Theranos, The Trial of Elizabeth Holmes, ch. 8: choosing investors with more money than sense a winning strategy

The prosecution continues to pile up defrauded investors–but this one may backfire on them. Alan Eisenman invested about $1.2 million in Theranos in 2006 on behalf of himself and his family–after a five-minute phone call with Elizabeth Holmes. As an early investor, he also believed he was entitled to special treatment, such as direct talks with Holmes, frequent enough to the point where she offered to buy out his shares for five times their value and cut off contact. 

Later, he had other opportunities to sell his shares up to nearly 20 times their purchase price, but held on stating he didn’t have enough information on what was apparently a ‘liquidity event’. Lack of information was a persistent red flag, with gaps in communication from 2010 to 2012 and a contentious relationship with Sunny Balwani. Despite this, when Theranos needed money in 2013, he then invested an additional $100,000 despite no audited statements since 2009. This last investment became one of the government’s counts of wire fraud.

In his testimony, Eisenman testified that like others, he was initially impressed that Oracle founder Larry Ellison was involved with the company and that Theranos had contracts with six international pharmaceutical companies including Pfizer and Novartis–which was blatantly false.

This incredible narrative becomes more understandable when you understand Holmes’ strategy of choosing only ‘high-quality investors’ of the family fund sort. She targeted funders who weren’t knowledgeable and meticulous in examining the company books and the technology. The funders were also oh-so-socially connected. According to The Verge, Eisenman was ‘wired’ into Theranos–“he was friends with the Holmes’ family’s financial advisor [David Harris], who had also invested. Plus, his wife’s father, who had also invested, was friendly with [Bill] Frist, who was on the board.” Eisenman contacted Frist as well when he was essentially cut off from Holmes about 2010. 

Surely Eisenman was entitled to be upset and more than a little embarrassed, as a former money manager and financial planner. But then his actions dealing with the prosecution left a Mack truck-sized opening for the defense on the cross-examination. He sent an email to the prosecution team perhaps 15 hours after he finished his direct examination last Wednesday, strictly against instructions. He did it again on Friday, ostensibly about travel plans. An assistant US attorney called him to remind him not to contact them again. The defense leveraged this into the compromising position of being biased against Holmes beyond his actual loss, for instance a purported statement he made “upon entering the courtroom” about wanting Holmes to go to prison.

Coming so late in the trial–the prosecution may rest this week–the abrasive impression that Alan Eisenman left may leave an opposite impression on the jury that favors the defense interpretation of naïve investors who didn’t do their due diligence homework, and by extension, deserved to lose their money. CNBC 15 Nov, 10 Nov

To be continued….

TTA’s earlier coverage: Chapter 7, Chapter 6Chapter 5Chapter 4 (w/comment from Malcolm Fisk)Chapter 3Chapter 2Chapter 1

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