The Theranos Story, ch. 63: 12 new wire fraud, conspiracy, forfeiture charges for Holmes, Balwani

The Fraud That Is Theranos manages to stay in the news, despite a global pandemic, with more fraud charges. Only a few weeks ago, things were looking up for former executives Elizabeth Holmes (left, in the Female Steve Jobs days) and ‘Sunny’ Balwani. The defense insisted that they couldn’t prepare a proper defense without breaking shelter-in-place executive orders, which built their case for delaying the original August trial date. Prosecutors are requesting 27 October; the defense 2021. In February, the nine counts of wire fraud and two counts of conspiracy were reduced by the judge, who dismissed the two conspiracy charges related to defrauding patients who did not pay directly (e.g. insurance payment) and directing doctors to misrepresent Theranos to patients. 

Now Federal prosecutors have filed 12 fresh counts of wire fraud and conspiracy against Holmes and Balwani, plus forfeiture, in the Federal US District Court, Northern District of California, in San Jose. The superseding information (link to PDF) filed on 8 May details the very public splash and claims on their capabilities made by Holmes to the media, on their website, in their Walgreens partnership, and in advertising, from 2013 to 2015. Revealed today (12 May), the expansion of charges include 12 counts of:

  • Wire fraud against Theranos investors, including conspiracy to defraud investors through false representations of their revenue, financial models, and technology, going back to 2010
  • Wire fraud against Theranos patients, through representing to doctors that the tests were accurate while knowing they were not
  • Six additional charges of wire fraud through using electronic media and electronic transfers of funds
  • Four additional charges of wire fraud in transmitting through phone and internet laboratory and blood test results, plus payments for the purchase of nearly $1.3 million in ads targeting patients and doctors for the Wellness Centers

Wrapping this up is a demand for forfeiture of proceeds (which were at least $700 million).

These felony charges carry a potential sentence of 20 years imprisonment, a $250,000 fine, three years supervised release, plus a $100 special assessment (ahem), in addition to whatever proceeds can be clawed back in what is now a worthless company.

The actual indictment needs a grand jury to be convened, which cannot happen until 1 June or later.

Additional information on The Register, BioSpace, and Fox Business.

Theranos’ fraudulent blood testing is even more relevant in this Age of COVID with reports of the proliferation and uneven performance of virus and antibody tests. Tyler Shultz, who worked at Theranos and was related to investor/advisor George Shultz, warned on 2 May that Theranos would have thrived in this hothouse. The UK alone ordered millions of kits from China, only to send them back due to poor sensitivity (ability to avoid false negatives) and specificity (ability to avoid false positives). Rapid testing kits have come under particular fire. The US opened the gates to non-FDA cleared tests in March, only to close them shut a few days ago. Only Belgium, with the highest rate of fatalities per 1,000 infections, has banned the rapid tests. Other tests are more accurate but they take more time to return results and cannot be administered at home. Many believe that they already had COVID and anxious to see if they have the antibodies (IgG) floating about in their plasma. Bloomberg

“There were practices going on there that were wrong”: Outcome Health’s Desai pleads guilty, cooperates with DOJ.

Perhaps the smartest move, under really, truly bad circumstances. Ashik Desai, the former executive vice president of business operations/chief growth officer of point-of-care health information/advertising company Outcome Health, ‘copped a plea’ this past Monday to felony wire fraud charges. According to the Chicago Tribune, Assistant US Attorney Matthew Madden told Judge Thomas M. Durkin of the Northern District of Illinois Federal Court in Chicago that Mr. Desai is cooperating with the investigation. “When I was at Outcome Health, there were practices going on there that were wrong,” Mr. Desai said, understatedly, during his court appearance Monday. “I participated in those practices that ended up defrauding Outcome’s customers.”

According to the article and other sources (WTTW), Mr. Desai is only 26; he started at Outcome as an intern when it was still Context Media and departed in 2017. With continued cooperation, the prosecution is recommending only 10 years in prison, half of what a conviction might bring at the statutory maximum of 20 years. He was released on bond and surrendered his passport.

The multiple and most serious charges in the indictment are for the two founders, Rishi Shah and Shradha Agarwal, both of Chicago, and Brad Purdy, their former COO and CFO, all in their early 30s. These are criminal charges of fraud relating to their capital raises of about $1 bn during 2011 into 2017, deceiving their investors, lenders, and their own auditors for profit and misrepresenting to advertisers their delivery performance.

On Monday 9 December, Mr. Purdy pleaded not guilty to six counts each of mail fraud and wire fraud, two counts of bank fraud and one count of making false statements to a financial institution. His counsel, not unexpectedly but amusingly for those of us who are experienced in the corporate pecking order and what exactly a CFO is responsible for, stated: “Ashik Desai and several of his underlings committed a massive fraud. The evidence will show Brad Purdy was not part of that fraud,” he said. “Evidence is going to show Ashik Desai repeatedly lied to Brad and others to conceal his fraud from people like Brad.” Mr. Purdy also was released on bond and surrendered his passport.

Two of those underlings, Kathryn Choi and Oliver Han, pleaded not guilty on Thursday 5 December to their respective charges of wire fraud. They face five years maximum if convicted. In this Editor’s opinion, they were indicted to bring forth additional information to buttress the major charges on Mr. Desai and the three top executives. As ‘small fry’ with at most a little profit sharing, they are sideshows–easy to pressure. They may truly spill the beans if they and their counsel sense that things are going badly–if they have any more beans to spill. 

Mr. Shah and Ms. Agarwal are scheduled to appear in court next Monday, 16 December. They have previously stated that they will plead not guilty (FiercePharma). Flight risk is undoubtedly a concern for the prosecution regarding Ms. Agarwal. According to this Refinery29  interview from 2017, Ms. Agarwal is an Indian citizen and, while a long-time legal resident, not a naturalized American. Mr. Shah was born in the US. This cautionary Tale of the Unicorn, told in the Chicago Way, warns us all to be careful of what we see, are asked to do, sign on to–and sign off on.