Theranos Trial: United States vs. Elizabeth Holmes, Day 7 (Plausible Deniability)
Whistleblower Erika Chung was excused today, and whether her testimony helped the government meet the required legal standard for conviction depends on your subjective opinion of Elizabeth Holmes. To sum up, Holmes may still claim plausible deniability, meaning she remains protected by the presumption of innocence.
"Those who make the charge must prove it. They carry the burden. The sovereignty of the individual is honored by a presumption of innocence." -- Justice William O. Douglas (January 1969, Playboy Magazine)
Attorney Lance Wade deployed a three-pronged defense: 1) Holmes knew of lab issues but actively solicited information and directed employees to seek resolutions; 2) to the extent issues were not resolved, they were confined to R&D activities, not patient testing (i.e., no harm, no foul); and 3) Theranos successfully invented small sample testing, just not on its own hardware (i.e., not on the Edison).
It is undisputed several employees, including one of Theranos' founding employees, raised issues with the Edison's reliability before June 2014 (when Fortune magazine published a glowing review of Theranos). Emails prove Holmes knew about these issues when she spoke with journalists, including Fortune magazine's Roger Parloff. But it is also apparent Holmes, when informed of lab issues, was open to hearing about them and may have been misled by at least one lab director.
November 30, 2013: Erika Chung: "both QC controls failed."
November 30, 2013: lab director Daniel Young to Elizabeth Holmes: "We need to retrain," indicating lab employees failed to follow directions
November 30, 2013: lab director Daniel Young to Elizabeth Holmes: "one of the QC runs passed (after the SOP was followed appropriately)."
Whom do you believe when a story has multiple villains, all of whom can point the finger at someone else? (Note: though no one has told jurors it isn't their job to determine if a particular defendant is more culpable than another, it may be helpful to issue an instruction.)
The government was unable to respond effectively because Wade is arguing a case not before the court. Meanwhile, the defense is hoping the jury--like most American jurors before them--will prioritize their feelings about the defendant over the law. Let me explain, in layman's terms, the defense's strategy:
Defense: "See this saddle? It's smaller than every other saddle on the market and still protects the rider. It has a patent."
Government: "We're not arguing over a saddle. Investors were promised a unicorn, which didn't exist at the time defendant was telling everyone she had a unicorn."
Defense: "See this lasso? Did it fail? Sure. But defendant is a good person. When told the lasso didn't work, she not only asked her employees to fix it, she instructed them to prioritize it. Also, at no point in time was the lasso used on farms by actual farmers."
Government: "Again, investors were promised a unicorn. Something so innovative, it would eliminate traditional horses. Why would investors give defendant hundreds of millions of dollars for a lasso and a saddle?"
Defense: "The employees who raised issues lacked full insight into the company's progress. They only worked on one kind of project or in one specific lab."
Defense: "See this saddle? It's smaller than every other saddle on the market and still protects the rider. It has a patent."
Government: "We're not arguing over a saddle. Investors were promised a unicorn, which didn't exist at the time defendant was telling everyone she had a unicorn."
Defense: "See this lasso? Did it fail? Sure. But defendant is a good person. When told the lasso didn't work, she not only asked her employees to fix it, she instructed them to prioritize it. Also, at no point in time was the lasso used on farms by actual farmers."
Government: "Again, investors were promised a unicorn. Something so innovative, it would eliminate traditional horses. Why would investors give defendant hundreds of millions of dollars for a lasso and a saddle?"
Defense: "The employees who raised issues lacked full insight into the company's progress. They only worked on one kind of project or in one specific lab."
Government: "To the extent employees lacked full knowledge, it was because the company deliberately segregated the software, science, and hardware units from each other. The general guidance was not to share all details with other groups."
Defense: "See this patent? Defendant has almost two hundred of them. Are you saying defendant didn't do any real work? Are you calling the fine folks at the United States Patent and Trademark Office mentally deficient?"
Government: "Motherf..."
Even if investors, journalists, and hedge fund managers testify Holmes made specific claims about a specific piece of hardware, who's to say Theranos wouldn't have eventually achieved its goals? After all, the company did earn one or more patents claiming a new method of using small blood samples.
The government is in familiar epistemological territory: how does it prove a negative? How do you prove something that was supposed to exist had no chance of ever achieving existence? The government can't trot out experts who will testify Theranos was trying to do something scientifically impossible. It has to show at the time Holmes solicited journalists and investors, 1) she knew the Edison was too speculative to be achieved within a reasonable time period; and/or 2) she promised a functional Edison within a specific timeframe, i.e., less than three years.
I don't think the government can do either 1) or 2). Instead, the government will show Theranos made deals with Walgreens and Safeway promising to put the Edison in stores after FDA approval. To confer criminal liability, this approach requires the government to show Holmes promised the Edison would "go live" on a date certain, a promise that would be contradicted or tempered by legal boilerplate. I haven't seen the contracts Theranos signed with Walgreens/Safeway, but I assume they involve some payment up front, then future payments once deliverables have been met. If I'm right, the government has a problem: no one goes to jail for not meeting contractual milestones. They have to return the payments received and pay penalties and interest, but they don't go to prison.
It seems we are back to the accounting statements. Had Theranos classified cash from investors as revenue, it would have serious legal issues, but it didn't. In fact, I saw an unfamiliar line item on Theranos' financial statements: "customer deposits." I remember thinking, "Theranos isn't a bank--this doesn't make sense." Now it does.
Furthermore, even if we assume Holmes, at the time she solicited investor funds, made specific claims about fingerstick testing on a homegrown machine called the Edison, it's not enough. The emails presented today give Holmes plausible deniability.
Bottom line: at the time she solicited investor funds, did Holmes promise the Edison, using fingerstick samples, would "go live" on a specific date? If not, at the time Theranos negotiated deals with Walgreens and Safeway to use the Edison in stores, did Holmes know the Edison could not be deployed under agreed-upon terms? If so, did she have a duty to disclose that information? No one so far has answered these questions. The presumption of innocence remains in effect.
© Matthew Mehdi Rafat (2021)
ISSN 2770-002X
Bonus I: Much of the government’s focus has been on disproving the following Holmes’ statement: “[Theranos] currently offers more than 200--and is ramping up to offer more than 1,000--of the most commonly ordered blood diagnostic tests, all without the need for a syringe.”
Questions: 1) if Theranos’ lab managers are telling Holmes the tests work as long as employees follow standard operating procedures, has the government proven intent to defraud? 2) What if lab managers told Holmes the reverse engineering of the Advia 1800 was on track?
More to the point, what if one lab director told Holmes everything was fine while a senior manager told Holmes things were falling apart? How many employees, and of what rank, need to be on each side of the ledger before the government disproves reasonable doubt?
Questions: 1) if Theranos’ lab managers are telling Holmes the tests work as long as employees follow standard operating procedures, has the government proven intent to defraud? 2) What if lab managers told Holmes the reverse engineering of the Advia 1800 was on track?
More to the point, what if one lab director told Holmes everything was fine while a senior manager told Holmes things were falling apart? How many employees, and of what rank, need to be on each side of the ledger before the government disproves reasonable doubt?
Bonus II: one can already predict questions investors will be asked:
Government: “How many investments does your firm make every year?” “What percentage of your investments typically fail?” “Is it common for investments to fail?”
Well-prepared Witness: “It’s very common for investments to fail, but it’s not common for founders to misrepresent their products.”
Government: “Why not?”
Well-prepared Witness: “For better or for worse, the hedge fund community is small, and people care about their reputation. All those stories you hear about bad actors in the financial community, they almost never implicate hedge fund managers. Bernie Madoff was an exception, and you had to know someone in his inner circle to meet him. The bad stories you hear are almost always from trading desks, people looking to make a quick buck or a quick commission. That’s not the hedge fund community. Even ignoring values like morality and friendship, there’s a good chance that a founder will need more funding than originally anticipated.”
Well-prepared Witness: “It’s very common for investments to fail, but it’s not common for founders to misrepresent their products.”
Government: “Why not?”
Well-prepared Witness: “For better or for worse, the hedge fund community is small, and people care about their reputation. All those stories you hear about bad actors in the financial community, they almost never implicate hedge fund managers. Bernie Madoff was an exception, and you had to know someone in his inner circle to meet him. The bad stories you hear are almost always from trading desks, people looking to make a quick buck or a quick commission. That’s not the hedge fund community. Even ignoring values like morality and friendship, there’s a good chance that a founder will need more funding than originally anticipated.”
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