Theranos Patient Fraud Charges May Move a Jury More Than Money

(Bloomberg) -- The audacity of the con prosecutors say Elizabeth Holmes and her ex-boyfriend perpetrated -- not just on investors, but on doctors and patients -- has the potential to result in significant prison time, legal experts said.

Holmes, until last week the chief executive officer of Theranos Inc., and former company president Ramesh “Sunny” Balwani were criminally charged last week. The indictment for investment fraud wasn’t a surprise, lawyers said, given the seriousness of related civil charges brought against the pair in March by the U.S. Securities and Exchange Commission.

More unusual was the addition of a second conspiracy -- transmitting the results of blood tests to patients that prosecutors say Holmes and Balwani oversaw and knew were likely to be unreliable. Those charges could act as a prosecutorial insurance policy, experts said: A juror unmoved by venture capitalists being hoodwinked might prove more sympathetic to doctors and patients getting HIV or diabetes blood tests that Holmes and Balwani knew to be inaccurate.

“That reflects a certain callousness, which doesn’t bode well for the defendants,” said William Portanova, a former federal prosecutor.

“This is such a monstrously large and long-term fraud, if true, and the evidence as detailed in the indictment appears truly criminal,” he said. “We could be looking at unprecedented sentences here. And by that I mean maximum terms.”

Holmes, 34, dropped out of Stanford University to found Theranos. She rose to national attention starting in 2013 when she claimed the company’s machines could run thousands of medical tests using the blood from a finger-prick instead of vials, and do so quickly and cheaply. She and Balwani, 53, raised millions from investors; at one point, Theranos was valued at more than $9 billion.

In 2013 Theranos promoted its testing services in a partnership with Walgreens stores in California and Arizona. Prosecutors point to the publicity of the partnership, and the dramatic growth it promised, as just one of Holmes’s and Balwani’s lies.

Unreliable Results

Hundreds of patients and their insurance companies paid Theranos for tests and results Holmes and Balwani knew might be inaccurate or unreliable, according to the indictment. The added charge also allows prosecutors to argue that false blood tests, not just financial information, should be permitted as evidence, experts said.

“This conspiracy misled doctors and patients about the reliability of medical tests that endangered health and lives,” John F. Bennett, a special agent of the Federal Bureau of Investigation, said in a statement.

According to a court filing, Holmes and Balwani pleaded not guilty at their June 15 arraignments. Both were released on $500,000 bonds and required to forfeit their passports.

John D. Cline, a lawyer for Holmes, declined to comment.

Balwani “did not defraud Theranos investors, who were among the most sophisticated in the world,” his lawyer, Jeffrey B. Coopersmith, said in an emailed statement. “He did not defraud consumers, but instead worked tirelessly to empower them with access to their own health information. Mr. Balwani is innocent, and looks forward to clearing his name at trial.”

Holmes settled the SEC’s lawsuit without admitting wrongdoing while Balwani is fighting the civil suit.

After the Theranos testing device was shown not to work, Holmes was barred from running a clinical company by U.S. regulators and was sued by investors, and the company let go many of its employees. By the end of 2017, Theranos was nearly bankrupt.

Decades in Prison

Sol Wisenberg, a criminal defense lawyer, said Holmes and Balwani face decades in prison if convicted. Under federal sentencing guidelines, he said, based on the hundreds of millions of dollars solicited from multiple investors, Holmes faces up to 24 years.

“A judge is free to give her less than that, and her attorney is free to argue for less,” Wisenberg said. If Holmes is convicted at trial or pleads guilty, “either way, she is going to prison for a very long time,” he said.

The conspiracy to defraud doctors and patients is the type of additional charge prosecutors sometimes hold out as something they won’t add to an indictment if a defendant agrees to plead guilty to charges beforehand, Wisenberg said. In exchange, prosecutors might, for example, agree to lower the amount of the investor loss claimed, he said. Added to an indictment, it can also make for a longer sentence, he said.

“It adds an emotional portion that a judge will not ignore,” Wisenberg said.

The case is U.S. v. Holmes and Balwani, 18-cr-00258, U.S. District Court for the Northern District of California (San Francisco).

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