Theranos Itself Was Not A Fraud


Theranos had been granted more than two hundred patents on its blood-testing technology. The Edison/miniLab device had gone through four major revisions across ten years before the product was tested in the real world.  When the Theranos blood-testing device was utilized in the real-world, it was at just one location in Palo Alto and forty locations in one region of Arizona.  Getting permission to do those blood tests even required special approval from the Arizona state government.  If Elizabeth Holmes wanted to organize an elaborate fraud on investors, there would’ve been much better ways to do it than devoting ten years of her life to full-time work, hiring hundreds of skilled employees, and co-inventing two hundred patents worth of technology.  I have one, almost two, law degrees: a Juris Doctor, which included a program specifically in corporate transactional law, and I’m currently finishing up a post-doctorate Master of Laws in Corporate Governance, Compliance, & Regulations.  That’s in addition to having a Bachelors of Business Administration.  All that said, after even more research, you still cannot convince me beyond a reasonable doubt that Elizabeth Holmes personally herself committed each and every element of a criminal fraud.  Ramesh Balwani is another matter.  The investors and advisors are likely the real perpetrators of any fraud involving Theranos.  However, I could easily accept that Ms. Holmes was a willing participant in a conspiracy to commit fraud.  Business failure is not the same as fraud.  I feel obligated to defend Theranos, and Elizabeth Holmes, only because much of what I’ve read recently, aside from being hearsay and inaccurate, sends the wrong message to would-be innovators.

Elizabeth Holmes

“I don’t know.”  That was the response by Elizabeth Holmes to more than 600 questions during her deposition in the federal criminal case.  Based on her age, inexperience, and lack of formal education, she could not have fully known the extent of what was going on at Theranos, which had long grown well beyond her ability to manage it.  The chief executive officer of a corporation is personally liable for the representations made by her on behalf of her company.  However, when the CEO has absolutely no prior professional experience, all of the CEO’s personnel has many decades of experience, and some of whom are highly-regarded attorneys, then all that CEO can do is make decisions based on their advice, judgment, and opinions.

Puffery” is a legal term that refers to exaggerated or subjective statements made to promote a product or service.  Elizabeth Holmes thought her statements about her company, and its products and services, were all acceptable because they were puffery and unsworn out-of-court statements.  Her personnel and advisors lead her to believe that such statements were not fraud, even if for no other reason than their own ability to profit from Theranos depended on her making such statements.

Criminal fraud requires the requisite culpable mental state, which basically means the intent to defraud.  Elizabeth Holmes did not have the intent to defraud, merely to raise more capital for her company and get Theranos products and services to market.  She was relying on the advice, judgment, and opinions, of those around her, that the comments she was making were within the letter of the law.  Therefore, Elizabeth Holmes did not commit fraud.

Ramesh Balwani

Ramesh Balwani, however, was a self-made multi-millionaire in his mid-forties when he joined Theranos.  Much less is said, and written, about Ramesh “Sunny” Balwani than Elizabeth Holmes.  Mr. Balwani had previously worked for multiple high-tech firms, sat on multiple boards of directors, and obtained a Masters of Business Administration from University of California, Berkeley, all more than ten years before joining Theranos.  His role at Theranos was both as a board member and its chief operating officer.  Mr. Balwani used his personal relationship with Elizabeth Holmes to his own direct personal advantage to obtain those roles at Theranos.  He also used his personal relationship with Ms. Holmes to secure his positions with Theranos, both as president and COO, longer than his ability to competently serve the company in those positions, to the direct detriment of the company and its investors.  Based on his age, education, and experience, Mr. Balwani absolutely knew, or should’ve known, that the statements provided by Theranos to investors were false and misleading to the point of being criminal.  All of those facts lead me to conclude that Ramesh Balwani is far more responsible for the failure of Theranos, and any alleged fraud, than Elizabeth Holmes.

Theranos Investors & Advisors

The most guilty parties, if any, are the investors and advisors that placed Elizabeth Holmes in this mess.  Almost nothing has been written about the culpability of the investors and advisors that placed her in the position of having direct liability for a multi-billion dollar fraud.  On her own, with no prior business experience or formal education, there is no way Elizabeth Holmes would’ve had the skill or ability to even obtain a meeting with any of these major investors and extremely high net-worth individuals, much less raise hundreds of millions of dollars from them.  Existing early investors and venture capital firms involved with Theranos facilitated the meetings between Elizabeth Holmes with larger investors and high net-worth individuals so that those earlier investors could get a return based on a higher valuation of Theranos.  Those early investors also provided Ms. Holmes with the legal advice, financial documents, and talking points they wanted her to make, all for their own benefit and not hers.

Criminal fraud requires, in addition to a culpable mental state, the element of reliance on the false statements by the alleged victims.  None of the later investors were relying on statements by Elizabeth Holmes when they chose to invest, in some cases, a hundred million dollars or more.  Rather, those investors were relying almost entirely on the reputation of the earlier investors that had referred Theranos, and Ms. Holmes, to them to obtain additional investments.  Additionally, the alleged “victims” that invested hundreds of millions of dollars were all sophisticated institutional investors and extremely high net-worth individuals.  Those types of investors have a legal duty to conduct due diligence on investments like that.  It is not unheard of that an investor spend hundreds of thousands of dollars, or even millions, before investing amounts like what was invested in Theranos.  The allegation that Elizabeth Holmes by herself somehow manipulated billionaires like Rupert Murdoch and the Walton family that founded Wal-Mart out of hundreds of millions of dollars is just ridiculous.

Willful Blindness & A Criminal Conspiracy

Elizabeth Holmes certainly knew that some of her statements about Theranos, and its products and services, were untrue.  Therefore, she might have had willful blindness to the fraud going on around her.  Even if she was relying on her attorneys and advisors telling her that it was legally acceptable to make certain statements, she knew enough about the situation that she probably should’ve sought an objective second opinion from somebody completely outside the company regarding her liability for the statements she was making on her company’s behalf.  Elizabeth Holmes also benefited greatly financially from the alleged fraud at Theranos.  Her willful blindness about the truth of her statements, her willingness to go along with this alleged scheme to defraud investors and others about Theranos, and the extent that she personally benefited from the scheme, may make Elizabeth Holmes guilty for a conspiracy to commit fraud.

Sending Elizabeth Holmes To Jail Sends The Wrong Message

Business failure is not the same as fraud.  The fact that a business fails and investors lose their investment, rather than get a return, does not itself mean that the business was a fraud.  There is no dispute that Elizabeth Holmes put more than ten years of her own life into founding and managing Theranos before the company’s collapse.  Those ten years resulted in more than two hundred patents and full-time salaried positions to hundreds of skilled employees.  Elizabeth Holmes also somehow got a real integrated blood-testing hardware device out in the real world in a real test market.  Even if the product had major problems, she somehow got it to market.  Nobody else in the world has ever done that.  Nobody else even ever bothered to try.  And someday somebody will pick that idea up where Ms. Holmes and Theranos failed, get it right, and ultimately take all the credit.

The current situation with Theranos, and sending Elizabeth Holmes to prison, sends the message that if you innovate, and raise money to innovate, and then fail, that you can expect to end up a defendant in criminal court for your failure.  That’s wrong and would dissuade many talented innovators from ever taking the risk of becoming entrepreneurs and starting companies.  If Elizabeth Holmes wanted to organize an elaborate fraud on investors, there would’ve been much better ways to do it than putting in ten years of work, hiring hundreds of skilled employees, and co-inventing two hundred patents worth of technology.  You may dislike Elizabeth Holmes because you worked for her and her failure means you are now out of a job.  And you may dislike Elizabeth Holmes because of her personality and lavish lifestyle before the demise of Theranos.  But Elizabeth Holmes never intended to end up in this mess.  And Elizabeth Holmes never intended on defrauding anybody.  Regardless of how the criminal cases turn out, Theranos itself was not a fraud.

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