Theranos Wunderkind Elizabeth Holmes Convicted on Federal Fraud Charges

It looks like Elizabeth Holmes will be trading in her trademark black turtleneck for an orange jumpsuit. On Jan. 4, a federal jury convicted the former Theranos CEO and co-founder once hailed as the next incarnation of Steve Jobs of four counts of fraud, each carrying a maximum prison sentence of 20 years.

The rise and fall of Theranos

It’s a fall from grace worthy of classic Greek tragedy. Holmes founded Theranos in 2003 at age 19. By 2014, her face was gracing the covers of Fortune, Forbes, and other business magazines who portrayed her as a wunderkind and visionary and suggested that her Theranos blood testing lab startup would disrupt health care the way Apple did the computer market. Investor—and major retail partner Walgreens—fell for her charisma and “lab on a chip” technology which, she famously told her Fortune interviewer was capable of running 200 different blood tests with a single drop of blood. Theranos became a Silicon Valley sensation with a valuation of over $9 billion. But it turned out to be smoke and mirrors. The touted finger blood stick technology proved unworkable. Theranos found itself using analyzers from other companies to test consumer blood samples, sometimes modifying those platforms in unapproved and potentially illegal ways. The all-too-often end result was inaccuracy in test results. As a result of testing issues, an agreement with Walgreens, which had been the company’s steppingstone to the consumer market, unraveled.

The fallout

First exposed by The Wall Street Journal reporter John Carreyrou, the Theranos scandal and story of Holmes’ descent from business prodigy to poster child of corporate corruption and Silicon Valley greed garnered national attention. A feature film was planned with Jennifer Lawrence slated to play the role of Holmes. Next came the retribution part. Walgreens sued Theranos for breach of contract and won damages. In addition to the private lawsuits, Theranos, Holmes, and her erstwhile business partner/lover Ramesh “Sunny” Balwani faced government fraud charges across a number of fronts. In April 2017, Theranos settled Medicare fraud charges with CMS by agreeing to a $30,000 fine and two-year Medicare exclusion. In March 2018, Holmes settled massive stock fraud charges with the SEC. The price tag: A $500,000 penalty, 10-year ban on serving as an officer or director of a public company, and promise to relinquish voting control over Theranos and return the remaining 18.9 million shares she obtained as a result of the fraud. Determined to carry on, Theranos refocused its business, shedding CLIA lab testing and concentrating on technology. Layoffs followed. The company, which once reportedly employed 800, was reduced to fewer than 25 employees. But things went from bad to worse. In July 2018, Holmes and Balwani, were indicted by a federal grand jury. Corporate dissolution of Theranos soon followed.

The Holmes trial

Holmes was indicted on 11 counts of fraud, wire fraud, and conspiracy to commit wire fraud. After repeated delays, the case finally began on Sept. 8. For nearly four months, a federal jury in Northern California heard testimony from dozens of witnesses, including doctors, Theranos board members, employees, and patients. The star witness was Holmes herself. During her seven days of testimony, she admitted to adding pharmaceutical companies’ logos to Theranos reports they hadn’t signed off on, secretly swapping in modified Siemens analyzers in its blood-testing partnership with Walgreens after the company’s own MiniLab and Edison machines couldn’t perform as promised, and other mistakes. But she insisted that her belief in the Theranos vision was sincere and that her greatest failure was failure itself. However, this time the famous Holmes charisma didn’t work. After deliberating for more than seven days, the jury found her guilty on four counts of misleading investors. It also found her not guilty on four counts related to defrauding patients and deadlocked on the three other charges. If, as expected, Judge Edward Davila declares a mistrial on those charges, the feds could indict and retry her on those same charges.

What’s next for Holmes?  

Each of the convictions carries a maximum fine of $250,000 plus restitution, as well as up to 20 years in prison. At the time of publication, the sentencing date hadn’t yet been scheduled. Although Holmes is expected to appeal, it seems likely that she will spend some time in federal prison. But any prison sentences would likely be concurrent rather than consecutive, meaning that 20 rather than 80 years would be the most she’d serve. Meanwhile, Balwani, who asserted his Fifth Amendment rights to avoid testifying in the Holmes trial, is next up, with his trial slated to begin in a few weeks.

The moral

While it’s easy to lump them together with other infamous purveyors of corporate scandal like Enron and AIG, Theranos and Elizabeth Holmes represent something far more nefarious. The devastation wrought by Theranos goes beyond the mere loss of fortunes, jobs, and reputations. Investors always have the potential to recover their financial losses; employees can always get new jobs. But there was another set of victims whose losses are totally unredeemable. The patients. How many Theranos patients who relied on faulty test results lost the opportunity to receive early treatment that might have saved their lives? How many were subjected to costly, unnecessary, and harmful intervention and treatment as a result of being misdiagnosed? Venture capital is risky business and the potential rewards are great. But while this kind of risk-reward dynamic might be great for computers and consumer goods, it’s utterly unacceptable for health care. To the extent it serves as a cautionary tale for other freewheeling venture capitalists willing to gamble with the lives of patients, something positive will come out of the Theranos tragedy.