“Fake it until you make it” may work in Silicon Valley, but that slogan does not fly in federal court.
A San Francisco jury Theranos founder Elizabeth Holmes convicted Monday of conspiracy to defraud investors in her start of blood testing, and of three charges of wire fraud.
The fallout from Stanford University has attracted investors with promises to revolutionize healthcare by conducting multiple blood tests from a single drop of blood. But the company’s $ 9 billion valuation collapsed after questions about its technology were raised in 2015 and 2016.
This ruling will resonate around the technology and investment communities, and it should, too.
While entrepreneurial investors regularly promise the moon and fall short, Theranos has committed utter deception. Holmes admitted at the stall that she had doctored documents to affix drug company logos and that her “Edison” machine could only perform 12 types of tests, despite her public claims of more than 200.
Fraud trials of U.S. corporate executives have been few and far between in recent years. Some acknowledge the Sarbanes-Oxley corporate accounting reforms, which were adopted in the wake of a series of scandals in the early 2000s, with the improvement of the accuracy of public company reports. Others argue that the Department of Justice has taken its eye off the ball over white-collar crime, something President Joe Biden has promised to reverse.
Be that as it may, technology companies, especially those that have not yet sold shares to the public, have historically enjoyed more leeway on their promises, even though valuations have risen in the billions. Now some of those superstars have fallen to earth, and a reckoning is coming. Former Nikola CEO Trevor Milton is expected to stand trial for criminal fraud in April over allegations that he lied to investors about the electric truck company’s technology.
As a rare female founder, and one who deliberately made comparisons to Apple’s Steve Jobs in court, Holmes won a star-studded board and drew breathtaking media coverage of both her meteoric rise and dramatic fall.
But this result was not the product of a hasty rush for judgment: the convictions came after a 15-week trial and more than 50 hours of deliberation. Theranos employees testified about the gap between her claims and reality, while investors described her proposals for finance.
The jury was not convinced by Holmes’ attempts to blame the company on others, including former president Ramesh Balwani, whom she accused of mental and physical abuse.
Holmes is expected to appeal, a process that could take years. But the split verdict will make it harder for her to argue that she’s unfair as a scapegoat. Jurors extensively rejected attempts to hold her responsible for erroneous blood test results reported to patients.
They seem to have taken seriously the judge’s order that the patient charges would require them to find that Holmes persuaded clients to use her tests instead of a traditional laboratory. The jurors were also unable to rule on three charges involving investors who deposited money, even after Holmes denied their requests for additional information.
Some apologists already say that Holmes should be jail spared for she was punished enough. This is ridiculous. Privileged people who use their connections and credentials to steal do just as much harm to our society as those who use grosser methods.
Investors have been pouring cash into thousands of tech startups over the past few years and some of those companies will inevitably disappoint. Holmes’ conviction is a timely warning that there is a crucial difference between rosy optimism and outright fraud.