January 09, 2022

Elizabeth Holmes Verdict: Lying to Consumers is OK in the US but not to Investors

Prabir Purkayastha

THE verdict on Elizabeth Holmes, the CEO of Theranos, who was tried for fraud, was guilty. Theranos was a company set up by Holmes and her former partner Ramesh "Sunny" Balwani and had promised to revolutionise testing. Their advanced biotech equipment—they claimed—would provide results for a whole battery of tests with just a few drops of blood.

In its heyday, Theranos was worth $9 billion, and Elizabeth Holmes was looked upon as the Steve Jobs of the coming Silicon Valley's biotech revolution. Holmes was the face that launched billion-dollar stock sales to private equity and venture funds. She figured in 2015 as one of the most influential persons of the year and was feted by Wall Street as the world's youngest billionaire. The trial evidence showed that Theranos technology did not work, and she, while fully aware of it, knowingly falsified the results and forged documents. These documents showed that major pharmaceutical companies endorsed her products, and even the US military was using Theranos equipment in the field.

Holmes got major names in the industry to invest almost a billion dollars into Theranos. The investors included the Walton family who owns Walmart, Rupert Murdoch, the major media mogul, and Trump's secretary of education, Betsy DeVos and her family, Larry Ellison, the Oracle founder and many other money bags.  Theranos’s board of directors had dazzling names including former US secretaries of state, Henry Kissinger and Geroge Shultz, former US secretaries of defence, James Mattis and Willam Perry.

This is the characteristic of today's stock market: it is dominated by trillions of dollars of private wealth, estimated by the Economist to be in the range of $9 trillion (Family offices become financial titans: Dec 18, 2018).

The twist in this tale of fraud and greed is that the court did not convict Holmes of defrauding her thousands of patients who used Theranos' faulty tests. On those counts, she walked free. In the heartland of capital, the real sin is to defraud investors, not your customers! This is good, old fashioned American justice: customers are suckers, it is alright to treat them as such, but not the investors who are big money. In the Theranos case, they had put in $945 million in a technology hyped by Ellen Holmes in the best tradition of Silicon Valley: fake it till you make it!

What was Theranos faking? It claimed that, unlike conventional blood testing methods, which need to take about three cubic centimetres (or millilitres) of blood, normally from our veins (venipuncture) in the crock of our arms. The amount could increase to 30 ccs depending on the number and type of tests. Theranos claimed that they would use a small container called a "nanotainer" and a special machine called Edison to take only a few drops of blood—1/100th to 1/1000th of conventional tests—to run a battery of tests. Later on, the Edison was replaced by a miniLab, which was supposed to deliver even better results and number of tests.

It was not Edison or miniLab did not deliver results; they did. But the results had very large errors.  Faking it of Theranos did not stop in merely the accuracy of its tests. It claimed it could do more than 1,000 tests using its miniLab; it could do only 12. It claimed it did not use any equipment but its own in Theranos chain of diagnostic labs. It did: contrary to these claims, the bulk of its tests was performed on commercially available machines from other companies. They used the small nanotainer samples by diluting them to increase the volumes required by commercially available machines.

Not surprisingly, these tests carried out in either Edison or after dilution of the samples had large errors. The patients were the victims of these results. For example, in the trial, evidence was placed that a Theranos test indicated a patient had suffered a miscarriage when she had not.

A reporter, Roger Parloff, wrote in a cover story for Fortune (June 2014), the US financial magazine on how Theranos was bringing a revolution to the testing industry using the fingerstick method and the number of tests it could perform. He wrote, "To me, it felt more like a tap than a puncture… and the sheer number of tests the company could do at a lower cost than competitors." A fingerstick is a device that is routinely used, for example, in checking our blood sugar at home. It does not draw blood from our veins but from the capillaries close to the skin and draws only one or two drops.

Parloff wrote, "Theranos's tests can be performed on just a few drops of blood, or about 1/100th to 1/1,000th of the amount that would ordinarily be required, an extraordinary potential boon to frequently tested hospital patients or cancer victims, the elderly, infants, children, the obese, those on anticoagulants, or simply anyone with an aversion to blood draws." He corrected his story in December 2015, after John Carreyrou started a series of exposes in Wall Street Journal in October 2015. Wall Street Journal's series started the unravelling of the media image of Theranos and ultimately its downfall.

It was articles like Fortune's, supported by high profile persons in Silicon Valley that put Ellen Holmes on the road to stardom and her company becoming one of the biotech heavyweights. She was highly photogenic, was selling an idea that was easy to grasp and, with technology hurtling at a breakneck speed, believable to the billionaires out to make a killing through early investments in successful ideas. The Theranos problem was, she faked it too far and left too many paper trails to her claims which were verifiably wrong.

Ellen Holmes was a 19-year-old dropout from Stanford who used the money that her family had given her for her education. She teamed up with Sunny Balwani, a tech-entrepreneur, who had successfully sold out from one of the start-ups netting $40 million during the 90s dot-com bubble. He joined as the chief operating officer(COO) of Theranos with Ellen Holmes as its chief executive officer(CEO). Sunny Balwani is also being sued separately for fraud.

The media, including those who are disturbed by the trial focussing on fraud of investors, not on the patients who got erroneous results, do not understand bourgeois law. Protecting private property is central to bourgeois law, not people. It is the task of regulations to see that the public is protected from harm by companies acting to maximise their profits. These regulations have been systematically weakened to help capital against the interests of the consumer during the hyper-capitalist regime starting with the 90s that we call neoliberalism.

The case against Ellen Holmes was supplying doctored evidence or making false statements to investors. Lying to users of Theranos tests is apparently not fraud; or as Elizabeth Lopatto in Verge (January 5, 2022) put it, "For the charges to stick, jurors had to believe Holmes had intended to defraud patients, not merely give them bad results." Giving bad results knowingly to patients is not a crime; but giving wrong information to your investors is!

Why did not regulators look at Theranos' Edison and miniLab instruments? At its height, Theranos was generating nearly 900,000 tests a year without its lab or instruments needing to conform to any US regulation or law. This is the big loophole in US regulations: any laboratory-developed diagnostic tests designed, manufactured and used within a single laboratory is not regulated. This is not only true for Theranos tests but also a number of other tests, notably cancer tests that use the same loophole. Will this case and verdict change the laboratory test industry and plug the Theranos loophole? Nothing that we see currently shows any inclination of the US authorities to regulate the biotech industry on this count; unless we see more Theranos happen.

Theranos ceased operations in 2018, and its CEO, Ellen Holmes, is now waiting for her sentencing. The company’s stock and its technology are now worthless. The house of cards that Holmes and Balwani built has collapsed. But has the, “fake it till you make it,” collapsed in Silicon Valley? Elizabeth Lopatto (The Verge, January 5, 2022) takes a more cynical view that it will only make the Valley more cautious and not get caught red-handed lying to your investors. Lying to the people is OK—as the Theranos verdict shows—but not to the money-bags.