The Theranos Trial: The Downfall of a Silicon Valley Start-Up
Updated: Jan 24, 2022
Elizabeth Holmes, the founder and CEO of Theranos - a biotech company claiming to be able to discover diseases with only a few drops of a patient’s blood; has now been convicted of fraudulent activities and faces 20 years in prison. Originally founded in Silicon Valley and regarded as the leading biotech company in the world valued at $9bn, the company has now been forced to shut down operations and the story of its downfall has plagued its reputation forever.
Background to Theranos as a Company:
Theranos Inc, a consumer healthcare technology business founded in 2003, promised it would “revolutionize blood-testing.” Their invention of the “nanotainer” (a small appliance used for withdrawing, storing and interpreting blood from the fingertip) and the “Edison” testing machine, were advertised to be able to analyze a patient’s blood in a matter of minutes for a more affordable cost than all other existing technologies commonly used in the blood-testing industry.
Although the operation of the device itself remained private and was never demonstrated to the public; investors and patients blindly gave their trust to Theranos. With this, the company was quickly able to raise $900 million in investment funds to launch and support the operations of the company.
Soon after, news outlets such as the New Yorker and the Wall Street Journal criticized Theranos for their vague and secretive activities, and with help from interviews with past employees, reports were published explaining the inner-workings of the previously mysterious company. The public soon knew of its extremely exaggerated capabilities, and that blood tests were analyzed on competitors’ machines instead of their own Edison equipment; a violation of the U.S. Food and Drug Administration (FDA) policy.
Further studies done by the FDA found that Theranos had “uncleared medical device(s)” which did not meet regulatory standards, poor documentation, mismanaging company complaints, and did not meet the required qualifications. At this stage, the Centers for Medicare and Medicaid Services (CMS) also discovered that Theranos’ testing lab posed “immediate jeopardy to patient health and safety”.
Several lawsuits followed and deals were ended with big companies such as Walgreens and Safeway, accusing Holmes and business president Ramesh “Sunny” Balwani with fraud.
The Theranos lawsuit:
Theranos’ lawsuit began in June 2018 before the U.S. District Court in San Jose, California, where both Holmes and Balwani pleaded “not guilty”. However, after much investigation, they were found guilty of their crimes and convicted on 11 charges in total: 2 counts of conspiracy to commit wire fraud (a violation of the 18 U.S.C. § 1349) and 9 counts of wire fraud (a violation of the 18 U.S.C. § 1343).
The court found that the defendants had defrauded doctors and the public, by a) making false statements regarding the company’s ability to offer fast, reliable and affordable blood tests and results; and b) excluding information regarding the true abilities and concerns of Theranos’ technologies. Holmes and Balwani were fully aware of the business’s inability to provide accurate tests for calcium, chloride, potassium, bicarbonate, HIV, Hba1C, hCG and sodium; yet still advertised their product to persuade patients to purchase Theranos blood tests in stores around California and Arizona.
Investors were also defrauded by Holmes, through the means of various false financial statements, communications and marketing campaigns; overinflating the position of the sinking company.
The United States common law defines fraud according to nine aspects: (1) a representation of fact; (2) its falsity; (3) its materiality; (4) the representer’s knowledge of its falsity or ignorance of its truth; (5) the representer’s intent that it should be acted upon by the person in the manner reasonably contemplated; (6) the injured party’s ignorance of its falsity; (7) the injured party’s reliance on its truth; (8) the injured party’s right to rely thereon; and (9) the injured party’s consequent and proximate injury.
Majority of these sections were violated by Holmes. The founder knew of the company’s inability to produce accurate blood tests yet still gave falsified information to investors and the public, meaning that her actions were fraudulent as they meet all legal requirements.
As a result, the accused will face 20 years in prison, as well as a $250 000 fine and restitution for each count. Holmes lost all ownership and control of Theranos, reinstated millions of shares and was banned from acting as a director of a public company for 10 years.
I believe that this sentence is fair and that the court ruled lawfully, as it is proportional to the damage caused by Elizabeth Holmes and her partners in crime. She knowingly acted fraudulently, and tore many lives apart because of her dishonest actions. However, I believe the fine of $250 000 given to Holmes and Balwani is far too low, as a) both individuals could afford to pay a bigger fine (since Holmes had a net worth of almost $4.5 billion and Theranos was once a multimillion dollar company) and b) because the fine is an insufficient amount to remedy the losses from innocent investors and patients (Walgreens invested $140 million into their partnership with Theranos). Another aspect to consider is that Theranos’ downfall tainted the reputation of investor brands and led to the misdiagnosis of thousands of people; which cannot be monetarily defined. Holmes must be held accountable for her actions, and must remedy her wrongdoings.
The future of Theranos and start-ups in Silicon Valley:
Theranos was shut down and liquidated in September 2018, closing down all its labs and business activities. By this time, Holmes’ net worth had fallen from $4.5bn to almost nothing, and it was found that Walgreens had invested almost $140 million in their partnership with the company.
The case of Theranos became a turning point for Silicon Valley, and for the law itself. Companies previously eluding responsibility due to the industry’s nature of “fake it till you make it” caused many to lie about aspects of their companies; have now been forced to act transparently and openly. Investors have become more cautious before putting money into new start-ups, and patients are more wary before trusting many new pharmaceuticals. More regulations have been put on new firms, and more regular check-ups into business activities have become mandatory.
Once respected, Holmes is now detested for ruining lives and the reputation of Silicon Valley, a once renowned hub for high technology and innovation.