Fraud trial will put fallen Silicon Valley star Elizabeth Holmes to the test
Theranos was like The Wizard of Oz, with Holmes as its public face and bullish Sunny Balwani operating the machinery behind the curtain. Despite the dysfunction, she remained bulletproof — until now.
In September 2015, Elizabeth Holmes, founder of Theranos, a company that claimed to have developed a blood-testing process that would revolutionise medicine, appeared on stage as one of the keynote guests at the meeting of the Clinton Global Initiative in New York, alongside Bill Clinton and the Chinese investor and founder of Alibaba, Jack Ma. In her uniform of black turtleneck sweater, black jacket and black trousers, and radiating an aura of calm and self-assurance, Holmes took part in a conversation about the role of technology and entrepreneurialism in affecting global change. Access to health information, she told the audience of policymakers, thinkers and heads of corporations and foundations, was “a basic human right”. Theranos technology would give patients access to lab testing “which every person can afford”.
It was the summit of an extraordinary rise that had seen Holmes, then 31 and a compelling mixture of the brilliant, the charismatic and the geeky, become, in the words of Forbes magazine, “the world’s youngest self-made woman billionaire”, with a personal wealth estimated at $4.5 billion. “You founded this company 12 years ago, right?” Clinton asked. “Tell them how old you were.” Holmes gave a shy, self-deprecating smile. “I was 19.” “Don’t worry about the future,” Clinton told the applauding audience. “We’re in good hands.”
Less than a month later, The Wall Street Journal would publish the first in a series of articles that would pull back the curtain on Theranos, leading to criminal charges alleging that Holmes and the company were engaged in a multimillion-dollar scheme to defraud investors, and a separate scheme to defraud doctors and patients. She is accused of nine counts of wire fraud (financial fraud involving the use of telecommunications or the internet) and two counts of conspiracy to commit wire fraud, along with her business partner and lover Ramesh “Sunny” Balwani. If convicted, Holmes and Balwani face up to 20 years in prison, and a fine of $250,000 plus restitution (repaying the money fraudulently obtained from investors), for each count of conspiracy and wire fraud.
Holmes’s trial is likely to be a grandstand event. Her story, a salutary fable of hubris and nemesis in Silicon Valley, is the subject of two screen projects currently in development: a film starring Jennifer Lawrence, and a series for the streaming service Hulu starring Amanda Seyfried. The trial, scheduled to start in August 2020, was delayed for a year by Covid and then by Holmes’s pregnancy – she gave birth to a son, William, in July. Holmes and Balwani have pleaded not guilty. Holmes’s lawyer did not respond to requests for an interview or comment.
But back in 2015, Bill Clinton could be forgiven his credulous enthusiasm. Holmes had already deceived large swathes of the establishment. She’d persuaded former secretaries of state George Shultz and Henry Kissinger to sit on the Theranos board. Investors had ploughed an estimated $1 billion into her company. She was seen as the young genius pioneering one of Silicon Valley’s greatest achievements. Who could have guessed Theranos would soon be described as “Silicon Valley’s Greatest Disaster”?
Holmes was at Stanford University when she began exploring a technology that would enable multiple measurements to be taken from tiny amounts of blood on a single microchip, at the same time patenting a patch that would draw blood painlessly through microneedles to diagnose infections and deliver antibiotics. In 2004 she dropped out of college and set up Theranos (combining the words “therapy” and “diagnosis”). Within six months she had raised $6 million to finance the company.
The patch idea was quickly abandoned as unfeasible. Instead, Holmes switched her attention to developing a device that would revolutionise blood testing. The theory behind it was compelling. Taking blood is a laborious process. It has to be sent to a laboratory for analysis. Tests can be costly and time-consuming, especially for life-threatening illnesses like cancer. With Theranos technology, it was claimed, rather than drawing blood from the arm with a syringe – a process that Holmes, who had a fear of needles, likened to medieval torture – a few drops of blood could be drawn from a simple prick to the finger and captured in a phial less than half an inch tall, which Holmes called “the nanotainer”. It would then be fed into a device – in effect, a portable minilab – able to run a multitude of tests, the results of which could be sent wirelessly in a matter of hours to the patient and their doctor.
Holmes claimed the process would save the US health-insurance systems “hundreds of millions of dollars on an annual basis”. Less altruistically, it would also kick the door open for Holmes to become a serious player in the diagnostic lab-testing industry, worth $75 billion a year.
The device – solid black, and looking somewhat like a home printer – could be installed in surgeries, pharmacies, even patients’ own homes. She called it the Edison, after the inventor Thomas Edison. The problem, it would become apparent over time, was that despite more than 10 years of research, the Edison machine would never end up working.
Theranos recruited seasoned Silicon Valley veterans, many of them former Apple employees, including Avie Tevanian, who had led the software team that developed Mac OS X. Though based in Silicon Valley, Theranos was not strictly speaking a tech company. But Holmes aligned herself to the mystique surrounding the young entrepreneurs and innovators who seemed to be reinventing the world. Her story was irresistible: the college dropout who had bravely forged her own path. A woman in the boys’ club of Silicon Valley, where the work of many women innovators had gone largely unrecognised. Holmes was too striking and her project too revolutionary to ignore. Her otherworldly appearance created a mystique around her. She had piercing, saucer-shaped, doll-like blue eyes and never seemed to blink. She lowered her voice by an octave to lend gravitas. Her black turtleneck sweaters and black trousers appeared to have been recycled from Steve Jobs’ wardrobe. “She wanted to be the female Steve Jobs,” said John Carreyrou, the Wall Street Journal reporter who broke the story on Theranos. “She wanted the fame and the money and she would stop at nothing to get it.”
But by 2009, as the software engineers and lab technicians at Theranos struggled to make the technology work, the company was running out of money. Salvation arrived in the person of Ramesh “Sunny” Balwani, a software engineer who had worked at Lotus and Microsoft and been a successful entrepreneur. Balwani came in with a $13 million personal loan, and was made president and COO of the company. Holmes and Balwani had been in a longstanding romantic relationship, a fact they kept from investors and staff.
If the whole operation was like The Wizard of Oz, with Holmes as the company’s public face, it was the abrasive, bullish Balwani who operated the machinery behind the curtain. Employees were siloed in separate departments and instructed not to talk to each other about what they were doing. Non-disclosure agreements extended even to talking with their family. The company published little in the way of peer-reviewed data, and refused any attempts to have the technology independently scrutinised. This was ostensibly to protect trade secrets. But it also concealed the fact that the technology was defying any attempts to work as advertised, and that Holmes’s claims for its efficacy were becoming increasingly fanciful.
Avie Tevanian was initially impressed by Holmes, but quickly began to question her claims for the Theranos technology. “She’d prick her finger and then she would put blood on something and then she put it in the machine and then sometimes she would say… ‘this part doesn’t work any more’, which was a little bit odd,” he later told ABC’s Nightline. “But some of that you expect to get from a start-up that has a product that’s not done, right?” But when Tevanian raised doubts about the technology, Holmes ignored him and then instructed another board member to ask him to resign. “I was done with Theranos,” he said. “I had seen so many things that were bad go on, I would never expect anyone would behave the way that she behaved as a CEO. And believe me: I worked for Steve Jobs. I saw some crazy things. But Elizabeth took it to a new level.”
Yet despite the setbacks and the dysfunctional culture in Theranos, Holmes seemed bulletproof. In 2011 she was introduced to George Shultz, who agreed to join the Theranos board, enthusing in interviews that Holmes was “the next Steve Jobs or Bill Gates”. Shultz opened the door to other board members and investors, including Henry Kissinger. In a 2014 New Yorker profile of Holmes, Kissinger rhapsodised about her “sort of ethereal quality – that is to say, she looks like 19. And you say to yourself, ‘How is she ever going to run this?’” His answer was, “by intellectual dominance; she knows the subject”.
By now, Theranos had struck up a partnership with the giant pharmacy chain Walgreens to install the Edison device in “Wellness Centers” in branches across America. Holmes claimed the Edison would be capable of performing up to 200 tests in a few minutes, for everything from STIs to cancer – and at half the cost of conventional lab tests. But the Edison was able to provide only a small fraction of the tests that Theranos claimed it could. In an attempt to work around the inadequacies of the device, Theranos acquired conventional testing machines manufactured by Siemens and other companies, hacking them in an attempt to analyse the single blood samples. When prospective investors came to the Theranos lab, a blood sample would be taken and fed into the Edison. The customer would then be ushered out of the lab, led on a tour of the offices and given a seductive sales presentation – while their blood sample was furtively hurried downstairs for tests on the other machines, before the customer returned to be given the results.
Holmes assured Walgreens that the technology was “viable and consumer-ready”. But that claim was false. Only a single Theranos test, for herpes, was approved by the Food and Drug Administration (FDA). Theranos technicians made frantic attempts to modify the Edison to match the promise, but by the time the device was being installed in Walgreens pharmacies in 2013, it could still manage only a handful of tests. Furthermore, some customers were angry at receiving venipuncture (using a needle to draw blood) rather than a single finger-prick test, and alarmed to get results suggesting they were suffering from serious conditions, which were contradicted when they checked by having independent tests done.
Nonetheless, the Walgreens deal was sufficiently impressive – or at least appeared to be – to enable Theranos to raise a further $650 million from a raft of new investors. As money poured into the company, Holmes began to behave like the magnate she had always dreamt of being. By 2014 Theranos had 700 employees and was valued at $9 billion; the Forbes 400 list estimated Holmes’ personal worth at $4.5 billion. She appeared at healthcare conferences, producing a nanotainer from her pocket and holding it up, like a priestess offering holy wine at communion, and repeating one of her favourite lines about seeing “a world in which no one ever has to say, ‘If only I’d known sooner’. A world in which no one ever has to say goodbye too soon.”
By 2015 Walgreens had 40 testing centres in pharmacies in California and Arizona. Holmes was named in Time magazine’s list of the 100 most influential people; Obama appointed her a Presidential Ambassador for Global Entrepreneurship, and in April 2015 she was a guest at a White House dinner for the visiting premier of Japan, Shinzo Abe. But the cracks were beginning to appear.
In his New Yorker profile in 2014, the writer Ken Auletta described being shown around the Theranos lab – “a large, labyrinthine place bustling with chemists and technicians” – but noted that exactly what happened in the Edison was “treated as a state secret”. Holmes’s description of the process, he wrote, was “comically vague”.
The profile alerted the attention of Adam Clapper, a pathologist in Missouri who ran a blog called Pathology Blawg. He was suspicious about the claims for finger-prick testing, and the lack of published peer-reviewed data. “Until I see evidence Theranos can deliver what it says it can deliver in terms of diagnostic accuracy,” he wrote, “I personally will remain a sceptic.” Clapper’s blog led Wall Street Journal reporter Carreyrou to investigate Theranos, setting him on the trail of employees who had left, or been fired from, the company, and who provided damning allegations against Theranos.
Among them was Tyler Shultz, the grandson of George Shultz, who joined Theranos in 2013 as a research engineer, when the company was first installing Edison machines in Walgreens pharmacies. In a deposition to an SEC investigation in 2017, Shultz testified that while he was working for Theranos the majority of blood tests were run on other machines, and that the company “only ran seven tests on the Theranos devices”. Asked whether Holmes knew that Theranos could not run all of those tests, he replied, “Yeah, she knew.”
Later, when the house of cards had come tumbling down, Reed Kathrein, a California lawyer who would litigate against Theranos on behalf of eight private investors, took depositions from Holmes and Balwani. Kathrein says Holmes “conducted herself with extreme professionalism; she was calm throughout – a six-hour deposition, when most people would begin to get irritated and snappy, she was in complete control of herself”. And she “very politely refused to answer all the questions”.
In October 2015, Carreyrou published the first in a series of articles for The Wall Street Journal revealing that the Edison machines were error-prone, constantly failed quality control, and were only used for a small number of tests. Carreyrou’s investigations led Theranos to face a string of legal and commercial challenges from medical authorities, investors and Walgreens, which sought $140 million in damages. By June 2016, Forbes had written down Holmes’ net worth from $4.5 billion to virtually nothing, and Theranos collapsed into bankruptcy and closed for good.
In March 2018, the SEC charged Theranos Inc, Holmes and Balwani with raising more than $700 million from investors through an elaborate, years-long fraud in which they exaggerated or made false statements about the company’s technology, business, and financial performance.
While neither admitting to nor denying the allegations, Theranos and Holmes agreed to resolve the charges against them, with Holmes paying a fine of $500,000, returning the remaining 18.9 million shares that she held, relinquishing her control of the company, and being barred from being an officer or director of any public company for 10 years. Balwani did not settle. Three months later, the US Attorney for the Northern District of California announced the indictment of both Holmes and Balwani on wire fraud and conspiracy charges.
In pre-trial hearings, Holmes’s lawyers have revealed they will argue that the common currency in Silicon Valley of hyperbole and raising expectations means investors knew what they were getting into, and that Holmes was acting in good faith, believing the Theranos technology would work. They also plan to call on a clinical psychologist to testify about a “mental disease or defect” bearing on the issue of guilt, suggesting that Holmes was acting under the psychological influence of Balwani, whose trial is due to begin next year.
So was Holmes really an accomplished fraudster, or simply an idealist who truly wanted to save the world, but who fell into a hole – and just kept digging? “I think she started out with the best of intentions,” Reed Kathrein says. “But I also think she’s a chronic liar, and what started out with a little lie just got bigger. I think she and Sunny believed at some point the technology would work, despite the science to the contrary. She drove her people very, very hard, but it just wasn’t working. In the meantime she was lying to everybody. I think she believed in her snake oil, let’s put it that way.”
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