Tag: theranos

FraudHealthcareLitigationSecurities

Securities Fraud: The United States v. Elizabeth Holmes

on October 13, 2021

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):

  1. The defendant was part of a scheme to defraud another person, such as obtaining money or something else of value through false pretenses.
  2. The defendant acted knowingly with the intent to defraud.
  3. The defendant made or caused to be made false representations that were material to the scheme to defraud.
  4. 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.

Update:

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.

Criminal LawExpert WitnessForensic PsychiatryFraudUncategorized

Elizabeth Holmes Fraud Trial: Mental Disease & Defect Defense

on September 29, 2020

Before Nikola and the Trevor Milton scandal, there was a prominent blood-testing startup called Theranos. Its founder, Elizabeth Holmes, currently faces a criminal fraud trial.

If you’ve been tuning into business news recently, the latest scandal with Nikola, a electric-powered truck manufacturer, and its founder, Trevor Milton, is no surprise to you.

For those who have not been following along, a quick summary is as follows: Nikola (NKLA) recently became a publicly traded company alleging they had hydrogen fuel cell (battery) technology that would revolutionize the trucking business. The stock did well after IPO. Nikola then did a multi-billion dollar deal with General Motors. The stock went higher. A few days after the GM deal, a short-seller released a report that accused them of a being an intricately constructed fraud. The founder, Trevor Milton, contested the accusations on social media and asked for time so he could rebut all of the allegations. Within a couple of days he went silent, was removed as executive chairman, and deactivated his social media accounts. It has been widely reported that both the SEC and DOJ are conducting investigations related to his actions and claims as founder and executive chairman.

I share that story because some news agencies have suggested Trevor Milton’s story is similar to that of Theranos founder and CEO, Elizabeth Holmes. Ms. Holmes is now facing a criminal fraud trial and she is the focus of our our post today. Stay tuned next week for some further discussion on the issues surrounding Nikola.

Background:

Elizabeth Holmes founded a privately held biotechnology company called Theranos. The company intended to revolutionize blood tests, with just a drop of blood. No more needles and vials, just a small drop of blood, and the tests results would be available rapidly. Ultimately, they failed to deliver tangible results and led consumers to believe false promises. After receiving more than $700 million in private investment, the company began falling apart.

In Spring 2018, Holmes was charged with fraud by the SEC, as reported by Bloomberg. This being a civil action, Holmes settled it without admitting any of the allegations. The settlement required her to relinquish her shares to the company and abstain from being an officer or director of a public company for a period of 10 years. There was also a fine, according to Barron’s. To the best of my recollection, Ms. Holme’s settled with the SEC on the same day she was charged.

In the Summer of 2018, the US Attorney’s office filed charges against Holmes’ for conspiracy and wire fraud, as reported by CNN. This criminal indictment is the inspiration for this blog post.

For more than 2 years, we’ve followed the developments in the criminal prosecution of Elizabeth Holmes, wondering if it would lead us to an interesting analysis from an expert witness perspective. In September of 2020, I found this article from the New York Daily News. It seems Ms. Holmes is preparing for the use of a “mental disease or defect” defense.

More specifically, the article from the New York Daily News, indicated the judge had assigned a neuropsychologist and psychiatrist to conduct a two-day, 14 hour evaluation of Ms. Holmes. Additionally, this evaluation is to be recorded. Now, I had never heard of psychological evaluation being this long and I worked in the mental health field for years before joining Experts.com.

To the best of my knowledge, I had not heard about the “mental disease or defect” defense since law school. I remembered it as a mitigating factor to a crime. Something we learned about when we learned about defenses and factors related to defenses.

So, I did what I usually do with these blog posts, and reached out to the experts. This time, I thought it would be good to get insights from a federal public defender and a psychiatrist.

First, let’s see get a view of the legal opinion…

Analysis from Federal Defense Attorney, Diego Alcalá-Laboy:

Diego Alcalá-Laboy is a criminal defense attorney with his own practice Defensoria Legal, LLC, in Puerto Rico, where he represents federal criminal defendants and advises startups. He is also an adjunct professor at the Inter-American University, School of Law and teaches the Federal Evidence and Federal Criminal Procedure courses at the University of Puerto Rico Law School’s Federal Bar Review.

Nick Rishwain: Why would one use a defense of “mental disease” and what impact might it have on the case?

Diego Alcala: A prosecutor must prove that a defendant intended to commit an act (mens rea), and that he committed the act (actus rea). And most crimes require that the defendant acted intelligently, knowingly, or willfully, and on some occasions recklessly or negligently. The type of “mens rea” a crime requires is defined by Congress and the interpretations given by the courts. On some occasions, an offense may not even require a mens rea, such as with strict liability offenses.

Crimes may have different elements, and a prosecutor may have to prove that the defendant had the required mens rea to commit each element of the offense. If the prosecutor cannot prove this, the defendant may be found not guilty.

Congress also recognized that a defendant may show that because of a medical defect he was unable to appreciate the nature and quality of his or her acts because of a severe mental disease or defect. After the John Hinkley trial, Congress amended its statutes and eliminated the affirmative defense of diminished capacity but allowed a defendant the possibility to attack an element of an offense because of a mental condition.

This is a lot harder than it sounds. The Courts are the gatekeepers of the any scientific testimony intended to be presented at trial. Therefore, whenever a defense of mental defect is offered by a defendant, the Court must ensure that the evidence offered is grounded in sufficient scientific support. This scientific evidence then must be scientifically sound and must also show that the medical condition negates mens rea of an element of the offense. So, a defense of mental defect, if grounded on scientific basis, and shows that it negates an element of the charged crime, will clear the defendant from a particular case.

NR: Have you ever seen a “mental disease” defense used in a criminal fraud matter?

DA: I have never seen a mental disease defense presented before. But I did find some cases where the defense tried to introduce this type of evidence but was ruled inadmissible because it did not satisfy the Court that the proffered evidence: a) was based on sound scientific principles, or b) even if it was based on sound principles, it failed to negate mens rea for the element(s) of the offense. In fraud cases, a defendant is accused of committing some type of false representation. It follows that the evidence of mental disease must show that if his/her medical condition can be logically connected to a subjective belief that his/her assertions were not false, baseless, or reckless vis-a-vis the truth.[1] I have not found a fraud case in which the defense has been able to overcome this burden.

NR: If it is established that Elizabeth Holmes is suffering from “mental disease,” can she still be held criminally liable for her actions?

DA: If a defendant presents a successful mental disease defense, the federal law states that she will be found not guilty. But a finding of not guilty does not necessarily mean that she is free to leave. A determination of not guilty by reason of mental defect will then place a defendant in a “suitable facility” and may be release only after showing that she is no longer a threat.

NR: Does a “mental disease” defense have much success in federal criminal trials?

DA: As mentioned, I have not found a successful case, and primarily the difficulty lies in the very narrow type of cases that may meet the discussed admissibility standard. Even if she can get this evidence into trial, it is still up to the jury to accept this defense.

Now that we have some idea of the application of the law for fraud in federal criminal cases, we need to review the science as outlined by Mr. Alcalá.

Analysis from Forensic Psychiatrist and Expert Witness Dr. Sanjay Adhia:

Dr. Sanjay Adhia is triple-Board-Certified in Forensic Psychiatry, Brain Injury Medicine, and Psychiatry. Dr. Adhia serves as a Psychiatrist and Brain Injury Medicine specialist at TIRR Hermann Memorial, a Rehabilitation and Research hospital treating those with brain and spinal cord injuries and psychiatric elements of their injury and recovery. In private forensic practice he conducts Independent Medical Examinations (IMEs), and renders his opinions by report and testimony. Dr. Adhia serves on the faculty of McGovern Medical School at UTHealth. You can visit his website at: forensicpsychiatrynow.com.

Nick Rishwain: According to the psychiatric community, what constitutes “mental disease” and “mental defect?”

Sanjay Adhia, MD: These are more legal terms rather than actual formal psychiatric definitions.

According to Merriam-Webster, the legal definition of “mental disease” is “an abnormal mental condition that interferes with mental or emotional processes and internal behavioral control and that is not manifest only in repeated criminal or antisocial conduct”.

Examples would include Schizophrenia, Schizoaffective Disorder and Bipolar Disorder which are considered Severe Mental Illness (SMI). These conditions may lead to psychiatric hospitalization. The conditions maybe associated with and loss of touch with reality and a lack of volitional control.

“Mental defect,” on the other hand, is defined by Merriam-Webster as a “an abnormal mental condition (as mental retardation) that may be of a more fixed nature than a mental disease”.   “Fixed” disorders would include Intellectual Developmental Disorder (IDD; formerly known as mental retardation), Autism and Brain Injury. According to this definition, Antisocial Personality Disorder (ASPD) would be excluded. ASPD is marked by a tendency to lie, break laws, and act impulsively. It shares some features with psychopathy or sociopathy. A number of states do not permit the use of ASPD in the insanity defense.[2] Allowing ASPD would have unintended repercussions. For example, it could potentially permit a defendant like Ted Bundy or Jeffrey Dahmer to avoid prison.

NR: In the court order, it limits the evaluation of Ms. Holmes to a 14 hour, 2-day, psychiatric examination. Is this out of the ordinary in a criminal matter?

SA: There is a wide range of exam times in criminal cases. It would depend on a variety of factors including the type of case, the jurisdiction, the funding available and the severity of the charge. Assessment time in a misdemeanor will not be identical to a capital case. Ms. Holmes’ case is not a capital case, but it helps to understand differences in how long the examination might take. The exam time in a Competency to Stand Trial for a misdemeanor trespassing case would likely be under two hours. I have seen some examiners spend 30 minutes for the interview in such cases. The other extreme would be Capital cases which could go over 8 hours or several days; this is especially true if neurocognitive testing is required, which can take an entire day.

Again, in a capital case the threshold and the stakes are very high—especially in death penalty cases that often go to the appeals court.

In misdemeanor cases, you may have a single mental health expert and the findings may be accepted without the need for an opposing expert. In Capital cases, the defense itself may retain several mental health and other medical experts (i.e. Fetal Alcohol Syndrome experts). In the Holmes case, the 14 hours is to be shared between a forensic neuropsychologist and a forensic psychiatrist.

As it is a high-profile case, it is possible that the court may allow additional funds or there maybe a willingness of the expert to work within a budget.

It is my experience that the examination in insanity cases take more time than other types of cases as you have to elicit a detailed account of the crime from the defendant and then determine the mental state at a time in the past and consider malingering (lying for secondary gain—like a lesser sentence). I suspect in the Holmes case, it is likely the charges are not limited to one circumscribed incident so it could take additional time. It is worth noting that time spent reviewing records and preparing a report could exceed twenty hours or more.

NR: What information might you need to establish or rebut an insanity defense?

SA: In addition to interviewing the defendant, it would be helpful to review medical records, legal records along with police records and videos. I often will interview collateral informants as well. In Ms. Holmes’s case there maybe, media accounts, if admissible, as well as financial records and corporate documents. Of course, an expert would review the other expert witness reports. Records in a violent crime could include an autopsy, or blood splatter expert reports, for example. In the Holmes case, there may be a forensic accounting or fraud expert report.  Other sources of data could include polygraph testing, school records and employment records.

NR: In the Holmes case, the defense has retained a trauma expert. Is it common to successfully assert an insanity defense in cases of PTSD?

SA: Insanity defenses are more commonly associated with other diagnoses that are considered to be more severe forms of mental illness such as schizophrenia, bipolar disorder and IDD because they have a different impact on decision-making and regulating behavior. Although many individuals with PTSD do suffer with severe symptoms, they are generally able to maintain awareness of the nature of their acts and appreciate the wrongfulness of such acts. In jurisdictions that allow for the volitional prong, individuals with PTSD are generally considered to be able to behave lawfully. Of course, there are cases where PTSD is successfully asserted as an insanity defense.[3] In cases where the defense attorney realizes the PTSD does not lend itself for an insanity defense, they may successfully utilize it for sentence mitigation.

[1] United States v. Bennett, 29 F. Supp. 2d 236 (E.D.Pa. 1997), aff’d 161 F.3d 171, 183 (3d Cir.1998), cert. denied, 528 U.S. 819, 120 S. Ct. 61, 145 L. Ed. 2d 53 (1999)

[2]Does A Psychopath Who Kills Get to Use the Insanity Defense? NPR, 8/3/16, by NATALIE JACEWICZ

[3]PTSD as a Criminal Defense: A Review of Case Law by Omri Berger, Dale E. McNiel and Renée L. Binder; Journal of the American Academy of Psychiatry and the Law Online December 2012, 40 (4) 509-521;

Business ValuationExpert WitnessLitigationSecurities

SEC Charges Theranos CEO with Massive Fraud – Securities Expert Witnesses

on March 14, 2018

Once considered “The Next Steve Jobs” or the “female Steve Jobs,” Elizabeth Holmes has fallen from grace and landed directly in the cross-hairs of the Securities and Exchange Commission (SEC). Today, the SEC filed a civil complaint against Elizabeth Holmes and her company Theranos, Inc. There was a separate action filed against the Chief Operating Officer, Ramesh “Sunny” Balwani.

The complaint alleges, in part:

“Holmes, Balwani, and Theranos raised more than $700 million from late 2013 to 2015 while deceiving investors by making it appear as if Theranos had successfully developed a commercially-ready portable blood analyzer that could perform a full range of laboratory tests from a small sample of blood. They deceived investors by, among other things, making false and misleading statements to the media, hosting misleading technology demonstrations, and overstating the extent of Theranos’ relationships with commercial partners and government entities, to whom they had also made misrepresentations.”

Oh the good old torts of negligent and intentional fraud and misrepresentation. Takes me right back to the first year of law school, when Nickelback was a hot new band, rather than the sad punchline of Internet memes. I digress.

The complaint goes on to allege that based on representations, investors believed Theranos had developed a proprietary medical device able to conduct comprehensive diagnostic tests from a small amount of blood taken from the patients’ finger. They also made representations that they would collect and transport these samples in order to complete the tests on their proprietary analyzer. All of this would be done more efficiently and economically than traditional blood testing labs.

According to the complaint, Theranos was only able to perform about 12 of the 200 tests they claimed they were capable of performing.

Let’s stop here and give a simple warning: If you are soliciting money from investors, make it very clear what you are able to achieve. Differentiate this from what you hope to achieve in the future. Do not mix the two. Otherwise you get into a bad area called misrepresentation, or in this case, securities fraud.

A wide variety of expert witnesses:

In complex civil litigation such as this, there is room for a wide variety of different experts. I can only imagine the SEC and Theranos are both using consulting experts at this time in preparation for a long drawn out litigation. The complaint has only been filed today, so expert disclosures are a way off. Here are a few types of expert witnesses or consulting experts I expect to see in this matter.

Corporate Governance:

Expert witnesses on corporate governance are highly likely to play a role in this case. Officers of a corporation are fiduciaries of the corporation. Holmes owed a duty of care to the company and to her investors. She is accused of misrepresentation which, if proven, would certainly violate the standard of care owed to shareholders and the company. I expect there will be significant dispute by the parties to prove she either did or did not violate her fiduciary duties.

Securities & Finance:

Several different types of experts who practice in the area of securities fraud may come into play. We are likely to see experienced Wall Street experts with a history in equity trading, proprietary trading, investment research, securities valuation, financial forecasting, venture capital and investment banking.

Some experts will probably have backgrounds in IPO’s, private equity financing, securities financing, and stock options financing.

In this area, I feel as though I can go on ad infinitum. That’s not true and it is probable one or two candidates will have the requisite expertise, described in this section, to address the finance and fraud related matters.

Economics:

Although the SEC is primarily suing for injunctive relief, they do mention the potential for civil monetary penalties. I would expect there will be some need for an economist (by both parties) to establish the value of Theranos and shares owned by Holmes and Balwani.

As I do not practice securities litigation and this is not a law review article, it is possible the civil penalties are predetermined by the Securities Act and there is no need to value the penalties other than by the trier of fact.

UPDATE:

Within hours of writing this blog post, I discovered that Elizabeth Holmes has settled with the SEC. According to Reuters, she will be stripped of her majority control of the company and will have to return millions of shares to Theranos. She will also pay a $500,000 fine and be barred from being an officer or director of a public company for 10 years. As of this update, Mr. Balwani has not settled with the SEC.