In 2018, Experts.com uploaded a blog post regarding the separate SEC charges against Theranos founder, Elizabeth Holmes, and Chief Operating Officer, Ramesh “Sunny” Balwani, for securities fraud and injunctive relief. The post offered predictions of the types of experts expected to provide their insight on the situation due to the case’s multifaceted nature. As the trial began on September 8th, 2021, this month’s blog post will cover the events that have transpired since the SEC charge in 2018, the opening statements made in the trial thus far, and insight from Experts.com Member, Mr. James (Jim) Ellis, to help explain the legalities from an Expert Witness perspective.
2018 to the Present (Timeline by CNN)
As mentioned, the SEC has pressed separate charges against Holmes and Balwani for securities fraud in March 2018. Before these charges, Theranos had advertised how it could drastically change the healthcare industry by providing the world’s first portable, needle-free, and affordable blood analyzer sold in stores like Walgreens and Safeway. Essentially, people can test for various diseases and get results from a prick of a finger. Theranos would be a pioneer in modernizing blood tests without large vials with the help of their Edison blood analyzer machines. Investors were sold on this dream and the company was able to garner a net worth of $9 billion. Due to this seemingly revolutionary invention, she was heralded as the “next Steve Jobs” by multiple news outlets.
Since 2015, suspicions have been raised by various media and medical groups including the Wall Street Journal, Journal of the American Medical Association, Food and Drug Administration, Central for Medicare and Medical Services, and various investors, as the technology of Theranos’ product proved to be faulty. Holmes and Balwani not only denied any wrongdoings when criticized by skeptics, but they continuously reassured customers and investors that their blood analyzer was sure to be the next life-altering invention for the healthcare industry. As time went on, Theranos failed to execute its mission technologically, ethically, and by medical guidelines. Investors sued for fraud in 2016. The amount of money misappropriated by Theranos totaled approximately $700 million.
This led to the eventual indictment of both Holmes and Balwani despite having separate SEC charges. According to ABC News, Holmes agreed to pay a $500,000 fine, relinquish her role as CEO of Theranos and any other publicly traded company for the next decade, and give back her $18.9 million in stocks. As for Balwani, it remains to be seen whether he will decide to settle with the Securities and Exchange Commission. ABC News also highlighted Balwani’s attorney, Jeffrey Coopersmith, stating his client, “accurately represented Theranos to investors to the best of his ability.” He will, however, still be tried in court after Holmes.
Since the settlement, the rise and fall of Theranos have been the subject of various documentaries like HBO’s “The Inventor: Out For Blood in Silicon Valley,” (2019) and ABC’s podcast “The Dropout: Elizabeth Holmes on Trial,” (2019). Holmes’ trial date was set to occur in 2020, but due to the pandemic and her pregnancy, the trial was delayed and set for 2021.
The Trial (CNN Business)
On September 8th, 2021, the long-overdue trial between Elizabeth Holmes and the U.S. Government began. As this trial is ongoing, there is a limited amount of information. In his opening statement, Robert Leach, Assistant U.S. Attorney and lead prosecutor for the case stated, “This is a case about fraud, about lying and cheating to get money… Out of time and out of money, the defendant decided to mislead…. The defendant’s fraudulent scheme made her a billionaire. The scheme brought her fame, it brought her honor, and it brought her adoration.”
Holmes’ attorney, Lance Wade, shot back in an opening statement for the defense with, “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… In the end, Theranos failed, and Ms. Holmes walked away with nothing. But failure is not a crime. Trying your hardest and coming up short is not a crime.”
There have been some predictions about what strategies Holmes’ legal team may use in court. In 2020, CNN reported the relationship between Holmes and Balwani was more than just business partners. As the two were romantically involved in the past, and according to recently unsealed court documents, Holmes may admit to experiencing emotional, psychological, and sexual abuse. Whether Holmes testifies regarding these claims remains to be seen. Balwani has vehemently denied the abuse allegations, and since his trial commences after Holmes’, only time will tell if this topic will be discussed in court.
(photo credit: New York Post)
Insight from Our Members
Considering the charges of the trial, Experts.com Member and Private Investigation Expert Witness, Mr. James (Jim) Ellis, sheds light on the elements that constitute wire fraud and the situations for which the federal charge is used. According to Mr. Ellis, “Wire fraud, and mail fraud as well, are generally federal statutes that can be used against fraud schemes where no other federal statutes apply.” Since the statute is extensive, federal prosecutors use this to charge the varying types of fraud. Four characteristics constitute wire fraud (941. 18 U.S.C. 1343, United States Department of Justice Archives):
- The defendant was part of a scheme to defraud another person, such as obtaining money or something else of value through false pretenses.
- The defendant acted knowingly with the intent to defraud.
- The defendant made or caused to be made false representations that were material to the scheme to defraud.
- The defendant transmitted a material misrepresentation by wire, radio, or television communications in interstate or foreign commerce.
Mr. Ellis adds how the courts also include electronic communication in their interpretation of the statute due to the emergence of the internet and cellular devices in recent decades. This increases the odds of Ponzi schemes, phishing, catfishing, online shopping scams, and other duplicitous actions taking place. Most of these cases would not be considered wire fraud scams unless the dollar amount lost equals or surpasses $1 million. Anything less does not warrant federal attention. Although this is unrelated to the Theranos v. United States Government trial, Mr. Ellis mentioned, “According to the FBI, over $600 million was stolen from unsuspecting people in 2020 through online romance scams.”
From the elements of the statute and the multitude of avenues wire fraud can be committed nowadays, it can be inferred that wire fraud cannot be an accidental crime. Due to the second element of wire fraud, federal prosecutors who use this charge must provide evidence of the defendant having the intent to scam individuals, knowingly providing promises under false pretenses, and doing so to acquire monetary gain from their victims.
To play devil’s advocate regarding Elizabeth Holmes’ trial, it is possible her intention at the beginning of building her business was not to scam investors and patients. From her interviews on various media channels, her belief in Theranos and its mission never wavered. Mr. Ellis imparts, “However… if the same person began to realize their company wasn’t sustainable or even profitable, or if their product wasn’t turning out as they thought it would; and they knowingly made misrepresentations about their company or product in the hope they could eventually turn it around; then they quite possibly have committed wire fraud.” Because it is difficult to distinguish a failed attempt from a duplicitous sale, law enforcement must be meticulous in looking for the elements of fraud (listed in the statute above) before starting an investigation.
This case is interesting not only because of the nature of Theranos’ inventive endeavor, but because we see two corporate executives being sued for wire fraud. Mr. Ellis mentioned, “Often the federal government will use civil statutes to target the corporate entity itself. The wire fraud statute is normally used against the employees of a corporation who is committing fraud.” Those who hold corporate positions, especially people that lead the corporations, tend to be entrepreneurs. Why is this important? Because those with an entrepreneurial spirit are most likely to find themselves in legal matters like Elizabeth Holmes if they are not careful enough. “These people who start new ventures, even with the best of intentions, could easily fall into a trap of telling a ‘white lie’ to not let a dream die,” Mr. Ellis added. The question of how often corporate executives find themselves in civil or criminal fraud lawsuits remains unanswered, but what is salient is the undesirable consequence of committing wire fraud, an outcome Elizabeth Holmes and Sunny Balwani are currently facing.
It remains to be seen how this will all play out in the courtroom but investors, clients, and the general public are on the edge of their seats to learn the fate of these two infamous entrepreneurs.
On Monday, February 21st, 2022, Elizabeth Holmes was found guilty on four of eleven counts of conspiracy to commit wire fraud and wire fraud. The four counts are (WSJ):
- Conspiracy to commit wire fraud against Theranos investors.
- Wire fraud against Theranos investors: wire transfer of $38,336,632 from PMF Healthcare Master
- Wire fraud against Theranos investors: wire transfer of $99,999,984 from Lakeshore Capital Management LLP
- Wire fraud against Theranos investors: wire transfer of $5,999,997 from Mosley Family Holdings LLC
According to New York Times, Ms. Holmes “faces a maximum sentence of 20 years in prison for each count.” Her sentence will be finalized and announced on September 26th, 2022. Sunny Balwani’s trial commenced on March 23rd, 2022, so the verdict is yet to be determined.