Elizabeth Holmes Conviction Leaves Justice Half Served

(Bloomberg Opinion) -- On Monday, the charismatic founder of Theranos Inc.,  Elizabeth Holmes, was found guilty of criminal fraud for her role in building the blood-testing startup into a $9 billion company that collapsed in scandal. She was convicted of four out of 11 counts of conspiracy and wire fraud and acquitted of four counts. The jury didn’t reach a verdict on three of the counts. Holmes was found not guilty of all charges pertaining to defrauding patients.

Bloomberg Opinion columnist Bobby Ghosh was joined by columnist Tim O’Brien and Alex Gibney, director and producer of the 2019 documentary “The Inventor: Out for Blood in Silicon Valley” to discuss the verdict and what it means for Silicon Valley in a Twitter Spaces.

Bobby Ghosh: Tim, I'm going to start by asking you how best to parse this particular set of results from the Elizabeth Holmes case.

Tim O'Brien: The first and easiest cut is that the jury found it easy to decide that investors had been defrauded by Holmes, and possibly others, at Theranos. But they found it more difficult to draw the same conclusion about patients, which concerns me. White collar fraud can be difficult to prove. You have to show that the defendant had knowledge that they were committing a wrongful act. The fact pattern around how investors got defrauded was clearly easier for the jury to chew than whether patients were harmed.

A number of patients testified that their lives were upended because of faulty diagnoses from Theranos. Those patients have been left on the sidelines in this ruling. Having said that, I think it’s important that she’s been held to account. Corporate governance and fraud in Silicon Valley have been a problem for a long time.

Bobby: Alex, in your documentary about Holmes, you portray her as a very complex individual. Some might argue that it’s a slightly sympathetic portrayal, certainly more nuanced than what we’ve often seen in other coverage of the trial. What did you find interesting about her personality?

Alex Gibney: One of the most interesting moments in the trial was when she actually took the stand. I think Elizabeth Holmes, who was a great storyteller in the tradition of her hero, Steve Jobs, felt that she could convince the jury that she was a sympathetic character. She cried, she talked about an abusive relationship with her then-lover Sunny Balwani, who was also the COO of Theranos, and there were a lot of people watching the trial, myself included, who thought she might get off on account of her personal charisma, which would have been a fascinating if unjust result.

I was surprised that none of the charges of defrauding the public were made to stick. I found that to be the most morally abhorrent part of this story: She went live with blood testing machinery, which affected real patients in real ways, knowing that it wasn’t giving good results. She recklessly endangered patients.

Bobby: Why did those charges not stick?

Tim: I can’t get in the head of the jurors, but the standard in a fraud case like this is that you have to prove intent and, as unfortunate as it is, I don’t think the jurors could draw a straight line between Elizabeth Holmes’s actions and direct damage to each patient. In a courtroom it comes down to testimony, documentation and other witnesses. There was an overwhelming amount of clear cut information regarding at least $600 million of other people’s money that she burned through.

But even without being able to prove that Holmes directly had knowledge of the way in which Theranos’s patients were harmed, she was a senior officer at a company that sold this product and made claims for blood-testing abilities that were completely built on sand. In my mind, there’s a lot of justice that’s been left on the table.

Bobby: There’s also the question of who else ought to have been on the dock. Theranos’s board of directors surely bear some of the responsibility for the $600 million.

Tim: One of the most poignant tales in all of this is Tyler Shultz. Tyler was the grandson of George Shultz, the former secretary of state and a Theranos board member. Tyler worked at the company for just several months in 2014 and during that brief time, he became concerned about the claims the company was making, whether or not they had proper quality controls and whether they were actually on the up and up. He brought those concerns to Holmes and Balwani and was dismissed and threatened. When he brought them directly to his grandfather, George Shultz took the side of Theranos’s management and it caused a rift in the Shultz family.

That incentivised Tyler to go to regulators on his own and ultimately talk to the Wall Street Journal. But it wouldn’t have had to come to that if Theranos had a less feckless and more proactive board. This was a board populated with big names. In addition to George Shultz, there was Henry Kissinger; William Perry, a former defense secretary; two former senators; Richard Kovacevich, the former CEO of Wells Fargo; and Jim Mattis, a former Marine Corps general who later became a defense secretary in the Trump administration. There is no indication at all that those illustrious men ever fully carried out their responsibilities as members of the board to oversee what Holmes was doing. They haven’t been really held to account other than reputational damage.

Bobby: Alex, you’ve talked about the prison of belief, where members of the board couldn’t bring themselves to believe that she could have been pulling the wool over their eyes.

Alex: They wanted to believe in this story of a female entrepreneur in male-dominated Silicon Valley. They wanted to believe that she was finding a private business solution to a public health problem. The other aspect of this is that the board was purposefully chosen, I think, by Holmes not to have any real medical expertise at all. As a result, she was able to con them far more effectively. Frankly, they were also charmed by her. There were a lot of old, white men who were responding to an attractive, young woman.

George Schultz faced his own grandson and was so enchanted by Holmes that he just shrugged Tyler’s claims off. Nothing was more poignant than that in terms of how somebody could be captured by that belief. They say a con is not about fooling somebody, it’s about people wanting to be fooled. I think the board members wanted to be fooled.

Tim: In addition to however enamoured they were of Elizabeth Holmes, there was money on the table. Directors on boards get stock options and so often have financial incentives to cheerlead. Greed had to be a factor for some of these folks.

Bobby: You talked about the board being an illustrious group of gentlemen. Let’s talk for a moment about an infamous group of gentlemen. Where does Elizabeth Holmes fit in to the rogues gallery of great American con-artists like  Bernie Madoff or Jeffrey Skilling?

Alex: Intriguingly, though this is a relatively minor point, Elizabeth Holmes’s father actually worked at Enron for a year or two, so there was a direct connection. But I think both Holmes and Skilling were possessed with the idea that the end justifies the means. They were on a mission to convince people that they had something: Skilling had a pure free-market notion of how to run electricity markets and Elizabeth Holmes had this device. They felt therefore that they were entitled to bend the rules.

As they bend the rules more and find themselves in more and more difficult positions, they ratchet up the mendacity, because they’re still hoping that they’re going to succeed, but they realize that they’re not. Instead of directly reckoning with that, they keep finding ways of hiding the problems that they should have been trying to solve. That’s what unites Skilling and Holmes.

Tim: Holmes is going to be in the Pantheon of white collar fraudsters and she certainly belongs in the company of Bernie Madoff and Jeff Skilling. All three of them perpetrated frauds for years and years. While some people did raise red flags about them, no one really aggressively tried to pull back the curtain and see what was going on.

The people who are comfortable sitting at the top of a grift, especially one involving hundreds of millions of dollars, they have to have a sort of psychic, psychological and moral hole at the core of their being. It’s possible that they truly believe that they’re not selling garbage but I have to believe that in some corner of their minds, they know what they’re doing and don’t really care. There were so many stories about Bernie Madoff. Even after his coffers were full in terms of investments and he didn’t want to allow new investors into his fund, someone would call and he would just get attracted to the idea of reeling them in, essentially adding them to the victim’s list.

Alex: We must never forget in the case of Elizabeth Holmes that, unlike financial instruments, she was literally dealing with the lives of patients and she didn’t blink. There was a moment where Walgreens was going to rescind its loans and investment in Theranos if she didn’t start putting machines in Walgreens locations. So she went ahead and did it, knowing that the technology wasn’t working, which meant that they were going to deliver bad tests to real patients. That is a terrible moral crime.

When you get these people for whom the end justifies the means, in a way they become far more dangerous because they’re possessed with this sense of mission that allows them to be extremely compelling. That’s what carries people forward to invest a lot of money with them and to give them a break, which is why I think we need to be on the lookout for people like Holmes and Skilling all the time.

Tim: If Tyler Shultz and a handful of others inside Theranos hadn’t decided to go outside the company to raise a yellow flag, and if John Carreyrou hadn’t decided to zoom in on this and report it as diligently as he did, you have to wonder how long this could have continued to go on. It’s shocking because, in theory, we have boards of directors, regulations and management structures to prevent this from happening. Yet it happened in the most grotesque and carnivalesque way imaginable at Theranos.

Alex: Another important figure to mention in the Theranos case would be David Boies, who became the enforcer for Elizabeth Holmes. On the one hand, you had her charisma and everybody wanted to get behind that, but for the other people who might want to have come forward, there was the specter of David Boies ready to sue them if they violated their NDAs. For a long time, I had difficulty getting people to talk because they were still afraid of him.

Bobby: One of the reasons Holmes was so compelling both to her board and the public is that she was this female unicorn, someone who you don't see enough of in Silicon Valley or the start-up world in general. Do we think this will raise the bar even higher for female entrepreneurs to get the funding and the trust they need?

Tim: I don't think that this is going to make it more difficult for female entrepreneurs to get capital or opportunities to start their own companies. There are a lot of systemic reasons that persist that go well beyond anything that’s come up in this case, such as a lack of opportunity, sexism and a male-dominated business culture. A lot of progress still needs to be made around there.

Elizabeth Holmes was a scammer because she was a scammer. It has nothing to do with gender and everything to do with greed and predatory behavior.

Alex: The sad part of her case was that even as she knew that her technology wasn’t working, she would often use her idealised role as this woman trying to compete in Silicon Valley as a kind of a shield, and that was terribly unfortunate. That’s the only specific aspect of this. Larger structural forces are much more problematic for women than anything here. Tim’s absolutely right to say that Elizabeth Holmes’s legacy is that she committed fraud, regardless of gender.

Bobby:  In a way, it wasn’t just Holmes on trial, but Silicon Valley’s culture. The “fake it ‘til you make it” mentality has been part of the Silicon Valley ethos forever. Do we think this will force companies or entrepreneurs to think differently?

Tim: The cynical journalist in me says no. As long as there’s a lot of money to be had, people will try to do good things to get their hands on that money and other people will try to do bad things. Corporate governance problems aren’t limited to Silicon Valley and other industries arguably have had much more serious financial frauds associated with them.

You want to have an innovative risk-taking ecosystem in a vibrant economy, too. You want a place where smart, talented, creative people can bring dreams to the table and get funded. Inevitably, some of that does involve promises, but there’s a difference between a promise and a fraud.

Alex: One of the points we made in the film was that the original “fake it ‘til you make it” guy, the man for whom Elizabeth Holmes named her device, was Thomas Edison. He bribed journalists with stock options and held fraudulent exhibits of his early light bulbs. At the end of the day, he succeeded and now we lionize him, but he was also motivated to overpromise and, in some cases, to cross the line. That’s why it’s so hard to perceive the effective frauds — the person or people at the center are a mixture of aspiration and deception.

It’s incumbent on all of us going forward, both to allow ourselves to be inspired by outlandish possibilities that we hope will come true, but also to recognize with the benefit of experience that there’ll be motivations for people to come up with fraudulent ways of making dreams come true. We have to be on the lookout for it, because if we’re not, it’s gonna happen again and again and again.

More From Other Writers at Bloomberg Opinion: 

• Was Theranos’s Elizabeth Holmes Treated Fairly?: Sarah Green Carmichael
• ‘Fake It Till You Make It’ Will Live On After Theranos: Parmy Olson
• Theranos Directors  Pay No Price for Holmes's Fraud: Timothy L. O’Brien
• Holmes Verdict Sends a Mixed Message to Investors: Stephen L. Carter

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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