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Elizabeth Holmes' disastrous error

In 2004, Elizabeth Holmes was on top of the world. She'd left Stanford after her second year to join the ranks of Sil...

Posted: Mar 16, 2018 7:17 PM
Updated: Mar 16, 2018 7:17 PM

In 2004, Elizabeth Holmes was on top of the world. She'd left Stanford after her second year to join the ranks of Silicon Valley's next-generation start-up pioneers.

She was inspired by a lifelong fear of needles and a nagging conviction that there must be a better way to diagnose and prevent disease in the developed world.

And she was going to "disrupt" the health care system as we knew it, back before "disrupting" was even a thing.

Her company, Theranos, aimed to democratize health care by providing broader access to preventive care through proprietary blood diagnostic technology. Holmes boasted the ability to do an array of blood tests from a single finger pinprick and just a few drops of blood, and claimed it could do it better, quicker, and cheaper than traditional blood testing.

The possibilities for earlier diagnoses and even prevention of any number of genetic diseases were endless.

By 2015, with Theranos at a market valuation of $9 billion, Forbes dubbed her the "youngest self-made woman billionaire," and Henry Kissinger sat on her board. By all accounts, at the age of 32, she was the elusive Silicon Valley unicorn (albeit a unicorn in a perpetual black turtleneck).

She's now its latest persona non grata.

With the depths of her alleged deception now revealed in the Security and Exchange Commission's recently released 24-page complaint, some are left scratching their heads as to how she could have gotten away with it--that is, if the allegations in the complaint are true. The answer is pretty simple.

As a white-collar criminal defense attorney, I can tell you just how unremarkable this story is. Countless well-intentioned young entrepreneurs suddenly find themselves in way too deep, and don't know how to extricate themselves. And many craft such compelling stories to investors that the line between fact and fiction is blurred even in their own minds.

It doesn't happen overnight. Whether it's confidence or hubris or just unbridled ambition, many truly believe that their company will be the next big thing, that they can pay off their debts as long as they can close the next deal, and that all will be forgiven once their investors are rich.

By all indications, Holmes ardently believed that her company would change the world -- someday. And her promises to investors were consistent with the media image she was simultaneously cultivating for her company: that it was on the forefront of revolutionizing the diagnostics industry, breaking into new territory to drive change and quite possibly eradicate epidemics as we know them. Except, according to the SEC, she was lying to investors along the way.

According to the complaint, it began when technological challenges were kept secret from Theranos investors; pharmacy execs were misled by omission at first, rather than explicitly. Later, in an apparent effort to hide these setbacks, Holmes sent blood tests to third-party vendors using traditional blood diagnostic analysis because her own technology wasn't up to snuff.

Even as her business partnerships were falling apart and her technological innovations stalling, Holmes included financial information in Theranos investor binders projecting $1 billion in revenues for 2015, which, by that point, she knew could not be true, says the complaint.

In my experience, frauds like the one Holmes allegedly perpetrated are shockingly commonplace and are rarely hatched with co-conspirators and commenced with ill intent. Rather, they are backed into through a series of questionable business decisions, which in totality create a desperate situation. It's those who double down rather than admit defeat in those circumstances that end up in trouble with federal authorities.

It looks to me that Holmes had all the hallmarks of a double-downer.

As detailed in the complaint, over the course of a two-year scheme, Holmes and former Theranos President Ramesh "Sunny" Balwani allegedly lied about the capabilities of its proprietary technology, the extent of commercial and business relationships, its access to the Department of Defense, its status at the Food and Drug Administration, and the financial state of the company.

By the time the Wall Street Journal published a scathing investigation into the company's practices and Holmes' integrity, it was too late.

In 2017, Theranos settled a civil lawsuit with Walgreens for an undisclosed amount and reached a deal with investors in exchange for their releasing potential legal claims against the company.

In her settlement with the SEC action, subject to court approval, Holmes will be barred from serving as an officer or director of a public company for 10 years, will pay a $500,000 penalty, and will return the shares of the company she obtained through the fraud back to Theranos investors.

Criminal and regulatory prosecutions (like the SEC's) are often investigated on parallel tracks, with coordination and cooperation among various government agencies. I wouldn't be surprised if the United States Attorney's Office for the Northern District of California has an open criminal investigation against Holmes. As this story unfolds, Silicon Valley's one-time darling is now its cautionary tale.

Minnesota Coronavirus Cases

Data is updated nightly.

Cases: 452268

Reported Deaths: 6100
CountyCasesDeaths
Hennepin938131490
Ramsey40370746
Dakota33353349
Anoka31193366
Washington20363231
Stearns17995189
St. Louis13857245
Scott1209197
Wright11723106
Olmsted1068375
Sherburne825766
Carver700138
Clay655582
Rice618070
Kandiyohi556572
Blue Earth545933
Crow Wing487778
Otter Tail460967
Chisago456436
Benton422287
Winona393048
Douglas377266
Nobles373946
Mower370829
Goodhue352661
Polk330559
McLeod326747
Beltrami314048
Morrison313545
Lyon304138
Becker288039
Itasca286443
Isanti284242
Carlton282543
Steele278110
Pine269214
Freeborn251523
Todd232630
Nicollet227537
Brown216934
Mille Lacs214945
Le Sueur212816
Cass209424
Meeker200933
Waseca191916
Wabasha17343
Martin171426
Roseau166217
Hubbard150138
Redwood140827
Houston139714
Renville137940
Dodge13714
Chippewa132032
Cottonwood128418
Fillmore12576
Wadena120517
Rock111212
Aitkin109233
Sibley10917
Faribault108316
Watonwan10688
Pennington100716
Kanabec98818
Pipestone95923
Yellow Medicine94216
Murray9056
Jackson87110
Swift84318
Pope7435
Stevens7078
Marshall70315
Clearwater68714
Lake66015
Lac qui Parle65716
Wilkin6309
Koochiching60210
Lincoln4892
Big Stone4663
Unassigned43768
Grant4358
Norman4248
Mahnomen4147
Kittson37320
Red Lake3194
Traverse2583
Lake of the Woods1951
Cook1150

Iowa Coronavirus Cases

Data is updated nightly.

Cases: 309989

Reported Deaths: 4424
CountyCasesDeaths
Polk46587464
Linn17979279
Scott15787171
Black Hawk14037243
Woodbury13093181
Johnson1224652
Dubuque11535159
Pottawattamie9111115
Dallas905972
Story877838
Webster471577
Cerro Gordo471472
Sioux459157
Clinton456167
Warren456139
Marshall429862
Buena Vista396130
Muscatine394978
Des Moines390043
Plymouth352470
Wapello348498
Jasper330159
Lee322632
Marion308152
Jones274250
Henry266131
Carroll258034
Bremer249348
Crawford233524
Boone222017
Washington222033
Benton212250
Mahaska197237
Jackson194331
Tama189959
Dickinson188329
Kossuth178544
Delaware175236
Clay171421
Wright166424
Fayette165024
Hamilton162030
Buchanan161624
Winneshiek159720
Harrison157962
Hardin156730
Cedar155419
Clayton153649
Butler150824
Page146315
Floyd140836
Cherokee139927
Mills138417
Lyon137333
Poweshiek134524
Hancock131424
Allamakee130230
Iowa127422
Calhoun12339
Madison123210
Grundy122128
Jefferson122025
Winnebago121529
Mitchell116637
Louisa115730
Cass114743
Chickasaw113512
Appanoose112040
Sac112015
Emmet111232
Union110723
Humboldt106419
Shelby104727
Guthrie104024
Franklin103218
Unassigned10050
Palo Alto91711
Montgomery88024
Keokuk86126
Howard85019
Monroe81919
Clarke8087
Pocahontas78111
Ida75830
Davis70021
Greene6977
Adair69520
Monona67118
Lucas66410
Osceola64611
Worth6154
Taylor5989
Fremont5246
Van Buren50115
Decatur4954
Ringgold44811
Audubon4208
Wayne41821
Adams2983
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