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00:00Elizabeth Holmes aspired to be Steve Jobs,
00:03but it turns out that she's more like Bernie Madoff.
00:06In 2003, a 19-year-old college dropout
00:08named Elizabeth Holmes founded a company called Theranos
00:11that promised to revolutionize blood testing.
00:12She claimed to have invented a machine
00:14that could run more than 200 tests
00:15on just a few drops of blood taken from a finger prick.
00:19She wanted to sell diagnostic tests directly to consumers.
00:22Holmes was very persuasive.
00:24She gave a TED talk where she promoted Theranos
00:26by calling it the most disruptive technology
00:28in the history of medicine.
00:29Yet in the United States today,
00:32healthcare is the leading cause of bankruptcy.
00:38And the lack of it, the leading cause of the suffering
00:43associated with finding out too late
00:48in the disease progression process
00:51that someone you love is really, really sick.
00:55Silicon Valley investors treated her like a rock star.
00:58Walgreens quickly became a corporate partner.
01:00Major investors included Rupert Murdoch, the Walton family,
01:02and the family of former Education Secretary Betsy DeVos.
01:05Holmes' big promises attracted some of the biggest names
01:08in American government in foreign policy.
01:10Bill Clinton was charmed by her,
01:12and Joe Biden praised her efforts.
01:14Secretaries of State Henry Kissinger and George Shultz
01:16joined the board of directors.
01:18Former Secretaries of Defense James Mattis
01:20and William Perry joined too.
01:21The company raised nearly $1 billion in funding.
01:24With the prospect of eliminating many lab tests
01:26and their associated costs,
01:27there seemed to be nothing stopping Theranos
01:29from becoming a mega player in the biotech industry.
01:31Its highest valuation was an eye-popping $9 billion.
01:35But Walgreens, Murdoch, the US foreign policy establishment,
01:37and the other investors ignored a very important principle
01:40in investing and life.
01:41If something seems too good to be true,
01:43it probably is too good to be true.
01:49As it turns out, there's no way to run hundreds
01:51of sophisticated diagnostic tests on a few drops of blood.
01:54Despite all the evidence that Holmes knew
01:56her testing machine would never work,
01:58a federal jury convicted her
01:59on just four of the 11 charges against her,
02:01three for wire fraud against investors,
02:03and one for conspiracy to commit wire fraud against investors.
02:06One juror said it was tough to convict her because, quote,
02:09she was so likable, she had such a positive dream.
02:12And it's a dream that they think
02:14she honestly still believes in.
02:15But as you can see, there's probably a reason
02:17why Jennifer Lawrence, Katie Holmes, and Amanda Seyfried
02:19are all practicing their most charming
02:21and cold-blooded stares.
02:22So today we're going to talk about the Elizabeth Holmes trial.
02:25Why did the jury find her guilty?
02:27Why did they acquit her on the other charges?
02:29And how much did Holmes help herself
02:31by testifying in her own defense?
02:32So let's start with the problems with Theranos,
02:35which have been well chronicled at this point.
02:37Blood analysis is one of the most important areas of medicine.
02:39The two main players in the field,
02:40Quest Diagnostics and Laboratory Corporation of America
02:43generate over $75 billion a year in revenue.
02:46Theranos promised to upend this regime
02:48by eliminating blood draws, vials, large needles,
02:50and lengthy waiting periods.
02:52What if you could just go to Walgreens, buy a testing kit,
02:54and screen yourself for high cholesterol,
02:56kidney disease, or even cancer?
02:58Wouldn't that be great?
02:59You'd save time, money, get diagnosed faster,
03:02and lives would be saved.
03:03And that was the heart of the Theranos project.
03:06But there was just one problem with this vision.
03:08Most blood tests could not be done with just a few drops
03:11of blood. There aren't enough molecules for detection.
03:13One of Holmes' professors had rejected her early ideas
03:16for biotech companies on the basis that the science
03:17and technology could not exist.
03:20The professor, Phyllis Gardner,
03:21later said that she found the conversations concerning
03:23because Holmes refused to accept that some ideas
03:26were not possible.
03:27She said, quote,
03:28"'The hubris of that just drove me insane.'"
03:30But Holmes dropped out in 2004 and went on her own way,
03:33aggressively selling her ideas to investors.
03:35Her company named Theranos is a combination of therapy
03:37and diagnostics.
03:38And while Holmes never submitted any of her inventions
03:40for any kind of peer review,
03:42that didn't matter to another Stanford professor,
03:44Channing Robertson.
03:45He said that the minute he heard her idea
03:47about a diagnostic test from a pinprick,
03:49he felt he was, quote,
03:50"'looking into the eyes of Steve Jobs or Bill Gates.'"
03:53Steve Jobs was, of course, the person
03:55that many company founders wanted to emulate.
03:56Jobs created his own persona, dressing only in black
03:59and promoting himself as an eccentric genius.
04:01Holmes took note of this and created her own mythos
04:03that was trying to piggyback on Jobs.
04:04She wore a black turtleneck and black suit every day.
04:07She had a intense stare that became famous.
04:11And we might laugh about this now,
04:12but according to Tyler Schultz, a Theranos employee,
04:15investors like his grandfather, George Schultz,
04:18were mesmerized by this act.
04:20But then came the whistleblowers.
04:21In 2014, Tyler Schultz emailed Holmes to complain
04:24that Theranos had doctored research
04:25and ignored failed quality control checks.
04:28Several other employees had also raised concerns
04:30about the company's science.
04:31George Schultz was 95 at the time,
04:33and Holmes called him immediately to warn him
04:35that she would get revenge on his grandson
04:37if he took his complaints any further.
04:38Tyler, though, anonymously contacted
04:40New York State's Public Health Lab
04:41and filed a complaint alleging that Theranos
04:43had manipulated a process known as proficiency testing,
04:46relied on by federal and state regulators
04:48to monitor the accuracy of lab tests.
04:50Theranos's lawyer, David Boies,
04:52who later joined the board of directors,
04:53surprised Tyler at his grandfather's house,
04:55informing him that the company was suing him
04:57for violating the terms of his NDA.
05:00And while Tyler was the first person to raise concerns
05:01about Theranos to outside regulators,
05:03he wouldn't be the last.
05:04In 2015, the Wall Street Journal published a series
05:06of articles exposing the Theranos testing machines
05:08as frauds.
05:09By then, Holmes had been appointed
05:11to the Harvard Medical Board
05:13alongside her old professor, Phyllis Gardner.
05:15Gardner spoke with the Wall Street Journal
05:16about her belief that Holmes was a fraud.
05:18And sure enough, regulators soon discovered
05:20that Holmes' Edison machines frequently failed
05:22quality control checks.
05:23That means they produced unreliable test results.
05:26Theranos eventually told regulators that it voided
05:28all test results from Edison machines for 2014 and 2015,
05:31as well as some other tests it ran
05:33on conventional machines.
05:34The Edison machine turned out to be a lemon.
05:36Theranos claimed that its test
05:37for one sexually transmitted infectious disease
05:40was sensitive enough to detect the disease 95% of the time.
05:43But when these results were submitted for validation,
05:45it showed sensitivities of between 65% and 80%.
05:49At the time, Walgreens was partnering with Theranos
05:51to provide in-store testing centers
05:53at 40 Walgreens locations.
05:55But when Walgreens realized the scope of the problem,
05:57they sued Theranos for $140 million.
06:00Walgreens eventually claimed that Theranos avoided
06:0211.3% of all blood test reports
06:04that the company provided to customers of Walgreens stores.
06:07But instead of acknowledging the problems
06:09with the Edison machine,
06:10Theranos fabricated the results
06:11while continuing to market the company to investors
06:14as world-changing technology.
06:15During the trial of Elizabeth Holmes,
06:17prosecutors showed a presentation that she had made
06:19to the board of directors saying that 10 of the 15 largest
06:22pharmaceutical companies in the world had validated
06:24the Theranos results.
06:26This was a lie.
06:27The US Centers for Medicare and Medicaid Services
06:30investigated Theranos and banned Holmes
06:31from operating a medical lab for two years.
06:34The US Securities and Exchange Commission, the SEC,
06:36charged Holmes and former Theranos president,
06:38Sonny Balwani with fraud and barred Holmes
06:41from serving as a director or officer
06:42of a public company for a decade.
06:44So that brings us to the criminal case itself.
06:47Holmes was indicted on 11 felony charges in 2018.
06:50The charges included wire fraud against investors,
06:53wire fraud against patients and conspiracy.
06:55And federal prosecutors painted Holmes as a charlatan
06:58who knew her technology didn't work.
07:00They said she was obsessed with fame and fortune
07:02and prosecutors presented evidence
07:03that when Theranos realized its test results
07:05were not accurate,
07:06the company substituted tests from regular blood draws,
07:09making it look as if the tests were from blood droplet tests
07:12rather than traditional blood draws
07:13in conventional machines.
07:14But the strongest evidence showed that Holmes exaggerated
07:17the company's involvement with potential partners.
07:19Prosecutors demonstrated that Holmes lied about having deals
07:22with drug companies like Pfizer and the US military.
07:24Holmes even added the logos of Pfizer and sharing plow
07:27to lab reports that she used in her presentation
07:29to investors and Walgreens executives.
07:32But these companies hadn't actually validated
07:33any of Theranos' systems.
07:35But the defense put on a case as well.
07:38Holmes testified for seven days,
07:39presenting herself as a visionary woman
07:42in a male-dominated field.
07:43Holmes told the jury that she still believed that Theranos
07:46was on the verge of proving its technology worked.
07:49She blamed her ex-partner, Sunny Balwani,
07:51for misleading regulators about the tests.
07:53Holmes told the jury that the two had secretly lived together
07:56and that Balwani abused her throughout the relationship.
07:59And Balwani himself will go on trial later this year.
08:02And Holmes attempted to raise a good faith defense
08:04to the wire fraud charges.
08:06Although good faith is a defense to wire fraud,
08:08an honest belief in the ultimate success of the enterprise
08:11is not in itself a defense.
08:12And the judge instructed the jury that if they believed
08:14that she acted in good faith in her representations,
08:17then she could not also have acted
08:19with an intent to defraud.
08:20So let's dig into the elements of wire fraud
08:22and the conspiracy charges that she faced.
08:25Holmes was eventually convicted
08:26of three counts of wire fraud
08:28and conspiracy to commit wire fraud.
08:2918 U.S.C. 1343 is the wire fraud statute.
08:32It states, whoever having devised
08:34or intending to devise any scheme or artifice to defraud
08:37or for obtaining money or property
08:38by means of false or fraudulent pretenses,
08:41representations or promises,
08:43transmits or causes to be transmitted
08:45by means of wire, radio or television communication
08:48in interstate or foreign commerce,
08:50any writings, signs, signals, yada, yada,
08:52shall be fined under this title
08:54or imprisoned not more than 20 years or both.
08:57So the prosecution had to prove four elements.
08:59First, that she knowingly participated
09:01in some sort of scheme to defraud
09:04and obtain money or property from other people.
09:07Expressions of opinions, aspirations or goals
09:10or general subjective claims can't be used as a basis
09:12to find that someone made a false
09:14or fraudulent representation.
09:16This is an important point
09:17and one we'll come back to
09:18when we talk about the jury's conclusion
09:19that she didn't defraud consumers.
09:21Probably because some jurors said
09:23that she believed that she had positive goals.
09:25But the second prong is that the statements made
09:27as part of the scheme have to be material.
09:29Statements tend to be material
09:31if they have a natural tendency to influence
09:33or were capable of influencing a person
09:35to part with their money.
09:36The third prong is that the government needed to show
09:38that Holmes acted with the intent to defraud.
09:40That is that she had the intent to deceive
09:42and cheat someone out of their money or property.
09:44And then the fourth prong is that Holmes
09:46used interstate wire communication
09:48to carry out an essential part of this scheme.
09:49And the jury found that Holmes' misrepresentations
09:52influenced investors to send money to Theranos
09:54and that her presentations actively intended
09:57to defraud investors by making them believe
09:59that Theranos had big government contracts
10:02and private partnerships that would produce
10:04a high rate of return on their investment.
10:06And the jury also found that Holmes had agreed
10:08with other people to perpetrate this scheme on others.
10:11That's why she was convicted of a conspiracy
10:13to commit wire fraud as well.
10:15The prosecution had lots of evidence
10:16that Holmes concocted test results to convince investors
10:19that the science behind her test was sound.
10:21In a 2014 Forbes article, Holmes said that Theranos,
10:24quote, does not buy any analyzers from third parties.
10:27And that was absolutely a lie.
10:29Theranos presented results conducted
10:30on these third party analyzers
10:32during their presentations to investors.
10:34And it's highly likely that the jury thought
10:35that these lies were material
10:36and that they convinced investors to part with their money.
10:39And the three counts represented a total
10:41of about $142 million in fraud.
10:43But the jury deadlocked
10:44on three additional wire fraud counts
10:46related to investments from three Theranos investors,
10:49Alan Eisenman, Chris Lucas of Black Diamond Ventures,
10:51and Brian Tolbert of The Hall Group.
10:53Prosecutors now have to decide
10:55whether they are going to retry her on those three counts,
10:57because the jury hung,
10:59so they couldn't come to a decision
11:00on those particular counts.
11:01But Holmes and Balwani were also accused of conspiring
11:04to commit wire fraud in violation of 18 USC 1349.
11:07The DOJ charged Balwani and Holmes
11:09with making materially false
11:10and misleading statements to investors.
11:12The government alleged that the duo, quote,
11:14made materially false and misleading statements
11:16to investors and failed to disclose material facts.
11:19This included telling investors
11:20that the company's proprietary analyzer was accurate
11:23when in truth it had serious accuracy problems,
11:25performed a limited number of tests,
11:27was slower than some competing devices,
11:29and could not compete with larger conventional machines
11:32in high throughput,
11:33or the simultaneous testing of blood from many patients.
11:36Holmes and Balwani promised investors
11:38a return on their investment
11:39in the hundreds of millions of dollars,
11:41while knowing that the company would only gross
11:43a few hundred thousand dollars in 2014 and 2015.
11:47Prosecutors proved that Balwani and Holmes
11:49faked test results during live presentations for investors,
11:51and the DOJ also said that Holmes told investors
11:54that the Walgreens partnership would be expanding,
11:57when in reality Walgreens was already moving
11:59to end the partnership.
12:00Balwani and Holmes told investors
12:02that the Theranos technology had already been deployed
12:04by the US military on the battlefield in Afghanistan,
12:07which was untrue.
12:09General Mattis testified
12:10that they were not being used by the military.
12:13When the jurors spoke out after the verdict,
12:14two of them said that the jury ranked witnesses
12:16according to their believability,
12:18and that they rated Mattis
12:19as the witness with the highest credibility.
12:21Not surprising.
12:22Mattis said that he wanted the military
12:24to do a test program of Theranos analyzers,
12:26but the test never happened.
12:28Balwani and Holmes told investors
12:29that they didn't need FDA approval
12:30for the machines and tests
12:31when they already knew
12:32that they needed clearance from the FDA.
12:34And the two also allegedly lied to the media
12:37and then used the articles and news segments
12:39containing their lies
12:40to promote Theranos to investors.
12:42And to find Holmes guilty of the conspiracy charges,
12:44the jury had to believe that she hatched a plan
12:46to commit wire fraud in partnership with Balwani or others.
12:49If the jurors thought that she just went along
12:51with Balwani because of their partnership,
12:53that probably wouldn't have risen
12:54to the level of conspiracy.
12:56But what about the other charges of fraud
12:58for crimes perpetrated against patients?
13:00The jury actually acquitted Holmes
13:02of wire fraud and conspiracy to defraud patients.
13:04So let's talk about why that likely happened.
13:07During the four month trial,
13:08the prosecution devoted very little time
13:10to proving this part of the case.
13:12The patients who purchased Theranos tests
13:14only testified for about one hour in total.
13:17The government accused Holmes and Theranos
13:18of making material misrepresentations
13:20about his Edison machine in advertisements.
13:22The ads mostly targeted physicians.
13:25The prosecution argued that these ads induced hundreds
13:27of patients to pay Theranos or Walgreens
13:29for blood tests and test results,
13:31which obviously wouldn't have worked.
13:33The government said Balwani and Holmes
13:34told doctors and patients that Theranos
13:36could provide accurate, fast, reliable,
13:38and cheap blood tests and test results,
13:40but they already knew that Theranos technology
13:42was in fact not capable
13:43of consistently producing accurate and reliable results.
13:46This was the alleged wire fraud,
13:48because Theranos used interstate electronic wires
13:50to purchase advertisements intending to induce individuals
13:53to buy the tests at Walgreens
13:55and stores in California and Arizona.
13:58And the prosecution had evidence
13:59that Theranos placed advertisements in Walgreens
14:02and on TV with their total marketing efforts,
14:04slightly over $1 million.
14:05But at the same time, the prosecutors didn't have
14:07the same kinds of direct communications
14:09between Holmes and individual patients,
14:11as they did between Holmes and investors.
14:13And theoretically, patients only used Theranos tests,
14:15because they were referred by their physicians.
14:18So it's possible the jury might have believed
14:20that there were too many intermediaries
14:21between Holmes and the individual patients,
14:23and doctors to conclude that Holmes
14:26actually influenced the patients themselves.
14:28And the defense argued that the prosecution needed
14:30to show that Holmes really intended
14:32to defraud these patients.
14:33Arguably, her company gave patients inaccurate test results,
14:36but inaccurate test results alone
14:38don't necessarily meet the criteria
14:40for an intent to defraud.
14:41The prosecutors needed to prove beyond a reasonable doubt,
14:44that Holmes knowingly participated in, devised,
14:47or intended to devise a plan to defraud these patients.
14:49And as we talked about earlier,
14:51generally opinions, aspirations, goals,
14:53or subjective beliefs can't be used as a basis
14:55to find that someone made a false
14:57or fraudulent representation.
14:58And the jurors who spoke out after the verdict
15:00said that they believed Holmes
15:01when she said she never intended to defraud patients.
15:04And juror number six, Wayne Katz,
15:05an Emmy-winning TV writer for a 1990s show
15:08called Tiny Toons Adventures,
15:09was inspired by Holmes' testimony.
15:12Quote, we respected Elizabeth's belief in her technology,
15:15in her dream.
15:16We thought she still believes in it,
15:18and we still believe she believes in it.
15:20He's saying that she had a subjective belief,
15:22even to this day, that she was helping her patients,
15:24not hurting them.
15:25Katz said that the jury quickly decided to acquit Holmes
15:27on all four counts of fraud against patients.
15:30The jury thought Holmes was one step removed
15:32from the patients so that they were not directly defrauded.
15:35Of course, this was also somewhat contradictory,
15:37since Katz also opined that everything ran through Holmes.
15:40But this is just what you often get from jurors
15:42who are grappling with difficult questions of law.
15:44Mike Q, jury number 11,
15:46said that although the panel thought
15:47Holmes' credibility was low,
15:49they also believed that she was genuine.
15:51But what happens next?
15:52Each of the four counts that Holmes was convicted of
15:54carries a maximum sentence of 20 years in prison.
15:57So theoretically, she could get 80 years in prison,
15:59but this will be reduced and modified
16:01by the federal sentencing guidelines.
16:03Several former prosecutors think she'll probably get
16:05less than 20 years in prison,
16:07especially as a first time offender.
16:09And the high profile nature of the case
16:11and the scope of the fraud probably suggests
16:12that she won't exactly get a slap on the wrist though.
16:15That's because the federal sentencing guidelines
16:16require the judge to consider the magnitude of the lies
16:19and how much money the investors lost
16:21in the fact that she was CEO.
16:23In these kinds of white collar crimes,
16:25the more money that is pilfered,
16:28the more prison you could get.
16:30And $140 million is quite a lot.
16:33Though Holmes may be able to sway the judge
16:35for less prison time by pointing to her relative youth,
16:37her capacity for change,
16:39and the allegations of abuse at the hands of Balwani.
16:42And there will almost certainly be a very hefty fine.
16:44The government can retry her on the other wire fraud charges,
16:47but that seems unlikely.
16:48The government has already spent significant resources
16:51and time on the case,
16:52and they got a conviction on four counts
16:54carrying a serious prison sentence.
16:56So that may be enough,
16:57particularly in light of the upcoming Balwani trial,
16:59which is also probably going to be
17:01an expensive prosecution.
17:03So it turns out that Theranos was a fraud
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