• Elizabeth Holmes and Theranos

    Author : August 2, 2018

    Elizabeth Holmes founded Theranos, a privately-held company that is now under fire for false claims and fraud. In 2015, Forbes magazine named Holmes as the youngest self-made female billionaire in the world due to the significant value of Theranos. Shortly after, Theranos and its board (including Ms. Holmes) became embattled over whether or not its claims about the technology it pedaled were accurate.

    In 2016, federal prosecutors started investigating Ms. Holmes' claims about her technologies, with the possibility that she had misled investors. In March 2018, the U.S. Securities and Exchange Commission officially sued both Holmes and Theranos. Their claims were that she and the company raised over $700 million from investors based on false or fraudulent claims. As part of a settlement, she paid $500,000.00 in fines, returned her significant number of shares, and was barred from working as an officer or director of any public company for a decade. But the problems continued – in June 2018, a federal grand jury indicted Holmes and her former COO on counts of wire fraud and conspiracy to commit wire fraud.

    The prosecution will need to prove that Ms. Holmes acted with the intent to deceive both her investors, as well as doctors and patients about the abilities of her blood-testing device. The government has accused Ms. Holmes of creating a scheme which used the company’s advertising and marketing campaigns to convince doctors and patients to have any blood tests conducted through the partnership Theranos founded with Walgreens. The payment for these tests was not direct, as in most cases that are prosecuted. Instead, payments for the tests were made and funneled through pharmacies, instead of being taken from the alleged victims. This will make it more difficult for the state to prove a direct connection.

    However, Ms. Holmes and her defense team will likely take one of two tacts in fighting these charges. First, she can claim that any statements she made about Theranos and its technology were done in good faith, and she legitimately believed what she told investors, doctors and the public. This might be difficult for jurors to believe. It would mean that Ms. Holmes was caught up in the hype of Theranos like everyone else, and she would probably need to testify to prove this. That would open her up to cross-examination, which is always a risky move. The state will probably also emphasize how involved Ms. Holmes was in the management of the company, meaning that it is unlikely that she was unaware of the truth of the matter.

    The other option available to her defense is based on the materiality of the statements she made. This would involve an argument that even if the statements were misleading, that the investors did not rely on them when they made their decisions to invest. The investors of Theranos were savvy business people, including Rupert Murdoch and the Walton family. The defense could certainly emphasize how such experienced business people would not have been misled by hyperbolic statements. However, Ms. Holmes did not just make statements to investors. The entire campaign to the public carried alleged misstatements and mischaracterizations of the devices, which will be considered material in the prosecution against her.

    Of course, Ms. Holmes could always choose to accept a plea deal – although the SEC had said they would not be lenient on its proposed sentence. If the majority of the $700 million investors paid has been lost, then the Federal Sentencing Guidelines recommend a prison sentence of 15-20 years. Even a lenient sentence means that Ms. Holmes is likely to spend a decade in federal prison.

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