Elizabeth Holmes’s defense says mistakes, not malice, led to collapse of Therano...
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SAN JOSE — After years of media coverage, a best-selling book, a documentary, a podcast and a government investigation, the saga of Theranos and its founder Elizabeth Holmes is culminating in a drab California courtroom.
Prosecutors unveiled their line of attack in Holmes’s criminal fraud trial, which began Wednesday in front of a jury and a roomful of reporters, curious members of the public and a handful of her supporters and family members.
At the center of the U.S. government’s argument is the accusation that, rather than being a young, ambitious tech visionary who simply failed to pull off her dreams, Holmes crossed the line into outright fraud, misleading investors, business partners and the media about the blood-testing machines her company was trying to develop. She ultimately did it to save her faltering business, prosecutors alleged.
“This is a case about fraud, about lying and cheating to get money,” Robert Leach, an assistant U.S. attorney, told the courtroom during the prosecution’s opening statement.
Holmes’s defense shot back. In a two-hour rebuttal, her lawyers argued that the story of Theranos is not so different from those of a thousand other business ideas that didn’t work out.
“Failure is not a crime. Trying your hardest and coming up short is not a crime,” defense attorney Lance Wade said.
Theranos is no longer a company, but its founder is still in the public consciousness. Her spectacular rise to the top of the Silicon Valley hype cycle and equally dramatic fall into disgrace and charges of fraud have been covered in nearly every medium, soon including a TV series and a film starring Jennifer Lawrence.
But the ultimate question of fraud vs. failure, whether Holmes committed a crime or was simply a high-profile example of the tech start-up world’s “fake it till you make it” ethos, has yet to be decided by a court. Over the coming weeks, a jury will hear arguments from both sides to make a decision.
Jessica Roth, a professor of law at the Cardozo School of Law, said that despite the crowded courtroom and larger-than-life tale of Silicon Valley hype, the case comes down to a straightforward question: Did Holmes intend to defraud her investors and patients as she boosted her business?
“The context of it being Silicon Valley and a start-up and the disruptive premise of the technology involved, all of that makes it very interesting,” Roth said. “I think like many fraud cases the facts about what happened are not going to be terribly in dispute. What will be in dispute is her intent.”
In court, Holmes silently took notes during the opening statements and gathered with family members including her mother and her partner, Billy Evans, after the day’s proceedings ended. She wore a gray skirt suit with a blue mask, and her blond hair was down.
Holmes began her quest as a young Stanford University student with an idea for a machine that could run medical tests on just a drop or two of blood, sparing millions the difficulty of having to face needles and sterile doctor’s offices to see if they were ill. But when the company began running into roadblocks, Holmes misled investors instead of being transparent about how serious the start-up’s challenges were, the prosecution alleged during an opening statement that lasted less than an hour.
“Out of time and out of money, Elizabeth Holmes decided to lie,” Leach said. And she did so repeatedly, he said.
In 2009, the company had a few small contracts with pharmaceutical companies, but they were beginning to dry up, he said. Pfizer, which had done some work with Theranos, had decided to stop devoting resources to the partnership. Holmes was in danger of not being able to pay her workers, Leach said.
Holmes and her then-boyfriend and business partner, Sunny Balwani, looked to Walgreens and Safeway for money, two big-name pharmacy chains that could validate the company’s nascent technology and get it in front of millions of consumers.
She gave investors “exemplary reports” from pharmaceutical companies, including one from Pfizer that the drug company had not authorized despite the report’s use of its logo, Leach alleged.
“The defendant gave this to investors to give the false impression that Pfizer endorsed Theranos’s miniature blood analyzer,” he added, even though the two companies were no longer working together.
Walgreens and Safeway committed to investing millions.
Meanwhile, Holmes’s personal star was rising. She appeared on magazine covers, spoke at conferences and was breathlessly profiled by numerous news organizations who consistently hailed her as the next legendary tech founder. Her black turtlenecks, the same signature clothing item worn by Apple founder Steve Jobs, symbolized her genius, at least in the minds of many supporters.
“The scheme brought her fame, it brought her honor and it brought her adoration,” Leach said. “She had become, as she sought, one of the most celebrated CEOs in Silicon Valley and the world. But under the facade of Theranos’s success, there were significant problems brewing.”
By 2013, Holmes still hadn’t made good on her promise to investors. Instead of the machines working as they were initially supposed to by providing lightning-fast results on tiny drops of blood in dozens of locations around the United States, Theranos was shipping samples back to its own lab and sometimes using machines built by its competitors to run tests, Leach alleged.
“This was not miniaturizing the lab she had promised. This was a way to deceive Walgreens and Safeway and to stall and to buy time,” Leach said.
Wade, one of Holmes’s defense lawyers from the firm Williams & Connolly, presented a starkly different narrative and said the government’s black-and-white story of criminality just wasn’t true.
“The reality of what happened at Theranos is far, far more complicated than what you have heard about Elizabeth Holmes so far,” Wade said during his opening statement. “Far more human and real, and oftentimes far more technical and complicated and boring.”
The company was doing real scientific work, developing its own techniques and working to build its own machine, he said. Running tests in a central lab was always its initial plan before scaling out to using the distributed machines it had developed itself.
The company’s investors were wealthy and knew the risks associated with start-up investments, Wade said. Theranos was always a speculative proposition.
The deal with Walgreens pushed the company to try to do too much, too fast. It was a mistake, but Holmes never crossed over into criminality, Wade said. “Theranos certainly didn’t see mistakes as crimes; they saw them as part of the path to success.”
Mistakes also included issues with Theranos’s tests and labs. Wade said some procedures and processes weren’t followed, and some tests weren’t performing well.
Still, “she had every reason to believe that the lab operations were under control and that an appropriate system was in place,” Wade said.
Instead, he said that Balwani was in charge of the lab at the time.
Balwani, who Holmes met when she was 18 and he was 37, demanded devotion from those around him and had a temper that sometimes prompted him to lash out, Wade alleged. The defense didn’t blame him completely for Holmes’s travails, and it didn’t introduce the issues of abuse and control noted in some pretrial filings.
“Like with most personal relationships, there was another side to it that most people never saw. You’ll have to wait for all of the evidence and then decide how to fairly view that relationship in full,” Wade said.
Balwani faces the same charges as Holmes. They were charged together but later had their cases separated. Balwani also pleaded not guilty.
Balwani has denied the accusation of wrongdoing in court filings. Balwani’s attorneys declined to comment.
Roth, the law professor, said the decision to lead with a more traditional white-collar defense in which a CEO relied on information from those below her was smart.
If Holmes had bad information from those around her, she can argue that she had no intent to defraud her investors when she claimed the company could do things it wasn’t actually capable of doing, Roth said.
Depending on what evidence the government unveils during the trial, Holmes’ defense could switch between different explanations for her conduct, said Jeffrey Bornstein, a white collar criminal defense lawyer at Rosen Bien Galvan & Grunfeld LLP.
“It may be that she was aspirational, in other words, that she believed that if given time she would eventually be able to make things work,” Bornstein said. “It may be that she’s going to take a position that she didn’t know and people lied to her."
“I think it’s going to be somewhere in the middle," he said.
Prosecutors can also point to Holmes’s own words. The Wall Street Journal in 2015 first reported the problems with the lab, and the then-CEO spoke out multiple times publicly in her own defense.
In an April 2016 interview with the “Today” show, Holmes said she was “devastated” that the company hadn’t found and fixed problems earlier, and that Theranos was rebuilding its lab from scratch.
“I’m the founder and CEO of this company,” she said. “Anything that happens in this company is my responsibility at the end of the day.”
Prosecution calls first witness amid star-studded list of potentials
Danise Yam was the first witness. An earlier version of this post misspelled her first name. This article has been updated.
Opening statements are wrapped. Now come the witnesses.
The government’s first witness, Danise Yam, started explaining on Wednesday the company’s finances before the trial ended for the day. Yam served as a corporate controller at the company from 2006 to 2017, when she was laid off. For most of that time, she reported directly to Holmes.
During his opening statement, prosecutor Robert Leach said he expects to call former lab employee Erika Cheung, too. She will tell jurors that Theranos turned a blind eye to concerns, Leach said.
Prosecutors could also call several high-profile witnesses to testify during Holmes’s trial, according to an updated witness list the government filed this week.
Theranos had a valuation of $9 billion when media investigations revealed faults within the company. It had raised about $800 million from investors, including many household names.
Holmes had attracted support from News Corp. chairman Rupert Murdoch, the Walton family of Walmart fame and Mexican businessman Carlos Slim.
Murdoch appears on the witness list, as does former secretary of state Henry Kissinger and former secretary of defense Jim Mattis, who were both once board members of the company.
Also on the list are Stanford professor Phyllis Gardner and emeritus professor Channing Robertson. Gardner was skeptical of Holmes’s scientific endeavors, and Robertson was an early Theranos board member.
Trial wraps for the day
The trial finished for the afternoon with the judge instructing the jury not to read news of the case.
As it concluded, Holmes greeted her mom, partner and other family and friends, who sat directly behind her.
Witness testimony will resume Friday morning in the San Jose federal courthouse.
Trial of fraud vs. failure
This is shaping up to be a trial of fraud vs. failure.
The prosecution opened by alleging Holmes knew what she was doing. The defense opened by saying she was acting in good faith.
“Ms. Holmes remains steadfast in her belief in this technology,” Holmes defense attorney Lance Wade said at the end of his opening statement, which lasted more than two hours.
Holmes‘s defense painted a picture of a young executive who was trying to change the world for the better, and who ran into mistakes along the way.
But the prosecution, which opened in less than an hour, alleged that Holmes’s company was running out of cash, and she knowingly misled investors to keep it going.
After opening statements, the prosecution called its first witness, an auditor who worked with Deloitte and who joined Theranos in 2006 as a corporate controller.
Defense says what happened at Theranos is ‘complicated’ and sometimes ‘boring’
“The reality of what happened at Theranos is far, far more complicated than what you have heard about Elizabeth Holmes so far,” defense attorney Wade said during his opening statement. “Far more human and real and oftentimes far more technical and complicated and boring.”
He spent several minutes outlining the science behind the technology the company was developing, defining various types of tests — or assays — the company could perform. They thought they could expand the tests to cover 96 percent of those used in the United States through just 125 new tests. They just needed a breakthrough. Hundreds of new assays were developed, he said.
The company always intended to move past the central lab model, he said. It was just in the first phase of its plan.
Wade said that Theranos told regulators what test it was running, and on which device. That the partnership with Walgreens sparked investments and that the second phase of its plan required it to do too much, too fast.
It was “a mistake. Not fraud,” Wade said.
He did admit to some problems common to all labs, however.
“There were problems with Theranos’s clinical laboratory,” Wade said. “There were. There were processes and procedures in place that were not followed. And some of the tests that Theranos offered in hindsight were not performing as well as expected.”
And he said Balwani had management over the lab during that time period.
“But the evidence will show that at the time she had every reason to believe that the lab operations were under control and that an appropriate system was in place,” Wade added, saying she thought the tests were accurate and reliable.
Defense points to trusting Balwani as a ’mistake’
As part of the defense’s opening statement, attorney Lance Wade pointed to Holmes’s relationship with Balwani, her former boyfriend and company executive.
The couple met in 2002, when she was 18 and he was 37, Wade said. Balwani encouraged her to follow her ideas and pursued a relationship with her.
“You’ll hear that trusting and relying on Mr. Balwani as her primary adviser was one of her mistakes,” Wade said.
He then moved back to discussing Theranos as a young company that made some mistakes.
“Theranos certainly didn’t see mistakes as crimes. They saw them as part of the path to success,” Wade added.
Balwani entered the picture at Theranos after Homes was pressured to bring in a more experienced business executive, Wade said. He said that Balwani was hard charging, demanding devotion and hard work from those around him — including Holmes. He sometimes had a temper and would lash out, Wade alleged.
Wade hinted that there will be more to come on Balwani.
“Like with most personal relationships, there was another side to it that most people never saw. You’ll have to wait for all of the evidence and then decide how to fairly view that relationship in full,” Wade said.
Balwani has denied the accusation of wrongdoing in court filings.
Jurors were asked to recount how much they already know about Theranos
Jury selection for the trial lasted two days last week, though potential jurors had already been asked to fill out an extensive questionnaire before reporting to the courthouse.
In person, potential jurors were quizzed on just how much they knew about Theranos. Had they seen the HBO documentary about Holmes and the company? Perhaps heard a podcast or read the book? And if so, could they still consider the case fairly?
During the first day of jury selection, Judge Edward J. Davila spoke to one potential juror who said he had heard of Theranos briefly on Reddit about the importance of deciding the case fairly.
“It’s very important, it’s critical, that every juror who sites on this case decide the case based on what you hear here, and not on the material they have read, listened to or been exposed to outside this case,” he said to the group of about 40 assembled potential jurors.
The selected jury is made up of five women and seven men, with five alternates in case they need to be swapped in.
Defense says Holmes was genuine in efforts to improve health care
Holmes’s defense team opened by positioning Holmes as a hard worker who was genuinely trying to change health care for the better.
“Elizabeth Holmes did not go to work every day intending to lie, cheat and steal. The government would have you believe her company, her entire life is a fraud. That is wrong. That is not true,” said attorney Lance Wade.
Holmes “worked herself to the bone” to make lab testing cheaper and easier, he said.
Wade said many doctors and patients spoke favorably of Theranos. The company still failed.
“But failure is not a crime,” he said. “Trying your hardest and coming up short is not a crime. By the time this trial is over you will see that the villain the government just presented is actually a living, breathing human being who did her very best each and every day. And she is innocent.”
The company made mistakes and so did Holmes, he said. Theranos could not overcome business obstacles that others saw but “she naively underestimated,” he said.
Prosecutors focus opening statement on Theranos technology
As prosecutors presented their opening statement Wednesday, they focused on the use of Theranos technology.
“This is a case about fraud, about lying and cheating to get money,” alleged Robert Leach, assistant U.S. attorney.
In 2009, he alleged the company was running out of money as it partnered with a few pharmaceutical companies. The next year, Holmes and Balwani started seeking investments from Walgreens, Safeway and others.
But “Theranos’ miniature blood analyzer could not run any blood test in real time for less than the cost of traditional labs,” Leach said. “They never could.”
He alleged that Holmes dazzled Safeway and Walgreens with false claims. The company was using traditional technology, and employees were modifying some of those third-party devices.
Holmes also gave investors “exemplary reports” from pharmaceutical companies, including one purportedly from Pfizer when it was not. “The defendant gave this to investors to give the false impression that Pfizer endorsed Theranos’ miniature blood analyzer,” Leach alleged.
Theranos trial kicks off with jury instructions
The Holmes trial started just before 9:30 a.m. local time Wednesday in San Jose when the 17 jurors filed into the room and Judge Edward J. Davila began jury instructions.
Davila began by again telling the jury that they needed to decide the case by what they hear in the courtroom and not in the outside world. The pervasiveness of media coverage surrounding the case was a key element during jury selection.
The judge asked all jurors if they had learned any more about the case since jury selection last week. No jurors indicated they had. Davila said he would ask the jurors the same question each day of trial.
The trial is expected to last 13 weeks.
Holmes expected to argue she suffered abuse that clouded judgment
Holmes’s defense team is expected to argue, at least in part, that the former CEO suffered abuse at the hands of her previous boyfriend, Sunny Balwani.
In court filings unsealed last month, it was revealed that Balwani had his trial separated from Holmes’s after arguing that her plans to allege intimate partner violence would mean he could not get a fair trial. Balwani is the former president of Theranos and was charged with the same crimes as Holmes.
Balwani’s legal team has disputed the allegations of abuse in court documents.
Holmes could argue that Balwani “verbally disparaged her and withdrew ‘affection if she displeased him’; controlled what she ate, how she dressed, how much money she could spend, who she could interact with — essentially dominating her and erasing her capacity to make decisions,” according to filings.
Holmes was evaluated by a psychologist hired by her defense, and the government also received court permission to appoint a doctor to meet with her.
The hearing is expected to start shortly.
Holmes arrives at courthouse in San Jose
Media cameras crowded around Elizabeth Holmes as she arrived for her first day of trial Wednesday morning in a gray skirt suit and baby blue face mask. Holmes was accompanied by her partner, Billy Evans, as well as others.
Holmes once graced the covers of Forbes and Fortune magazines.
She was held up as a role model to young women who were interested in the sciences and wanted to run their own company. In some ways Holmes was an atypical Silicon Valley CEO — she was a female leader in an industry that is still dominated by male executives.
In other ways she followed the footsteps of other tech founders — she started Theranos when she was 19 years old and a Stanford student, later dropping out of school. Microsoft co-founder Bill Gates and Facebook founder Mark Zuckerberg similarly dropped out of Harvard.
Holmes admired Apple co-founder Steve Jobs, and reportedly modeled her familiar “uniform” of a black turtleneck and simple pants on his simplistic style.
Holmes captivated audiences and investors with her personal story of how she got interested in making blood testing cheaper and less painful — telling people she was on a mission to change health care for the better.
“Make sure it’s something that you love so much that even if you were fired you would do it over and over and over again because you’ll build it differently,” she told Maria Shriver in an interview in 2015.
The fall of Theranos
Theranos collapsed in September 2018, nearly three years after the Wall Street Journal began publishing investigations into the company’s operations, reporting that the company’s blood testing technology did not work as advertised.
In January 2016, the Centers for Medicare and Medicaid Services issued a report finding that “the deficient practices of the laboratory pose immediate jeopardy to patient health and safety.”
Theranos later agreed with CMS to stay out of the blood testing business for two years.
Just months before the company shuttered, Holmes and her former partner Sunny Balwani made a deal with the Securities and Exchange Commission to settle allegations of massive fraud. As part of the deal, Holmes would not be allowed to serve as an officer of a public company for 10 years.
In a 2018 email obtained by the Wall Street Journal, new Theranos chief executive David Taylor said the company had run out of money and options to secure more.
“We are now out of time,” he wrote.
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