Why Elizabeth Holmes Was Convicted (and Also Acquitted)

- Elizabeth Holmes aspired to be Steve Jobs, but it turns out that she's more like Bernie Madoff.

In 2003, a 19-year-old college dropout named Elizabeth Holmes founded a company called Theranos that promised to revolutionize blood testing.

She claimed to have invented a machine that could run more than 200 tests on just a few drops of blood taken from a finger prick.

She wanted to sell diagnostic tests directly to consumers.

Holmes was very persuasive.

She gave a TED Talk, where she promoted Theranos by calling it the most disruptive technology in the history of medicine.

- Yet, in the United States today, healthcare is the leading cause of bankruptcy, and the lack of it the leading cause of the suffering associated with finding out too late in the disease progression process that someone you love is really, really sick.

- Silicon Valley investors treated her like a rockstar.

Walgreens quickly became a corporate partner.

Major investors included Rupert Murdoch, the Walton family, and the family of former Education Secretary Betsy DeVos.

Holmes' big promises attracted some of the biggest names in American government and foreign policy.

Bill Clinton was charmed by her, and Joe Biden praised her efforts.

Secretaries of State Henry Kissinger and George Shultz joined the board of directors.

Former Secretaries of Defense James Mattis and William Perry joined, too.

The company raised nearly $1 billion in funding.

With the prospect of eliminating many lab tests and their associated costs, there seemed to be nothing stopping Theranos from becoming a mega player in the biotech industry.

Its highest valuation was an eye-popping $9 billion.

But Walgreens, Murdoch, the US foreign policy establishment, and the other investors ignored a very important principle in investing and life.

If something seems too good to be true, it probably is too good to be true.

(dramatic music) As it turns out, there's no way to run hundreds of sophisticated diagnostic tests on a few drops of blood.

Despite all the evidence that Holmes knew her testing machine would never work, a federal jury convicted her on just four of the 11 charges against her, three for wire fraud against investors, and one for conspiracy to commit wire fraud against investors.

One juror said it was tough to convict her, because, quote, "She was so likable.

"She had such a positive dream.

" And it's a dream that they think she honestly still believes in.

But as you can see, there's probably a reason why Jennifer Lawrence, Katie Holmes, and Amanda Seyfried are all practicing their most charming and coldblooded stares.

So today, we're going to talk about the Elizabeth Holmes trial.

Why did the jury find her guilty?

Why did they acquit her on the other charges?

And how much did Holmes help herself by testifying in her own defense?

So let's start with the problems with Theranos, which have been well-chronicled at this point.

Blood analysis is one of the most important areas of medicine.

The two main players in the field, Quest Diagnostics and Laboratory Corporation of America, generate over $75 billion a year in revenue.

Theranos promised to upend this regime by eliminating blood draws, vials, large needles, and lengthy waiting periods.

What if you could just go to Walgreens, buy a testing kit, and screen yourself for high cholesterol, kidney disease, or even cancer?

Wouldn't that be great?

You'd save time, money, get diagnosed faster, and lives would be saved, and that was the heart of the Theranos project.

But there was just one problem with this vision.

Most blood tests could not be done with just a few drops of blood.

There aren't enough molecules for detection.

One of Holmes' professors had rejected her early ideas for biotech companies on the basis that the science and technology could not exist.

The professor, Phyllis Gardner, later said that she found the conversations concerning, because Holmes refused to accept that some ideas were not possible.

She said, quote, "The hubris of that just drove me insane.

" But Holmes dropped out in 2004, and went on her own way, aggressively selling her ideas to investors.

Her company name Theranos is a combination of therapy and diagnostics.

And while Holmes never submitted any of her inventions for any kind of peer review, that didn't matter to another Stanford professor, Channing Robertson.

He said that the minute he heard her idea about a diagnostic test from a pin prick, he felt he was, quote, "Looking into the eyes of Steve Jobs, or Bill Gates.

" Steve Jobs was, of course, the person that many company founders wanted to emulate.

Jobs created his own persona, dressing only in black, and promoting himself as an eccentric genius.

Holmes took note of this, and created her own mythos that was trying to piggyback on Jobs.

She wore a black turtleneck and black suit every day.

She had an intense stare that became famous, and we might laugh about this now, but according to Tyler Shultz, a Theranos employee, investors like his grandfather, George Shultz, were mesmerized by this act.

But then came the whistleblowers.

In 2014, Tyler Shultz emailed Holmes to complain that Theranos had doctored research, and ignored failed quality control checks.

Several other employees had also raised concerns about the company's science.

George Shultz was 95 at the time, and Holmes called him immediately to warn him that she would get revenge on his grandson if he took his complaints any further.

Tyler, though, anonymously contacted New York State's Public Health Lab, and filed a complaint alleging that Theranos had manipulated a process known as proficiency testing relied on by federal and state regulators to monitor the accuracy of lab tests.

Theranos' lawyer, David Boies, who later joined the board of directors, surprised Tyler at his grandfather's house, informing him that the company was suing him for violating the terms of his NDA.

And while Tyler was the first person to raise concerns about Theranos to outside regulators, he wouldn't be the last.

In 2015, "The Wall Street Journal" published a series of articles exposing the Theranos testing machines as frauds.

By then, Holmes had been appointed to the Harvard Medical Board alongside her old professor, Phyllis Gardner.

Gardner spoke with "The Wall Street Journal" about her belief that Holmes was a fraud, and sure enough, regulators soon discovered that Holmes' Edison machines frequently failed quality control checks.

That means they produced unreliable test results.

Theranos eventually told regulators that it voided all test results from Edison machines for 2014 and 2015, as well as some other tests that ran on conventional machines.

The Edison machine turned out to be a lemon.

Theranos claimed that its test for one sexually transmitted infectious disease was sensitive enough to detect the disease 95% of the time.

But when these results were submitted for validation, it showed sensitivities of between 65% and 80%.

At the time, Walgreens was partnering with Theranos to provide in-store testing centers at 40 Walgreens locations.

But when Walgreens realized the scope of the problem, they sued Theranos for $140 million.

Walgreens eventually claimed that Theranos voided 11.3% of all blood test reports that the company provided to customers of Walgreens stores.

But instead of acknowledging the problems with the Edison machine, Theranos fabricated the results, while continuing to market the company to investors as world-changing technology.

During the trial of Elizabeth Holmes, prosecutors showed a presentation that she had made to the board of directors saying that 10 of the 15 largest pharmaceutical companies in the world had validated the Theranos results.

This was a lie.

The US Centers for Medicare and Medicaid Services investigated Theranos, and banned Holmes from operating a medical lab for two years.

The US Securities and Exchange Commission, the SEC, charged Holmes and former Theranos President Sunny Balwani with fraud, and barred Holmes from serving as a director, or officer of a public company for a decade.

So that brings us to the criminal case itself.

Holmes was indicted on 11 felony charges in 2018.

The charges included wire fraud against investors, wire fraud against patients, and conspiracy.

And federal prosecutors painted Holmes as a charlatan who knew her technology didn't work.

They said she was obsessed with fame and fortune, and prosecutors presented evidence that when Theranos realized its test results were not accurate, the company substituted tests from regular blood draws, making it look as if the tests were from blood droplet tests, rather than traditional blood draws and conventional machines.

But the strongest evidence showed that Holmes exaggerated the company's involvement with potential partners.

Prosecutors demonstrated that Holmes lied about having deals with drug companies like Pfizer and the US military.

Holmes even added the logos of Pfizer and Schering-Plough to lab reports that she used in her presentation to investors and Walgreens executives.

But these companies hadn't actually validated any of Theranos' systems. But the defense put on a case as well.

Holmes testified for seven days, presenting herself as a visionary woman in a male-dominated field.

Holmes told the jury that she still believed that Theranos was on the verge of proving its technology worked.

She blamed her ex-partner, Sunny Balwani, for misleading regulators about the tests.

Holmes told the jury that the two had secretly lived together, and that Balwani abused her throughout the relationship, and Balwani himself will go on trial later this year.

And Holmes attempted to raise a good faith defense to the wire fraud charges.

Although good faith is a defense to wire fraud, an honest belief in the ultimate success of the enterprise is not in itself a defense, and the judge instructed the jury that if they believe that she acted in good faith in her representations, then she could not also have acted with an intent to defraud.

So let's dig into the elements of wire fraud and the conspiracy charges that she faced.

Holmes was eventually convicted of three counts of wire fraud and conspiracy to commit wire fraud.

18 USC 1343 is the wire fraud statute.

It states, "Whoever, having devised, or intending to devise, "any scheme, or artifice to defraud, "or for obtaining money, or property by means of false, "or fraudulent pretenses, representations, or promises, "transmits, or causes to be transmitted by means of wire, "radio, or television communication in interstate, "or foreign commerce, any writings, signs, signals," yada, yada, "shall be fined under this title, "or imprisoned not more than 20 years, or both.

" So the prosecution had to prove four elements, first, that she knowingly participated in some sort of scheme to defraud and obtain money, or property from other people.

Expressions of opinions, aspirations, or goals, or general subjective claims can't be used as a basis to find that someone made a false, or fraudulent representation.

This is an important point, and one we'll come back to when we talk about the jury's conclusion that she didn't defraud consumers, probably because some jurors said that she believed that she had positive goals.

But the second prong is that the statements made as part of the scheme have to be material.

Statements tend to be material if they have a natural tendency to influence, or are capable of influencing a person to part with their money.

The third prong is that the government needed to show that Holmes acted with the intent to defraud, that is that she had the intent to deceive, and cheat someone out of their money, or property.

And then the fourth prong is that Holmes used interstate wire communication to carry out an essential part of the scheme.

And the jury found that Holmes' misrepresentations influenced investors to send money to Theranos, and that her presentations actively intended to defraud investors by making them believe that Theranos had big government contracts and private partnerships that would produce a high rate of return on their investment.

And the jury also found that Holmes had agreed with other people to perpetrate this scheme on others.

That's why she was convicted of a conspiracy to commit wire fraud as well.

The prosecution had lots of evidence that Holmes concocted test results to convince investors that the science behind her test was sound.

In a 2014 "Forbes" article, Holmes said that Theranos, quote, "Does not buy any analyzers from third parties," and that was absolutely a lie.

Theranos presented results conducted on these third-party analyzers during their presentations to investors, and it's highly likely that the jury thought that these lies were material, and that they convinced investors to part with their money.

And the three counts represented a total of about $142 million in fraud.

But the jury deadlocked on three additional wire fraud counts related to investments from three Theranos investors, Alan Eisenman, Chris Lucas of Black Diamond Ventures, and Bryan Tolbert of the Hall Group.

Prosecutors now have to decide whether they are going to retry her on those three counts, because the jury hung, so they couldn't come to a decision on those particular counts.

But Holmes and Balwani were also accused of conspiring to commit wire fraud in violation of 18 USC 1349.

The DOJ charged Balwani and Holmes with making materially false and misleading statements to investors.

The government alleged that the duo, quote, "Made materially false and misleading statements "to investors and failed to disclose material facts.

" This included telling investors that the company's proprietary analyzer was accurate, when in truth, it had serious accuracy problems, performed a limited number of tests, was slower than some competing devices, and could not compete with larger conventional machines in high-throughput, or the simultaneous testing of blood from many patients.

Holmes and Balwani promised investors a return on their investment in the hundreds of millions of dollars, while knowing that the company would only gross a few hundred thousand dollars in 2014 and 2015.

Prosecutors proved that Balwani and Holmes faked test results during live presentations for investors, and the DOJ also said that Holmes told investors that the Walgreens partnership would be expanding, when in reality, Walgreens was already moving to end the partnership.

Balwani and Holmes told investors that the Theranos technology had already been deployed by the US military on the battlefield in Afghanistan, which was untrue.

General Mattis testified that they were not being used by the military.

When the jurors spoke out after the verdict, two of them said that the jury ranked witnesses according to their believability, and that they rated Mattis as the witness with the highest credibility, not surprising.

Mattis said that he wanted the military to do a test program with Theranos analyzers, but the tests never happened.

Balwani and Holmes told investors that they didn't need FDA approval for the machines and tests when they already knew that they needed clearance from the FDA.

And the two also allegedly lied to the media, and then used the articles and news segments containing their lies to promote Theranos to investors.

And to find Holmes guilty of the conspiracy charges, the jury had to believe that she hatched a plan to commit wire fraud in partnership with Balwani, or others.

If the jurors thought that she just went along with Balwani because of their partnership, that probably wouldn't have risen to the level of conspiracy.

But what about the other charges of fraud for crimes perpetrated against patients?

The jury actually acquitted Holmes of wire fraud and conspiracy to defraud patients.

So let's talk about why that likely happened.

During the four-month trial, the prosecution devoted very little time to proving this part of the case.

The patients who purchased Theranos tests only testified for about one hour in total.

The government accused Holmes and Theranos of making material misrepresentations about its Edison machine in advertisements.

The ads mostly targeted physicians.

The prosecution argued that these ads induced hundreds of patients to pay Theranos, or Walgreens, for blood tests and test results, which obviously wouldn't have worked.

The government said Balwani and Holmes told doctors and patients that Theranos could provide accurate, fast, reliable, and cheap blood tests and test results, but they already knew that Theranos technology was in fact not capable of consistently producing accurate and reliable results.

This was the alleged wire fraud, because Theranos used interstate electronic wires to purchase advertisements intending to induce individuals to buy the tests in Walgreens, and stores in California and Arizona.

And the prosecution had evidence that Theranos placed advertisements in Walgreens and on TV with their total marketing effort slightly over $1 million.

But at the same time, the prosecutors didn't have the same kinds of direct communications between Holmes and individual patients as they did between Holmes and investors.

And theoretically, patients only used Theranos tests because they were referred by their physicians.

So it's possible the jury might have believed that there were too many intermediaries between Holmes and the individual patients and doctors to conclude that Holmes actually influenced the patients themselves.

And the defense argued that the prosecution needed to show that Holmes really intended to defraud these patients.

Arguably, her company gave patients inaccurate test results, but inaccurate test results alone don't necessarily meet the criteria for an intent to defraud.

The prosecutors needed to prove beyond a reasonable doubt that Holmes knowingly participated in, devised, or intended to devise a plan to defraud these patients.

And as we talked about earlier, generally opinions aspirations goals or subjective beliefs can't be used as a basis to find that someone made a false, or fraudulent representation.

And the jurors who spoke out after the verdict said that they believed Holmes when she said she never intended to defraud patients.

And juror number six, Wayne Katz, an Emmy-winning TV writer for a 1990s show called "Tiny Toon Adventures," was inspired by Holmes' testimony.

Quote, "We respected Elizabeth's belief in her technology, "in her dream.

"We thought, 'She still believes in it, "'and we still believe she believes in it.

'" He's saying that she had a subjective belief, even to this day, that she was helping her patients, not hurting them.

Katz said that the jury quickly decided to acquit Holmes on all four counts of fraud against patients.

The jury thought Holmes was one step removed from the patients, so that they were not directly defrauded.

Of course, this was also somewhat contradictory, since Katz also opined that everything ran through Holmes.

But this is just what you often get from jurors who are grappling with difficult questions of law.

Mike Kew, juror number 11, said that although the panel thought Holmes' credibility was low, they also believed that she was genuine.

But what happens next?

Each of the four counts that Holmes was convicted of carries a maximum sentence of 20 years in prison.

So theoretically, she could get 80 years in prison, but this will be reduced and modified by the federal sentencing guidelines.

Several former prosecutors think she'll probably get less than 20 years in prison, especially as a first-time offender, and the high-profile nature of the case and the scope of the fraud probably suggest that she won't exactly get a slap on the wrist, though.

That's because the federal sentencing guidelines require the judge to consider the magnitude of the lies and how much money the investors lost, and the fact that she was CEO.

In these kinds of white collar crimes, the more money that is pilfered, the more prison you could get, and $140 million is quite a lot, though Holmes may be able to sway the judge for less prison time by pointing to her relative youth, her capacity for change, and the allegations of abuse at the hands of Balwani, and there will almost certainly be a very hefty fine.

The government can retry her on the other wire fraud charges, but that seems unlikely.

The government has already spent significant resources and time on the case, and they got a conviction on four counts carrying a serious prison sentence.

So that may be enough, particularly in light of the upcoming Balwani trial, which is also probably going to be an expensive prosecution.

So it turns out that Theranos was a fraud and a terrible investment.

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