Theranos, The Trial of Elizabeth Holmes, ch. 7: Edison labs consistent–in deficiency and strange results

November 11, 2021 | by

And Elizabeth Holmes knew. The last two years of Theranos’ existence, were, to put it mildly, fraught, for anyone honest. Job 1 for the very last in a parade of lab directors, Kingshuk Das, MD, was to respond to CMS on substantial deficiencies found in a November 2015 on-site inspection. The CMS deficiency report, sent to the prior lab director in January 2016, two months before Dr. Das’ start, had a subject line that would grab anyone’s immediate attention: “CONDITION LEVEL DEFICIENCIES – IMMEDIATE JEOPARDY.”

The report went on to say that it was determined that your facility is not in compliance with all of the Conditions required for certification in the CLIA program.” and concluded that “the deficient practices of the laboratory pose immediate jeopardy to patient health and safety.”

Dr. Das found some interesting things in his early days on the job, such as the Edison labs producing results detecting abnormal levels of prostate-specific antigen (PSA)–in female patients. When he brought this to Holmes’ attention, she quoted a few journal articles stating that certain rare breast cancers in women might present that result. This didn’t seem quite plausible to Dr. Das. Holmes then told him that it wasn’t an instrument failure, but rather a quality control and quality assurance issue. Nevertheless, Dr. Das went back and voided every Edison lab test made in 2014 and 2015, stating to Holmes that the Edison labs were not performing from the start. Most Theranos results sent to patients were produced on third-party machines made by Siemens and others, often on inadequately sized blood samples. 

As Dr. Das testified to the defense, many skilled people at Theranos earnestly tried to fix the problems with the Edison lab machines, but, as The Verge put it in part, if Holmes didn’t believe Dr. Das, other employees, or multiple preceding lab directors that the machines were really, truly broken, did it matter?

The defense is maintaining that Holmes didn’t really understand the lab details and was heavily influenced (ahem!) by president Sunny Balwani. However, the Babe in the Medical Startup Woods defense falls apart when there’s no Sunny to blame–he departed shortly after Dr. Das’ arrival. 

The actual theme–a long-term pattern of deception aimed at those who wanted to believe, and ponied up Big Bucks--was reinforced by a witness before Dr. Das. Lynette Sawyer was a temporary co-lab director for six months during 2014 and 2015, but never came to the Theranos site. It seems that her main duties were signing off remotely on documents using Docusign and backing up then-lab director Dr. Sunil Dhawan, Balwani’s dermatologist who came to the lab a handful of times. Even more amazingly, she was unaware of Theranos’ signature ‘nanotainers’ and the backup use of third-party devices. After her six-month contract was up, she departed, uncomfortable with Theranos’ procedures.

Kicking off the day was Judge Davila’s regular admonition to those in the public section of the courtroom to type vewy, vewy quietly. Then the video display for exhibits broke down. This led to a two-hour delay while the court found an antique projector to show the images to the jury and the public on a blank wall.

One wonders if the tapping plus the tech breakdown topping off the Parade of Fraud is leaving the jurors numb–or wanting to jump into the well above, even if there is no bottom. CNBC, Wall Street Journal (15 Oct), 5KPIX

TTA’s earlier coverage: Chapter 6, Chapter 5, Chapter 4 (w/comment from Malcolm Fisk), Chapter 3, Chapter 2, Chapter 1

To be continued….

 

 

Theranos, The Trial of Elizabeth Holmes, ch. 6: the decision maker was Holmes–and she was ‘cagey’

November 5, 2021 | by

Judge Davila is speeding up the trial, adding hours and days–perhaps because the damning testimony has become depressingly similar. Were the investors sloppy, or did Theranos–and Holmes–deliberately deceive?

Maybe…both.

Documents and slideshows from Theranos glowed.

  • The company faked memos and reports from both Pfizer and Schering-Plough, which was in the process of being acquired by Merck. Schering-Plough’s Constance Cullen said she found CEO Elizabeth Holmes’ answers to technical questions “cagey” and she was blocked by Holmes from asking questions of other Theranos employees.
  • Presentations describing the Theranos lab capabilities were written in present, not future, tense. Example from the prosecution reading from an investor deck: “Theranos proprietary technology runs comprehensive blood tests from a finger stick.” Another slide was 10-Pinocchio-worthy: “Theranos has been comprehensively validated over the course of the last seven years by 10 of the 15 largest pharmaceutical companies, with hundreds of thousands of assays processed.”

These were good enough for investors like Lisa Peterson of the DeVos family office, who testified last week about their decision to put in $100 million. In fact, investors were Social Networking right to Theranos’ door. The well-connected Daniel Mosley, who invested “a little under $6 million” in Theranos, after his client and friend Henry Kissinger, a Theranos board member and $3 million investor, asked him to evaluate the company, in 2014 recommended it to his other clients–the DeVos, Walton ($150 million), and Cox ($10 million)  families. Black Diamond Ventures founder Chris Lucas invested $7 million in Theranos. He believed that Theranos’ analyzers were being used by the military in the Middle East. Presumably, his uncle Don Lucas, who sat on the Theranos board, backed up the claim. They were additionally impressed by Holmes’ intensity and insistence that the company was on a mission to revolutionize blood testing. Risk can be fashionable for ‘high-quality families’ who aren’t hands-on with their money and won’t experience hardship if the investment doesn’t pan out.

The investors like Peterson and Mosley believed what they were shown was steak, not marshmallow, like projected revenue of $140 million in 2014 after zero revenue in the two prior years. They didn’t examine the books, other key corporate records, or make a technical evaluation of the labs. Why? “We were very careful not to circumvent things and upset Elizabeth,” Peterson of the DeVos office said. “If we did too much, we wouldn’t be invited back to invest.” Ooof. But on their side, in 2014-2015, the winds of hype were blowing fair, the skies were blue on CNBC, and Walgreens plus Safeway were lashed to the mizzenmast. The Verge, CNBC, KTVU Fox 2

The defense keeps pinning blame on the investors for being naïve, which is taken up by the NY Times. With 20/20 hindsight and infinite wisdom, the article blames the investors for not being scrupulous in their due diligence. A fair point made is that in ‘hot’ startup markets, no one looks too closely for the Fear Of Missing Out (FOMO)–something we see this very day.

Holmes’ chances of pinning the blame on president/boyfriend ‘Sunny’ Balwani and evading any lengthy time are low at best.

  • The defense sub-strategy of painting Holmes as controlled by Balwani appears to be augering in. CNBC uncovered a 27 June 2018 videotaped deposition in an investor lawsuit, eventually settled, where Holmes, in between taking the Fifth Amendment, also claimed she was the ultimate decision-maker at Theranos.
  • An analysis published in the Mercury News (PDF), through the paywall, is not sanguine about Holmes beating the odds and walking free, or with minimal time. However, juries do strange things in assessing fraud, even when piled high and wide by the prosecution, out of sheer boredom or cussedness. Holmes is also surrounded by family, friends, baby on breaks, and baby papa, all of which can sway some jurors.

So as the trial passes the halfway corner, we observers are waiting for a final bombshell–or two.

TTA’s earlier coverage: Chapter 5, Chapter 4 (see new comment from Malcolm Fisk), Chapter 3, Chapter 2, Chapter 1

To be continued….

Theranos, The Trial of Elizabeth Holmes, ch. 5: how to easily fool rich people and their investment offices

October 28, 2021 | by

It seems like smart people with big money like to jump into wells with no bottom, too. Yesterday’s testimony by Lisa Peterson in the Elizabeth Holmes trial indicated that Ms. Holmes knew her ‘marks’ as well as any grifter at the horse track. She concentrated on Very Rich People, whose Very Large Private Investment Funds are handled by ‘family offices’. Those offices handled investments for families such as DeVos (one of the top 100 richest families in the US), Walton (Walmart), and Cox (media). Holmes targeted five or six of these family offices, with the come-on line that she was seeking them because, after all, institutional investors wanted to recoup their investment via going public too soon for the Miracle Blood Lab.

Perhaps it was the prospect (and prestige) of backing a revolutionary healthcare technology, or large denominations falling from the sky, or just leaving it to their advisors, but they believed the sizzle, didn’t check that the steak was soy–and lost up to nine-figure sums. For these family offices, and for Rupert Murdoch, the losses were embarrassing, not life-affecting.

The former Secretary of Education Betsy DeVos did not testify either, leaving it to Lisa Peterson, who oversees private equity investments for RDV Corp., the DeVos family office. Ms. Peterson, who wouldn’t have the job if she weren’t decently savvy, drew a picture for the prosecution of being consistently lied to by Ms. Holmes and Theranos executives before committing to a $99 million investment through its legal entity Dynasty Financial II, LLC on 31 October 2014:

  • Holmes and Balwani showed financial projections of $140 million in revenue in 2014 and $990 million in 2015. Peterson testified she did not know that both 2012 and 2013 had zero revenue–a real lapse on her part, in this Editor’s view
  • Theranos claimed validation by ten major pharmaceutical companies, including Pfizer (in last week’s testimony, revealing that their validation was forged)
  • The RDV Corp. group was told multiple times that Theranos would offer hundreds of tests via finger stick with the analyzer at 50% of the cost
  • The DeVos investors supposedly never knew that third-party analyzers were doing all the testing. Both the pharma company validation and testing were critical in the underwriting agreement, Peterson said.
  • Holmes told Peterson the analyzers were being used in military helicopters (false) and that the company did not buy third-party analyzers (false, again).
  • Prior to the investment, three members of the DeVos family and Peterson’s boss Jerry Tubergen met with Holmes at Theranos’ Palo Alto headquarters on 14 October. Cheri DeVos had her blood drawn and tested using the Theranos lab. The family subsequently doubled their investment.

The binders were thick, the press articles at that stage were effusive, and both Safeway and Walgreens were going to roll it out in their stores. All the risk was on those companies for the execution, according to Petersen’s notes. 

So what we see is a classic ‘fake till you make it’ strategy, designed to play on two major retailers looking to buck up their pharmacy areas and select private investors with major funds. The articles in the WSJ and Fortune were fulsome to the point of parody. Holmes made an impact on supposedly cynical writers and Jim Cramer of CNBC’s ‘Mad Money’, who was highly influential on markets and investors at that time. It was to Cramer that Holmes made the famous statement, “This is what happens when you work to change things, and first they think you’re crazy, then they fight you, and then all of a sudden you change the world.” Whether she was scripted or really thought she was The Second Coming of Steve Jobs, it’s an audacious statement worthy of Napoleon or George S. Patton–which she had to walk back to Mr. Cramer and others in the press by early 2016 when the John Carreyrou/WSJ reporting made its own impact. The family offices questioned Holmes, of course, based on the email trail–and Theranos consistently downplayed the news to them as well as denying anything was wrong to the press.

What this Editor would like to know is once the signals went sideways, did any of these private offices’ investment managers get into Theranos to do some overdue due diligence and turn over some rocks, knowing that snakes might well fly out–or just let it ride?  CNBC, KTVU Fox 2 tweetstream 

What is somewhat risky may be the jury. The possibility of a mistrial has increased with halfway to go.  There have been three jurors removed, with their seats filled from the five alternates selected. Three more losses would lead to fewer than 12 jurors. Now the prosecution and defense could agree to go on–not a likely scenario. Judge Davila has increased the jury day by an hour daily to speed the trial up, but reports indicate the usual work and family problems. One juror was recently dismissed for playing a sudoku puzzle in the jury box due to “fidgetiness”. Choosing a jury was difficult in this tech area as few with the background and intelligence to understand financial fraud would be willing, for work and personal safety reasons, to appear on the jury. The defense is looking to unseal the juror questionnaires for their own strategic reasons. But CNN makes a mountain out of a speed bump, since Judge Davila is unlikely to pave any roads towards a mistrial.

Unfortunately, the Mercury News, Bloomberg, and WSJ, which would be primary sources, are paywalled.

TTA’s earlier coverage: Chapter 4 (see new comment from Malcolm Fisk), Chapter 3, Chapter 2, Chapter 1

To be continued….

Theranos, The Trial of Elizabeth Holmes, ch. 4: we deceive those who want to believe

October 21, 2021 | by | 1 Comment

The Theranos Cave apparently has no bottom. Reportedly at the halfway mark, Tuesday’s trial focused on the testimony of former Theranos product manager Daniel Edlin. Recommended by his college friend Christian Holmes in 2011, he soon stepped into frontline work, assembling presentations sent to investors such as Rupert Murdoch, conducting VIP tours with demonstrations of the Edison labs, coordinating with the press, and with Elizabeth Holmes, plumping for Department of Defense and pharmaceutical company business. 

According to Mr. Edlin’s testimony, Theranos executives and staff staged demos and blood tests for investors and VIPs. Sometimes the blood tests worked fine, sometimes they didn’t (as in Rupert Murdoch’s case). Investors and reporters often were more interested in seeing Edison and MiniLab machines “work” without seeing any test results. All routine for an early-stage technology company. What was not routine was that other test results others were “corrected” (for Walgreens executives), reference ranges changed, or tests removed on the direction of Dr. Daniel Young, a Theranos VP.  The MiniLab never was used for patient blood testing as it had trouble performing general chemistry or ELISA tests adequately.

Rupert Murdoch’s (listed as a witness) investor presentation binder was entered into evidence. According to CNBC, one section of the binder read: “Theranos offers tests with the highest level of accuracy.” Another section said the blood-testing technology “generates significantly higher integrity data than currently possible.” Mr. Edlin testified that Ms. Holmes vetted every investor deck and binder, including the ones shown to DOD. The website, overseen by Ms. Holmes, made statements such as “At Theranos we can perform all lab tests on a sample 1/1000 the size of a typical blood test.” However, even Theranos’ general counsel advised against using these superiority claims:

  • “Please remove reference to “all” tests and replace with statements such as “multiple” or “several.” It is highly unlikely that the laboratory can perform every conceivable test, both from a logistical standpoint and because the CLIA certification designates specific specialties of test the lab performs.
  • For a similar reason, replace “full range” with “broad range.”
  • Replace “highest quality” with “high quality”
  • What substantiation do you have for “have results to you and your doctor faster than previously possible?”
  • Remove “unrivaled accuracy.”

To be fair, some of this language did change over time. The defense, for instance, had a try at shifting blame to one of Theranos’ marketing agencies.

But overstatements were a way of ‘fake it till you make it’ life at Theranos. The infamous Fortune article (later retracted by the author), the glowing 8 September 2013 Wall Street Journal article by Joseph Rago made at the time of the Walgreens pilot were felt to be overstatements by Theranos insiders, but never corrected. Walgreens and Safeway executives previously testified that they were told that Theranos devices were in use in Army medical evacuation units. But the truth was, according to Mr. Edlin who managed the DOD relationship, that AFRICOM (US Army African Command) deployed the Edison device in Cameroon, Uganda, and South Sudan to run as an experiment to test the viability of the machine. It was never deployed in the Middle East (CENTCOM). The Edison 4.0 was deemed too heavy and put off until lighter-weight units were developed. Nonetheless, Theranos received a 12-month service contract. 

The prosecution strategy here is to show that Ms. Holmes was hands-on when it came to marketing and investor communications, approved the overstated claims, and was not “controlled” by Sunny Balwani as the defense maintains. If anything, he deferred to her. 

CNN Business, KTVU Fox 2 running commentary, Daily Mail, California News Times  Unfortunately, the Mercury News, Bloomberg, and WSJ are paywalled.

TTA’s earlier coverage: Chapter 3, Chapter 2, Chapter 1

To be continued….

Theranos, The Trial of Elizabeth Holmes: ch. 1

October 1, 2021 | by

“The company believed more about PR and fundraising than about patient care”, from Tuesday’s testimony by former lab director Adam Rosendorff, could be the prosecution’s strategy in the proverbial nutshell. Mr. Rosendorff, who quit in November 2014 after a long struggle to get Ms. Holmes and Theranos management to address persistent problems in patient lab results and to implement a legally required verification process, was a witness for the prosecution. The defense tried to paint his testimony in cross-examination as inconsistent and self-serving in accounts of Ms. Holmes’ state in hearing concerns about three particular blood tests, the launch date of public blood tests, proficiency tests versus ‘precision tests’, when the California Department of Public Health audited the lab, and exactly why he quit Theranos 18 months after hire. The questioning twice grew so heated that District Circuit Court Judge Edward Davila deemed it inappropriately argumentative. One example from Lance Wade to Mr. Rosendorff was that supervising quality control tests and making sure laws were followed was “why you get the big bucks, right?” “Not as big bucks as you get paid,” Mr. Rosendorff replied. Mr. Rosendorff did get caught up in an email trail and on narrowing the proficiency testing to FDA-approved devices versus the Edison labs. The cross and the bickering went on into Friday and probably will resume on Tuesday next week (@doratki).

Also on Tuesday was brief testimony from Celgene manager Victoria Sung, who drew a picture of more Theranos fabrications around how pharmaceutical companies (Celgene owned by Bristol Myers-Squibb) had not  “comprehensively validated” Theranos technology. 2012 results showed that Theranos labs performed “out of range” versus standard tests, and other tests were not run. Last week, Theranos employee Surekha Gangakhedkar in her testimony stated that she did not think GSK’s report validated Theranos’ tests. Mercury News, The Verge

Today, John Carreyrou, who broke la scandale Theranos in The Wall Street Journal and authored the book Bad Blood, filed a motion to stop being barred from court. Cleverly, La Holmes’ defense put him on the witness list but not subpoenaed him. Being on the witness list, however, means he cannot attend any part of the trial or publicly discuss his testimony, if given, without permission from Judge Davila. “Placing Carreyrou on the witness list was done in bad faith and was designed to harass him,” the motion claimed, calling his placement on the list “a cynical ruse” that violates the First Amendment. Also cited in the motion were the company chant about him and various text messages between Ms. Holmes and Sunny Balwani. Mercury News  Mr. Carreyrou and six years before the Theranos mast, interviewed in The Verge in an interview that diverges fascinatingly into the psychiatric drives of the players….

And earlier in September (Wednesday 22nd), General James Mattis, Ret. testified about how he initially wanted to pilot the Theranos labs on ships and remote locations, where space and swiftness are at a premium. The Verge article does take liberties in the psychology between the two (bachelor general, young female CEO), including his joining the board after retirement, sticking around despite his growing doubts until he was named secretary of defense in 2016. The defense drew out that he was confused about his compensation package ($150,000 per year plus a stock option purchase).

The Mercury News (which has a minimum of free articles before the paywall goes up, the WSJ (paywalled), local TV KRON4, The Verge, and CNBC have been covering the past weeks of the trial. Dorothy Atkins of @Law360 is also tweeting in real time on it (@doratki).

To be continued….

The Theranos Story, ch. 74: defense questionnaire trimmed; Holmes loses attorney-client privileges on 13 emails, doctor/patient testimony allowed

June 18, 2021 | by

This week’s update as Elizabeth Holmes’ Federal trial nears its 31 August start. 

The defense’s 112-page whopper of a jury selection questionnaire was, as most expected, nixed by Judge Edward Davila. He provided the defense with a slimmed-down version that apparently, from press reports, edited the media coverage issues. The prosecution had previously objected to the length, intrusiveness, and over-specificity around juror media usage. Judge Davila remarked in Tuesday’s hearing that jurors could be asked about their sources of news in an open-ended response. According to the Fox Business report, “He said both sides might be surprised to see how many potential jurors don’t know anything about the case.” Impartiality is also an issue in high-profile cases, but “impartiality does not require ignorance,” in the words of a previous Federal decision in the Enron CEO’s criminal case.

The jury will also hear testimony from patients and doctors who used Theranos tests and said they got inaccurate results. The testimony will be limited to facts about the inaccurate test and the money they lost by paying for it. Emotional and physical harm will be off-limits. Fox Business  What won’t be admissible, at least for now, is how Theranos “destroyed” its Laboratory Information System, or LIS, database. The defense argued that the prosecution took years to acquire it and then sat on the evidence. Judge Davila reserved the right to revisit that issue if appropriate. Fox Business

Elizabeth Holmes cannot keep her 13 emails with law firm Boies Schiller Flexner LLP out of the trial on attorney-client privilege grounds. US magistrate Judge Nathanael Cousins ruled that it did not apply to these emails since Boies Schiller was the corporation’s legal counsel and not hired by her personally. According to the Wall Street Journal (partial article as paywalled), the receiver who wound down Theranos after it closed in 2018 waived the company’s privilege to the documents, yet another factor. Boies Schiller represented Theranos up to 2016. Managing partner David Boies was a Theranos board director and a bulldog of an advocate from the company until then. Mr. Boies is now aged 80 and remains chairman of the law firm. (One wonders if the well-seasoned litigator, or his deposition, will be part of the trial.)

Judge Davila has also set the trial schedule–three days per week from late August into December, earlier disclosed as Tuesdays, Thursdays, and Fridays, with relatively short days to fight ‘juror fatigue’. Since Elizabeth Holmes will also have delivered her child by the time the trial starts, there will be a “quiet room” in the courthouse provided for her special needs during the trial.

TTA’s previous coverage of Theranos

The Theranos Story, ch. 73: the defense tries to stack the jury deck in Holmes’ favor, prosecutors say. And Theranos swag and memes are hot!

June 10, 2021 | by

Law and Order Proceeds. For those of us who follow US trials, or have served on a local or county jury, smart attorneys do a fair amount of ruling jurors in–and out. The voir dire process in high-profile trials is critical. Jury consultants make comfortable livings creating profiles of their ‘ideal juror’.

Thus it should not be a surprise that Elizabeth Holmes’ spare-no-expense-or-strategem defense would file in May with the court an over-the-top 41-page, 112 question jury document. Their rationale is to screen jurors for issues related to the extensive news coverage around la scandale Theranos, Holmes herself, and even the pandemic (!).

In the prosecution’s view, questions such as “Do you have investments?”, “Do you have health insurance?”, and inquiries about social media use, were “untethered” from pretrial publicity and the coronavirus pandemic.

By comparison, the prosecution presented to Judge Edward Davila a modestly sized nine-page questionnaire with a scant 51 questions. Typically, many of these questions are routine, such as reading about the case and if they had any pre-existing opinions which would prevent that person from a fair judgment of the facts presented in the case. On pandemic issues, the prosecution drew from previously used questionnaires that addressed them, though this Editor cannot see how the pandemic is pertinent to this case.

Holmes is facing 12 felony fraud charges. The trial will start 31 August and will be held on Tuesdays, Thursdays, and Fridays through 17 December, according to a filing last week by Holmes’ legal team. She faces maximum penalties of 20 years in prison and a $2.75 million fine, plus possible restitution. East Bay Times

Attention eBay Shoppers!  According to CNBC, original Theranos-labeled items are fetching real coin on auction sites like eBay and Poshmark. An original Theranos lab coat is supposedly listed for $17,000. Over at Etsy and Redbubble, which sell artist-created items, logo-printed t-shirts and masks, including those with Holmes’ face and the Silicon Valley meme, ‘Fake It Till You Make It’, “Girl Boss” signs, throws, posters (left), and greeting cards. (Good things? Yeesh!) are all over. The funniest is a sweatshirt with ‘Theranos Testing–A Guaranteed Result’. Over on Etsy, a merchant’s most popular Theranos item is a mug emblazoned ‘Theranos Early Investor’. (Is it cracked?) Perhaps Holmes could put her Theranos trinkets and trash online to defray a few costs. Or copyright her image like Bogart?

The Theranos Story, ch. 72: a little lifestyle and celebrity is admissible at trial–but not too much. And no profanity, please!

May 27, 2021 | by

The long-awaited update from the US District Court in San Jose. Judge Edward Davila ruled last Friday limiting the specifics on Elizabeth Holmes’ lifestyle that the prosecution wanted to present as evidence. Only general evidence of Elizabeth Holmes’ Silicon Valley CEO lifestyle would be admissible. The prosecution, in his words, “Each time Holmes made an extravagant purchase, it is reasonable to infer that she knew her fraudulent activity allowed her to pay for those items,” but that “Evidence of Holmes’s wealth can be construed as ‘appeals to class prejudice’ which are considered ‘highly improper’ because they ‘may so poison the minds of jurors even in a strong case that an accused may be deprived of a fair trial.” To the judge, evidence of Holmes’ wealth and fame are not even moderately related to the intent to defraud, the last of which is the heart of the charges.

The prosecution therefore has to walk a very fine line. It’s apparently fine to say that Holmes enjoyed a luxurious lifestyle equivalent to her Silicon Valley peers, with the usual perks. But details on brands of clothing, hotels, and other specifics “outside the general nature of her position as Theranos CEO,” is beyond the scope of the trial.

Judge Davila may be doing the prosecution a large favor by limiting this evidence. Too much reliance on lifestyle as the main motive to defraud is a crutch that could backfire with the jury, especially when they see in August a modestly dressed new mother Holmes. It could also open up an appeal on the basis of prejudicing the jury. To this Editor, there is abundant direct evidence of fraud of patients and investors in a technology that didn’t work, never could work, and the coverup. No need to overegg the pudding. Mercury News

And no profanity in the court! The jury will be spared the infamous employee meeting chants telling a rival testing company (Sonora Quest) and John Carreyrou of the Wall Street Journal to do something unprintable in a business article with themselves. The defense won the argument that these chants were the Silicon Valley Norm to motivate employees. Even the prosecution admitted that these might be “somewhat inflammatory”. Colorful, but inadmissible.  Mercury News

And lest we forget. Holmes is facing maximum penalties of 20 years in prison and a $2.75 million fine, plus possible restitution. The trial starts 31 August. Earlier chapters of this saga are here.

The Theranos Story, ch. 71: Holmes appears in court, lawyers argue celebrity, lavish lifestyle, Silicon Valley ethics

May 8, 2021 | by

After 15 months, Elizabeth Holmes puts in her Day in Court. Last Tuesday’s and Wednesday’s hearings in US District Court in San Jose were not virtual, but in court–and with Ms. Holmes present. The arguments between counsel were about what would be admissible; the relevance of her lifestyle (fine dining, houses, private jets), her wealth, spending, and celebrity to the charges of criminal fraud, first of hundreds of millions of dollars by investors plus patients and doctors with false claims that the Theranos labs actually gave accurate readings.

The defense argued that admitting information on the lifestyle and spending behavior would be inflammatory and prejudicial to the jury. The travel, the perks, the company-paid-for services were there because she was traveling on company business. Her stock was never sold and her salary at $200,000 to $390,000 (per SEC) was actually low for her peer group. To a certain degree, Judge Edward Davila agreed with the defense. Being in Silicon Valley, home of tech high flyers and Sand Road investors, Judge Davila said to the prosecution, “It seems like that’s designed to engage a class conversation amongst the jurors which I think you’d agree would be a little dangerous. What’s the value of, ‘Did she stay at a Four Seasons versus a Motel 6?” The prosecution countered that information regarding the increasing value of the stock and Holmes’ billionaire lifestyle largely funded by the company, more so than her salary, is relevant to the continuing fraud. “The perks that she is enjoying greatly reduce the pressure on her to cash in, sell stock and make more money.” And, one could say, to come clean and end the fraud around their technology.

According to the Mercury News, Judge Davila said he would rule on the dispute over lifestyle and compensation evidence later. The trial is scheduled to start 31 August. CNBC video, 5 May, 6 May  

The Theranos Story, ch. 70: the lab director turns Federal evidence

February 18, 2021 | by

A Tasty Appetizer of what awaits in July in Federal District Court, San Jose, showed up in the Wall Street Journal today (paywalled, link to full article below). Theranos‘ lab director Kingshuk Das, MD will testify in Elizabeth Holmes’ trial that the Theranos lab and technology did not work accurately enough to use–and that the company’s leaders ‘pushed back’ against his assessment.

Dr. Das’ comments, revealed in new court filings, represent his most extensive (and only revealed, in this Editor’s estimation) remarks on Theranos. His one-hour interview with Federal agents took place on 1 February. They indicate that Federal prosecutors continue to dig for damning evidence prior to the July trial.

Dr. Das held the lab director, later medical director, position at the Newark, California lab facility in Theranos’ final years (December 2015 in the article, the LinkedIn profile states March 2016, to June 2018). The Centers for Medicare and Medicaid Services (CMS) had already put Theranos on notice for“deficient practices” in November 2015. The WSJ, around that time, revealed Theranos’ dodgy practices.

Dr. Das’ fully credible and extensive pathology training is listed in his LinkedIn profile. It includes his MD at Case Western Reserve, internship at UCLA, residencies in clinical pathology at Washington University (St. Louis) and USC, and return to UCLA for a fellowship in molecular genetics, then rising to Associate Medical Director, UCLA Clinical Laboratories. As for many others, Theranos was challenging,  could not have been good for his career, but perhaps gave him a taste of how to do entrepreneurship right. He has worked in several positions and is currently listed with consumer genetics tester Invitae as a molecular pathologist and founder of AnimanDX from 2018.

This Editor would bet that Dr. Das had far more to say than what was cited in the WSJ article. At least this is more like Joe Friday’s ‘just the facts’ (Dragnet) and not mired in the swamp of ‘motivations’ represented by the filings around Silicon Valley’s Lifestyles of the Rich, Famous, and Busted.

Full article at StockXpo. Hat tip to reader William T. Oravecz. For those interested in the full sturm und drang by chapter, it is here.

The Theranos Story, ch. 69: Elizabeth Holmes ‘faked it till she made it’–like other Silicon Valley startups? (Updated)

January 12, 2021 | by

Lifestyles of the Rich, Famous, and Busted, Silicon Valley Style. As promised by the prosecution in the cases being brought against Elizabeth Holmes, the CEO/founder of Theranos, and separately with COO Ramesh ‘Sunny’ Balwani, they are proceeding with filings that connect Theranos’ continued defrauding of investors with Holmes’ extravagant lifestyle and desire for fame. “The causal connection between Defendant’s fraud and the benefits at issue is strong,” the filing stated, going on to detail how the fraud funded hotels, private jet travel, and “multiple assistants” paid by the company who also assisted with her personal needs.  “In addition to the tangible benefits that she received from her fraud, she also was the beneficiary of a great deal of favorable attention from the media, business leaders, and dignitaries”. Sustaining the illusion was necessary to continue the lifestyle and recognition.

Countering the prosecution filing on Friday was–of course–a defense filing that attributed Silicon Valley’s ‘fake it till you make it’ startup culture as a rationale for Holmes’ and Theranos’ actions. That filing states “founders in this area frequently use exaggeration and dramatic promises to generate needed attention for their companies and attract capital.” The “culture of secrecy” that concealed Theranos’ fraud?  “…if it is admitted Ms. Holmes surely could present evidence that other Silicon Valley start-ups used similar practices, and that persons at Theranos were aware of these practices.” In November, they also filed to block as ‘unfairly prejudicial’ any mention of Holmes’ lifestyle as irrelevant to her guilt or fraud. 

Another fake was pretending that problems didn’t exist and everything was just ducky. The prosecution also introduced emails that confirmed Holmes’ direct awareness of problems with the blood tests in 2014. One example was from her brother Christian, who worked in product management. It requested a meeting to discuss a customer complaint where it was “pretty obvious that we have issues with calcium, potassium and sodium specifically.” According to the filing, “Theranos emails contain many examples of customer complaints routinely being escalated” to Elizabeth Holmes and other senior company personnel. At trial, the evidence will show that defendant shaped Theranos’s response to those complaints, prioritizing the company’s reputation over patient safety.” This Editor would argue that it’s no different with car manufacturers (Ford and the now lower-case GM) than startups to spin a response, but the proper reaction to clinical product faults would be to pull back the offending tests and solve the problem before going any further. But the Edison lab and their technology didn’t work.

Updated with further analysis. In retrospect, it’s obvious that Theranos crossed the ethical line between massive hype (expected) and outright fraud (not), which is why the defense is fighting so hard to keep Silicon Valley Lifestyle and Startup Culture out of the case unless it can be spun their way. A key: Holmes’ emotional state and a psychiatric evaluation have also been introduced by the defense, countered by the prosecution. In this case, the fraud was based on dual ethical nightmares, the first worse than the second: faking of medical results, then defrauding small and large investors by faking company performance. Too many just wanted to believe, like the X Files. But we should not forget another high-profile hype and fraud that happened around the same time, Outcome Health [TTA’s articles here].  Outcome Health’s fraud was strictly financial–ad performance falsification leading to fraud and money laundering. They defrauded Big Pharma advertising and some of the largest global investors like Goldman Sachs. The Federal lawsuits on Outcome have gone very quiet after settlements, plea bargains, and COVID halting court actions.

Thanks in large part to Theranos and Outcome Health, that startup culture is mostly kaput. The lessons are learned–we believe. A modicum of modesty along with a large dose of telehealth/telemedicine/data analytics is The 2020-2021 Thing. A lasting effect? Perhaps. Small-batch blood testing is only now recovering from being radioactive.

Before the start of the company’s collapse in 2016, Theranos had raised a reported $900 million ($700 million in some accounts) and was privately valued at $9 bn. Few of the investors clawed back their money. Fraud doesn’t work. It never works.

The trial in Federal District Court, San Jose, is now scheduled for jury selection 13 July. It was moved just before Christmas from 9 March by Judge Edward J. Davila due to California’s COVID-19 surge (MassDevice). So here we are five years later It promises to be popcorn-worthy, with possible appearances by famous men such as Henry Kissinger, Rupert Murdoch, and former Defense Secretary James Mattis. CNBC, Bloomberg For those interested in the full sturm und drang by chapter, it is here.

The Theranos Story, ch. 68: the texts told the tech failure–and please omit Holmes’ ‘luxurious lifestyle’ and profane meeting language from trial

November 26, 2020 | by

The trials of Elizabeth Holmes and ‘Sunny’ Balwani churn on towards a March 2021 court date. Two major revelations have entered the record from last Friday 20 November’s flurry of filings on both sides. 

  • The prosecution introduced panicky Holmes/Balwani texts, iMessages, and Skype messages indicating that Theranos was having major trouble with validating its lab technology from 2014 on. One text from Balwani described a lab as a ‘disaster zone’. “The spreadsheets are replete with admissions by defendant and Balwani that demonstrate their knowledge that their statements to investors were false and misleading and that Theranos’s testing was beset with problems.”  CMS in 2015 concluded that their California lab posed an “immediate jeopardy to health and safety.” The messages were from previous civil cases and collected by securities regulators, with many still under seal from those cases.
  • The defense for Holmes moved to prohibit prosecutors as ‘unfairly prejudicial’ evidence of Holmes’ wealth, spending, and lifestyle,  citing Federal rules of evidence and that this information is not relevant to Holmes’ guilt or innocence on the fraud charges. In 2015, Holmes was worth an estimated (by Forbes) $4.5 bn despite what is claimed as a moderate salary and not selling equity. The government has detailed her company-paid perks such as a luxury SUV, a rented luxury house, and luxury-level travel, in addition to a ‘substantial salary’. 
  • The defense is also seeking to omit any references to Theranos employees making claims about the technology, including Theranos sales representatives falsely claiming that the FDA approved the company’s lab machines. The grounds to omit are that Holmes could not be responsible for their false statements.
  • The defense also seeks to omit transcripts of a company meeting that used profane language to refer to reporting in the Wall Street Journal investigating the company and a competitor at that time, on the grounds that such language is par for the course in High-Tech-Land. Mercury News (may be paywalled)

Fox Business 23 November, 24 November. BNNBloomberg.

In a separate case, a former Theranos lab scientist, Diana Dupuy, has claimed that she was wrongfully terminated from her job with medical testing company DiaSorin nine days after receiving a subpoena to testify at the Theranos trial. DiaSorin is claiming the reason is unrelated to Theranos. The suit has been filed in US District Court in San Francisco. Anecdotally, many former Theranos employees have reported that Theranos has been a glaring black mark in their resumes that make them close to unhireable. Mercury News

The Theranos Story, ch. 67: the Holmes/Balwani indictments stay, Holmes’ defense strategy fails

October 15, 2020 | by

What Elizabeth Holmes needs is Perry Mason and a good scriptwriter from the 1960s. On Tuesday, Judge Edward Davila hit the ‘REJECT’ button on Holmes and ‘Sunny’ Balwani’s six motions since August to have the July indictments by a grand jury–a second indictment of 14 July, then a third and operative charging document of 28 July, dismissed. In a single compact, well-reasoned order, all six motions were denied for both cases:

  1. Pre-indictment delay. The first indictment was made in June 2018. The findings were that the delays were due to defense motions which were agreed to by the government and the judge, then the pandemic which suspended all in-person court proceedings and then became remote. The separate trial dates were moved to October 2020 and then at defense requests due to preparation and witness travel, moved to March 2021. 
  2. Statute of limitations on the fraud counts from investors. Even the definition of investor was narrowly defined here as securities purchasers. However, the broader interpretation, for example business partners such as Safeway [TTA 8 Oct] and board members, are also included as investors. 
  3. The indictments did not provide fair notice of the charges. Fair notice was found. Again, investors include business partners and even their board members who had promissory or convertible notes.
  4. Duplicity of the multiple counts was not found.
  5. Failure to omit doctors as victims of the Theranos scheme; doctors were omitted after the first indictment. The judge did find some lapses in prosecution language.
  6. All the dismissal requests for the first indictment applied to the later two.

It seems as if the defense, particularly Holmes’, threw a lot at the wall to lessen charges against their clients, and none of it stuck. One wonders how Holmes (who did marry a wealthy man) but particularly Balwani, are affording all this legal churn.

Unless there are publicly released findings on Holmes’ mental defect defense, alleging her inability to discern right from wrong (a/k/a insanity defense lite, Twinkie Defense II, High Anxiety) [TTA 18 Sept], hold off on popcorn purchases till next spring. San Jose Mercury News (which incorrectly reverses the analogy, sorry), Wall Street Journal, and the Register (UK), which helpfully provides a PDF of the court order.

The Theranos Story, ch. 65: Elizabeth Holmes’ “mental disease or defect” defense revealed

September 18, 2020 | by

Going the ‘Twinkie Defense’ one better? While this Editor was enjoying a much-needed break from the Insanity of the World, hurtling across the wires was the revelation that Elizabeth Holmes’ pricey defense attorneys have prepared a defense for her that includes evidence “relating to a mental disease or defect or any other mental condition of the defendant bearing on the issue of guilt.” Interpreted, her mental state may have affected her intent and judgment in her business dealings. 

According to the filing, the defense is introducing testimony from Mindy Mechanic, Ph.D., a clinical psychologist and professor at California State University at Fullerton. According to her bio, her “work focuses on the psychosocial consequences of violence, trauma, and victimization with an emphasis on violence against women and other forms of interpersonal violence. Her work has addressed the mental health consequences of violence, such as Post-Traumatic Stress Disorder and depression as well as other important physical and social health outcomes.” 

The defense attempted to introduce this evidence without further examination by the Federal prosecution. Unfortunately, US District Judge Edward Davila did not agree. Ms. Holmes will be examined by two experts for the prosecution: Daniel Martell, Ph.D., a forensic neuropsychologist for the forensic litigation consulting firm Park Dietz & Associates, and University of California San Francisco psychiatrist Renee Binder, MD. Over the objections of the defense, the examination will be videotaped. The trial will commence with jury selection on 9 March 2021 [TTA 27 Aug].

Most of our Readers who care about this will be wondering, after they’ve picked themselves off the floor laughing at the above notion, that any person with a mental defect of this type could have fooled the savviest Sand Road VCs, Stanford/Hoover Institution luminaries, an admiral, a Marine general later Secretary of Defense, and Rupert Murdoch for years, to the tune of nearly $1 bn. That they should be gulled and fooled is disturbing enough. What is equally disturbing is the desperation of the defense to attempt an ‘insanity defense lite’ that sources and justifies Ms. Holmes’ inability to discern right from wrong.

This then proceeds to exactly what was the ‘interpersonal violence’ or post-traumatic stress that caused her judgment to warp quite this way. Was it her upbringing, which apparently was a bit upper-middle-class flaky–the ‘it’s not High Anxiety, it’s parents!’ reason? Was it a head trauma (the Howard Hughes defense), drugs, or surgery gone wrong? Did Sunny get Blue (in more than one way) on her? Stock up on the popcorn–la scandale Theranos has just gotten even more interesting. CBS Bay Area, Bloomberg News, Forbes, MedCityNews

A historical footnote. The term ‘Twinkie Defense’ came into usage in 1978 during the defense of the murderer of San Francisco mayor George Moscone and the better-known supervisor Harvey Milk. While not used per se by the defense team, the testimony of a psychiatrist for the defense that the murderer excessively consumed junk food, including Twinkies, as an indicator of depression and a sign of diminished capacity was hyped by the press as the ‘Twinkie Defense’. The term has passed into the vernacular. Ironically, both trials are occurring in the Bay Area.  Hat tip to The Crime Report.

The Theranos Story, ch. 64: Holmes’ trial moved to March 2021

August 27, 2020 | by

What a difference two years makes. Once the subject of breathless headlines and breaking news, the latest news on the trials of Elizabeth Holmes and Ramesh ‘Sunny’ Balwani in la scandale Theranos earned hardly any notice in the healthcare press. Only this Editor’s search for an update found information that the Federal court trials, due to the pandemic and corresponding difficulty with trial preparation and jury selection, have been moved to 2021. Pretrial hearings for both have been moved to October and December.

So not to further punish our Readers who are dreaming of mountain lakes and ocean beaches, your Editor, a/k/a Glutton for Punishment, has summarized the Court’s next steps. 

  • The Holmes and Balwani trials have been severed–legalspeak for separated
  • Holmes will go first starting on 9 March 2021 with jury selection in the Federal Court, San Jose, Judge Edward J. Davila presiding. Balwani’s trial will not start until Holmes’ trial is concluded.
  • The next court hearings for Holmes will be 6 October (pretrial motion), 2 December (status), and 16 February 2021 (status)
  • Balwani will have a status hearing on 8 December

In early August, the Department of Justice (DOJ) prosecutor added a 12th fraud charge to Holmes’ list, relating to a patient’s blood test. A grand jury was empaneled in June during the midpoint of the pandemic, leading to Holmes’ legal team attempting to obtain 21 broad categories of documents on the jury selection. Their intent is to overturn the indictment as improper.

No need to stock up on popcorn till a month before Easter 2021, but it will be munch-worthy as rumored witnesses will be ‘faces’ such as General James Mattis (ret.), former board member and customer; Henry Kissinger; and Rupert Murdoch. This Editor’s bet is that these aged titans will not appear, with the exception of the youngest, General Mattis. More likely to be called to appear, in this Editor’s view, are executives from Walgreens who did the deal with Theranos, the last-ditch investors at Fortress Investment Group, major investors such as Partner Fund Management, and early unrepentant backer Tim Draper of Silicon Valley VC Draper Fisher Jurvetson.

The Federal charges are summarized in TTA 13 May]The full sturm und drang by chapter are here.

CNBC, US Department of Justice, Northern District of California published notice  The 14 June indictment (15 pages)

The Theranos Story, ch. 62: Holmes’ attorneys request breaking ‘shelter in place’ orders for trial prep, charges shrink–and a coronavirus testing patent twist

April 8, 2020 | by

Even the ‘Bad Blood’ trial has a Coronavirus Twist. The trial of Theranos former CEO Elizabeth Holmes surfaced last week in the midst of the Public Health Emergency in the US District Court in San Jose, where Holmes is scheduled to go on trial in August. Williams & Connolly lead attorney Lance A. Wade filed a motion with Federal Judge Edward Davila to permit Holmes’ attorneys to travel, serve subpoenas and meet with potential witnesses, which would include health care professionals and testing laboratories, all in preparation for the trial. Judge Davila basically swatted it aside, stating “I have to tell you sir, I read [the document] and I was a little concerned,” the judge said. “You’re basically filing a motion in essence asking the court to violate orders in the midst of a national crisis.” Wade stated that it would be nearly impossible to prepare Holmes’ defense without violating shelter-in-place orders and public health warnings. While both the judge and the lead counsel agreed that much could be done remotely to prepare for trial, Wade maintained that it would be ‘almost impossible’ to complete it. 

The trial date may change at the next hearing on 15 April, since the judge has requested both the prosecution and defense to propose alternative trial schedules. Jury selection is scheduled to start in late July. 

A prosecutorial deteriorata? 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 and directing doctors to misrepresent Theranos to patients. He also severed Holmes’ trial from former president and live-in Sunny Balwani’s. One wonders that, between the reduction of charges and the delay which has made The Biggest Healthcare Fraud of the 21st Century old news, whether Holmes and Balwani will serve any significant Club Fed time at all. Law360. CNBC, Observer

Another Corona Twist is that a SoftBank/Fortress Investment shell company, Labrador Diagnostics LLC, which happens to own several Theranos patents, sued a small company, BioFire, developing COVID-19 tests. Labrador now states that the patent infringement doesn’t entail the COVID tests but others over the past six years. Our Readers will recall that SoftBank/Fortress was a ‘last ditch’ investor in Theranos in December 2017, collateralized by the patent portfolio. The Verge