Broken Love at Theranos May Be Tested in Criminal Fraud Case

(Bloomberg) -- Former Theranos Inc. Chief Executive Officer Elizabeth Holmes may team up with her ex-boyfriend, the company’s former president, to fight criminal fraud charges. Or they may be foes.

Holmes and Ramesh “Sunny” Balwani confront a proverbial prisoner’s dilemma: stand together to fight prosecutors, or point fingers at each other. The challenge isn’t just whether to trust an ex’s loyalty, lawyers say. If one is offered a deal to help prosecutors, there’s still no guarantee they’ll avoid years in prison.

The romance is “a complicating factor, probably, for everyone involved,” said Barbara McQuade, a former prosecutor and law professor at the University of Michigan.

The case is sure to be closely watched in Silicon Valley, where the blood-testing startup was once valued at as much as $9 billion and a darling of the media and tech community. And there’s the drama of seeing how the former lovers choose to fight claims they masterminded a massive fraud that allegedly duped investors out of $700 million. The pair split on the Securities and Exchange Commission investigation, which may indicate how they’ll handle the criminal case. Balwani is fighting the SEC, but Holmes settled.

“If I were the prosecutor, I would approach her about cooperating in the criminal case,” McQuade said. “I imagine that her settlement of the civil case would make him a little bit nervous that she would continue to cooperate against him in a criminal investigation.”

John D. Cline, a lawyer representing Holmes, didn’t respond to email and phone messages seeking comment. Kelly M. Gorton, a lawyer representing Balwani, declined to immediately comment.

In the SEC case, Holmes didn’t admit wrongdoing but did pay a $500,000 fine and was barred from being an officer or director of a public company for 10 years.

At a hearing Thursday in San Jose, California, experts expect either the government or Balwani to ask U.S. District Judge Edward J. Davila, who is overseeing both the SEC and criminal cases, to put the civil suit on hold while the other moves forward.

Holmes and Balwani are accused of lying for years, claiming Theranos machines could perform myriad tests with a single drop of blood, according to the June indictment. They used adoring publicity to defraud investors and prop up the closely held startup, prosecutors said. The pair are also accused duping doctors and patients who trusted the test results.

To win a guilty verdict on conspiracy and wire fraud claims, prosecutors must convince jurors that Holmes and Balwani knew they were lying and intended to deceive investors, doctors and patients.

Holmes founded Theranos in 2003. Six years later, when the company was almost out of cash, Holmes turned to Balwani -- who the SEC said was then her boyfriend -- for a $12 million line of credit. In September 2009, Balwani was appointed president and chief operating officer.

After Balwani joined, Threanos became markedly more secretive and adversarial, according to Anthony Nugent, a former vice president who testified last year in a shareholder suit against the company.

“The atmosphere of the place became caustic,” Nugent testified. That lawsuit was settled.

While Nugent was aware of their romance, it was largely kept secret. Holmes’s brother Christian worked at Theranos and also testified in the shareholder suit. He said that as late as 2015 his sister was weighing whether to disclose the relationship to board members.

Balwani, who has said he invested millions of dollars of his own money in Theranos, left in May 2016, a week before it was disclosed that the company was forced to correct tens of thousands of patient test results amid scrutiny over the accuracy of its technology.

The hidden relationship is “indicative of just another lie, another thing that’s been hidden,” said Reed Kathrein, a lawyer representing investors in another recently resolved shareholder suit. “They can’t even tell their board of directors they have a romantic relationship -- they’re lying from the get-go.”

While the relationship could help prosecutors argue they both knew what was going on and discredit attempts by either one to point the finger at the other, McQuade said the government has to be careful to not overplay the romance.

“You don’t want to be seen as prying unnecessarily into someone’s private life or exploiting salacious details of a relationship for gain in the case unnecessarily,” she said. “You don’t want to be seen as the morality police and distract the jury from focusing on the crime.”

The criminal case is U.S. v. Holmes and Balwani, 18-cr-00258, U.S. District Court, Northern District of California (San Jose). The SEC case is Securities and Exchange Commission v. Ramesh Sunny Balwani, 18-cv-01603, U.S. District Court, Northern District of California (San Jose).

©2018 Bloomberg L.P.

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