit wire fraud.

During an 11-week trial, 29 witnesses were called to testify, including former employees, investors, patients, and doctors. During her testimony, Holmes admitted to hiding Theranos’s use of modified commercially available machines from investors and to adding the logo of pharmaceutical companies to Theranos reports without authorisation.

It was also revealed that investors did not perform due diligence, and most had little to no knowledge about the healthcare industry, lab-testing, or the technology Theranos used. After 7 days of deliberation, the jury found Holmes guilty of four counts of wire fraud against investors, and one count of conspiracy to commit wire fraud. She was found not guilty of four counts of fraud against patients, and the jury were unable to reach a unanimous verdict on the remaining three counts of fraud against investors.

The larger problem of Silicon Valley

The money lost by the investors Holmes was convicted of defrauding paled in comparison to their net worth. Rupert Murdoch, a media mogul, invested $125 million in Theranos, which is nothing compared to his $21 billion net worth. The Walton family, who own Walmart, have a net worth of $238 billion, of which they invested less than 0.1% at $150 million. This is part of a larger culture within the tech industry, in which venture capitalists invest in high-risk, high-reward companies with little chance of succeeding.

The ‘start-up ecosystem’ of Silicon Valley produces many of these, and investors spread their capital among many companies, assuming around 60% of them will fail. And they do. There are many examples of Silicon Valley start-ups failing, and many examples of start-ups committing fraud to varying degrees.

The vegan food company, Hampton Creek, was found to have ordered contractors and employees to buy its own products from retailers. Magic Leap, a visual reality company, was found to have used animation to augment its demo videos. The HR start up, Zenefits, admitted to developing software which allowed employees to cheat on mandatory compliance training.

The tech industry is saturated with billion-dollar start-ups, or ‘unicorn start-ups’. Many of these are privately owned companies which can publish their own unaudited financial statements. This, along with the highly competitive nature of the industry, the demand for rapid growth, and a culture of “change the world, move fast and break things” creates an environment that encourages venture-capital funded start-ups to commit fraud.

Dave McClure, a founding partner of the venture fund 500 Startups, told Fortune, “You might even find a correlation between ‘interesting’ behaviour and successful entrepreneurship.’

In the words of Guardian reporter Kari Paul, “Silicon Valley’s culture of ‘fake it till you make it’ encourages founders to make big promises, often with little proof”. This allows companies to raise millions of dollars from investors, and to remain in business as long as it takes to make it, or be found to be faking it. This is the culture that allowed Elizabeth Holmes to fake it for so long.

In the closing statements of the trial against Elizabeth Holmes, her defence team stated, “Failure is not a crime. Trying your hardest and coming up short is not a crime”. No, it’s not, but Elizabeth didn’t just fail. She lied. The prosecution put it perfectly: “She chose fraud over business failure. She chose to be dishonest.”

As a result of her dishonesty, Elizabeth Holmes faces up to 20 years in federal prison, millions of dollars in fines, and further millions in victim restitution. Her sentencing is scheduled for September 2022. With the final chapter of Holmes’s story about to close, Silicon Valley may have some lessons to learn from it.

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