Theranos Trial: United States vs. Holmes, Opening Statements

I take back everything I said about government lawyer Robert Leach. His opening statement on September 8 was crisp, clear, and cogent, lasting 40 minutes without wasting a word or slide. In contrast, the defense droned on for approximately 90 minutes and showed photos of a young, pre-Theranos Elizabeth Holmes. By the end, all I could think was, "Everything that guy just said is b*llsh*it."

The judge began by asking the jury to avoid bias, including due to someone's station in life or position in society. Judge Edward Davila also reminded the jury the government must prove each element in each count beyond a reasonable doubt. His reminder was balanced by the broad net of conspiracy, i.e., when a defendant becomes a member of an illegal scheme with the intent to advance one part of it. Interestingly, a scheme could include false representations or omitted facts, but in order to use the omitted facts prong, a duty to disclose must first exist, whether due to a fiduciary or some other relationship inducing trust. (Since investors in privately-owned Theranos were sophisticated, i.e., multimillionaires, the defense team is advantaged if the government emphasizes omitted facts.) After warning the jury not to speculate about the absence of Ramesh Balwani, whose trial is bifurcated, the judge requested the government's opening statement.

Unlike the defense, Mr. Leach relied sparingly on the computer monitors in front of each juror. He carefully advanced the government's theory of the case in five parts and avoided hyperbole. His most salient line accused Holmes of being a liar who, when running out of money and losing a major pharmaceutical partner, began "lying and cheating to get money... Out of time and out of money, Holmes decided to lie... [and] to mislead." 

Pfizer Inc., a leading COVID19 vaccine manufacturer, is set to boost its reputation further. Though an early investor, Pfizer disavowed interest in Theranos' technology as soon as 2009. (Theranos declared bankruptcy in 2018.) However, according to the government, Elizabeth Holmes--not Theranos in general--showed prospective investors a letter, Pfizer logo embedded, containing statements contrary to Pfizer's actual conclusions. The smoking gun has been revealed, but not the culprit's fingerprints: can Holmes deflect culpability by pointing to her alleged co-conspirator Ramesh Balwani? 

In addition to an allegedly forged letter, the government claims Holmes told prospective investors that military units, including medical evacuation teams, deployed Theranos' technology worldwide. This was false. Theranos had only one contract with a U.S. Army Burn Center in Texas. (Remember Texas--we'll come back to it.) 

The more Mr. Leach spoke, the more it seemed Theranos misrepresented all but its most basic applications. It's not that Theranos didn't have technology or ideas--it's that its proven applications handled straightforward, common tests and therefore couldn't possibly change the world. Theranos, while claiming accurate, fast, and reliable blood testing using fingersticks, was actually utilizing ordinary devices from other companies, including Siemens' Advia 1800. The government claims Theranos' so-called revolutionary technology, its analyzer-in-a-box (aka TSPU), wasn't used more than twelve times. In short, when Holmes was recruiting journalists to hype up Theranos and soliciting funds to maintain Theranos, she knew or should have known the goal of receiving test results after grocery shopping at Safeway or picking up a Walgreen's prescription was nowhere in sight.

The government further alleges Holmes hired or approved Balwani's dermatologist to run labs; was "not an absentee CEO"; and knew about problems because her own brother raised them and emails were sent to her. Meanwhile, as Holmes enjoyed "fame, honor, and adulation," her negligence impacted patients and customers relying on Theranos' tests. One woman received a false positive for pregnancy, and another, a false negative. Yet another patient received an incorrect result for prostate cancer. According to Mr. Leach, lying to get money is a "crime on Main Street and a crime in Silicon Valley."

Astute readers have already identified a problem with the government's case. Negligence is not a crime. "Should have known" is not a crime. Only intentional acts can be criminal. Lance Wade, defense attorney, didn't say the aforementioned sentences. He mixed arguments, aiming for sympathy one moment and earnestness the next. First, he argued Holmes worked herself to the bone and wouldn't have driven to work every day (over a period of years) intending to cheat and to steal. I wasn't moved. Diligence does not exclude dishonesty. Someone with a Protestant work ethic is perfectly capable of being a thief.

Wade then attempted to sound local by mentioning Highways 880 and 84. Unfortunately, though 17, 880, 280, and 101 are well-traveled by Bay Area commuters, 84 is used mainly by Menlo Park residents. Did Wade mean to say Highway 85? I don't know, but an out-of-state attorney won't gain favor mentioning uncommon highways. 

Next, Wade showed a photo of a young, smiling Holmes on the courtroom's monitors and more over the next hour, including one with Holmes in a Stanford University shirt. Perhaps my heart is duller than most, but Wade's attempt to solicit empathy failed. Idealism at 19 doesn't preclude thievery at 29. 

Thankfully, Wade shifted into a more direct defense. He said Theranos "provided hundreds of jobs" and achieved "176 patents," which were, at some point, valued at hundreds of millions of dollars. It developed 235 specialized tests relating to cholesterol, iron, calcium, hormones, vitamin deficiencies, flu, Lyme disease, and Zika. Of the eight million test results generated, the government found issues only with about twenty. 

At this moment, I realized the defense was dissembling, hoping to distract the jury from the actual charges. The indictment doesn't allege Holmes did nothing. The government isn't alleging Holmes failed to go to work every day. No one is saying Theranos' scientists didn't do some work. The government is alleging Holmes, after her pharma sponsors abandoned her and after she had difficulty making payroll, knowingly lied about Theranos' work in order to lure investors. 

Imagine someone saying you lied about having game-changing technology and should be jailed for putting yourself above investors and patients. Your lawyer responds, "Look at the shiny buildings and all the employees, and the difficult journey from Stanford student to corporate executive. And over here, look at the things the indictment doesn't mention at all, the things the company did right." I have never wanted to kick a lawyer in the testicles as badly as that day. 

Wade subsequently tried disassociating financial motive from Holmes' repertoire, saying she "never sold a single share of stock" and was "motivated by... mission, not money." Did Theranos fail because of a fraudulent scheme, or was "a young CEO confronted with business obstacles others saw but she naively underestimated?" Mistakes are not crimes, and "failure is not fraud."

An excellent speech, had Wade not already signaled his inability to address the government's specific claims. 

Wade then revealed Holmes' probable strategy regarding day-to-day operations: "Blame Balwani." The two met when Balwani was 37 and Holmes was 18. In a photo, Holmes is in the middle of two Southeast Asian men, one of whom appears to be Balwani, her hands on each of their shoulders. They met again a year later, and Balwani allegedly encouraged Holmes to leave university and rely on his advice.

One problem with the "Blame Balwani" defense? Holmes hired him for his business experience, similar to Sergey Brin and Larry Page hiring Eric Schmidt. It's fine to blame a co-conspirator, but when you were the one who hired him (while sleeping with him), then allowed him to hire his dermatologist, holes begin to appear. 

If you think the aforementioned tactic would pit defense lawyers against each other, you'd be wrong. During one break, Wade patted the shoulder of Balwani's defense counsel, who happened to be in the courtroom, and friendly smiles were exchanged. A bifurcated trial means each defendant can blame the other to his or her heart's content, and two separate juries must evaluate such aspersions without fully seeing the piñata doll representing the real culprit. In a sense, the jury is blind with respect to Holmes' claims against Balwani, even as Holmes gets to attack him, eyes wide open. 

After laying the groundwork to blame Balwani, Wade discussed the science. Theranos focused on three different areas: assays; hardware; and software. What's an assay? It's an investigative procedure in medical labs for qualitatively assessing (or quantitatively measuring) the presence, amount, or functional activity of a target entity. Wade called it a test, a "recipe" leading to a test result. He countered the government's assertion that Holmes was backed into a corner, saying Theranos developed assay technology in 2009 that could be used with small blood samples. 

But the government isn't alleging Theranos lacked technology. It's not alleging Theranos had zero breakthroughs. (In fact, Theranos received FDA approval for an HSV-1-related assay.) The government is alleging Holmes knowingly lied about the capabilities of a specific piece of hardware in order to attract cash and survive while misleading multiple journalists into publishing false statements about Theranos' capabilities. 

Wade's next argument involved twisting the meaning of "due diligence" in a way that would cause Olympic freestyle wrestlers to injury-default. He said Walgreens and Safeway performed "due diligence" and "turned Theranos upside-down" before investing. On-screen, he displayed highlighted legal boilerplate warning Theranos was a "speculative" investment. He argued hedge fund managers who asked their friends and clients to invest are trying to shift blame from their own lack of due diligence to Elizabeth Holmes. Wade may come to regret antagonizing hedge fund managers, many of whom are well-respected and well-spoken, including Stanley Druckenmiller, who is listed as a witness. 

In almost two hours of speech, Wade's most credible statement referred to a reasonable request by Walgreens. Before rolling out Theranos' test-in-a-box to its customers, Walgreens wanted FDA approval, and Theranos didn't have it. While seeking FDA approval--which was never granted for the TSPU aka Edison 3.5, 4.0, 4S--Theranos negotiated a two-phase solution: Phase 1, intended to be temporary, would use a centralized lab/warehouse to handle blood testing results until Phase 2, when TSPUs would roll out to Walgreens' stores. Wade said Phase 1 "distracted" Theranos and pushed it into a similar set-up as Quest Diagnostics and Labcorp, traditional blood testing companies. (Note: shares of Quest and Labcorp, two publicly traded companies, are at or near five-year highs.) In short, Walgreens made Theranos try to do "too much, too fast." 

Wade isn't wrong. A centralized warehouse needing to safely store samples and results from all over the United States requires logistics expertise. Balwani is a software expert. Holmes is a marketing expert. To expect a fledging blood testing company with no logistics expertise to perfect shipping and storage in less than two years is impossible. Wade wants you to believe all of this was a mistake, not a fraud. It's only true if you have no expertise in finance, investing, or law, and no desire to ensure marketing firms tell the truth. 

At no point in time did Wade address the government's claims relating to the military, despite a thirty minutes' break allowing him to revise his opening statement. 

My earlier comparison of Mr. Leach to Juggernaut was prescient, but not in the way intended. He demolished every obstacle put in front of him by the defense, clearing the path for the government's victory. If you're looking for a derogatory nickname, try "Whitebread Wade."

Conclusion

By the end of the afternoon, I felt queasy. Holmes' mother and boyfriend sat behind Holmes, and I, two rows behind them. Given the circumstances, Holmes' mother seemed unnaturally unperturbed. Meanwhile, Holmes' boyfriend, a wavy-haired younger man named William Evans, lacked decorum. In the courtroom, two blond women appeared to be mimicking Holmes in some manner. During a break, outside the presence of jurors, Evans made a show of hugging them. I'd seen this mentality before, but couldn't place it until I had flashbacks to my brief, impoverished Texas childhood. Southern affluence mixed with the South's unique blend of devil-may-care sauce is unmistakable, even more so from the vantage point of an American immigrant. 

It wasn't until later I discovered Holmes attended a Texas high school endowed with almost 100 million dollars. Holmes' father, Christian, is a former Army reservist mostly employed in high-level energy and infrastructure roles. Christian's former position at Texas-based Enron has been mentioned, but the more relevant position might be Director of U.S. Trade and Development Agency, which worked with China. (Balwani and Holmes met in China during a language-immersion trip.) 

If you know Texas, you know the state doesn't do anything small in part because it doesn't have to. Awash in oil money and blessed with ample land, all Texans are impacted by a type of Christian confidence possible only in Texas. From where is Joel Osteen, megachurch pastor and author of 55 Ways to Be Blessed and Not Stressed? Houston, where Holmes attended high school. Where was Enron based? Houston, Texas. Say what you will, but Holmes isn't an example of Silicon Valley's alleged "fake it or make it" culture--Theranos was pure Texan swindle. If only Molly Ivins were still here. She'd know exactly how to explain everything. 

© Matthew Mehdi Rafat (2021)

Bonus: one of the jurors may be dismissed due to work scheduling conflicts, paving the way for an alternate. 

"I dearly love the state of Texas, but I consider that a harmless perversion on my part, and discuss it only with consenting adults." -- Molly Ivins