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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: 926931

Reported Deaths: 9740
CountyCasesDeaths
Hennepin1809132056
Ramsey749811054
Dakota68505591
Anoka64961589
Washington41119367
Stearns34021287
St. Louis29939416
Scott26281188
Wright26260226
Olmsted22677131
Sherburne19206130
Carver1687671
Clay12219108
Blue Earth1162171
Rice11578139
Crow Wing11318124
Chisago1005281
Kandiyohi9913108
Otter Tail9908130
Benton9174128
Beltrami8249100
Goodhue822699
Douglas7967101
Itasca779999
Mower740049
McLeod723384
Winona715158
Isanti711085
Steele695034
Morrison678681
Becker631675
Polk608987
Freeborn569947
Carlton552577
Mille Lacs539479
Lyon532961
Nicollet528561
Nobles527954
Pine521143
Cass505255
Todd496443
Brown473661
Le Sueur464736
Meeker437960
Martin391344
Waseca381433
Wabasha380110
Dodge366412
Hubbard357649
Roseau320532
Fillmore310115
Wadena306040
Redwood283845
Houston275317
Renville271651
Faribault261835
Sibley256017
Pennington254830
Kanabec254437
Cottonwood232933
Aitkin225052
Chippewa222043
Pope209910
Watonwan201121
Yellow Medicine189925
Koochiching179225
Rock178429
Swift174124
Stevens170211
Jackson162016
Clearwater159421
Marshall154822
Murray152911
Pipestone150929
Lake134124
Lac qui Parle124425
Wilkin122016
Mahnomen108314
Norman10579
Grant102410
Big Stone9585
Lincoln8915
Kittson74623
Red Lake71810
Traverse6086
Unassigned563124
Lake of the Woods5285
Cook3141

Iowa Coronavirus Cases

Data is updated nightly.

Cases: 532160

Reported Deaths: 7379
CountyCasesDeaths
Polk81677809
Linn32838430
Scott27126295
Black Hawk22334382
Woodbury20736263
Johnson20150108
Dubuque18996243
Pottawattamie16215214
Dallas15573115
Story1398059
Warren8637107
Cerro Gordo8141125
Clinton7928115
Webster7419124
Des Moines7153106
Marshall675494
Muscatine6717117
Wapello6546145
Unassigned64520
Jasper630591
Sioux622477
Lee5977106
Marion567697
Buena Vista503449
Plymouth493388
Henry427155
Benton414760
Jones413564
Bremer403873
Boone397042
Washington395464
Carroll373355
Mahaska372366
Crawford355647
Jackson324047
Dickinson317555
Buchanan312743
Delaware303255
Clay297636
Kossuth293477
Fayette290356
Hardin289253
Tama282878
Page276133
Wright270050
Cedar269527
Winneshiek267744
Hamilton262757
Floyd261049
Clayton252360
Poweshiek242043
Harrison240979
Madison237425
Butler237346
Cass235667
Iowa234336
Jefferson228544
Mills225330
Hancock222840
Winnebago222339
Cherokee217347
Appanoose210157
Lyon209842
Allamakee209456
Calhoun199519
Shelby199542
Union197141
Humboldt188231
Franklin188031
Grundy186137
Chickasaw184522
Mitchell184343
Emmet180146
Louisa178653
Sac175626
Guthrie169338
Clarke163629
Montgomery163146
Keokuk152639
Palo Alto152332
Howard150624
Monroe144340
Ida134141
Greene128818
Davis126825
Lucas126127
Monona124940
Worth12309
Pocahontas122125
Adair118239
Osceola105718
Decatur104813
Taylor100914
Fremont98913
Van Buren95922
Wayne86125
Ringgold78429
Audubon77617
Adams5869
Rochester
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