Elizabeth Holmes goes on trial for claims of fraud

In her December 2016 hearing before Congress, former CEO Elizabeth Holmes defended her company against claims made by whistleblowers that its purported blood-testing machine was “an elaborate Ponzi scheme.” Hearing people not believe in her …

In her December 2016 hearing before Congress, former CEO Elizabeth Holmes defended her company against claims made by whistleblowers that its purported blood-testing machine was “an elaborate Ponzi scheme.” Hearing people not believe in her diagnosis was crushing, she said. “The lowest moment in my career was when a patient brought in a very advanced cancer and I knew I had to get it removed. I couldn’t deal with not having a technology that could diagnose it,” Holmes testified at the time.

Since then, the woman many called the “smartest genius ever to run an American company” has been mired in controversy. Several former employees have accused Holmes and the company of fraud. The Securities and Exchange Commission has filed a lawsuit against her and some affiliates, alleging they used corporate funds to support their risky project. Current and former employees have described conflicts of interest — that Holmes asked the former senior director of innovation, Andrew Conrad, to switch the company’s focus from the supposed $1,000 blood-test machine to getting into clinical trials — an accusation Holmes vehemently denies. At the same time, her lawyers have filed a motion to throw out the lawsuit, calling the case “meritless,” and a motion to permanently bar two former employees from the case — Michael Brown and Robert Woodward — from testifying — both of whom Holmes has accused of leaking information. They called the prosecutors “aggressive” and denied that they intend to introduce text messages to the court or leave any confidential material out of the trial.

The dramatic courtroom and financial storylines are just a few highlights in a story that broke in October of last year when the Wall Street Journal published a heavily sourced article exposing a number of problems with the company, including the exaggeration of its achievements and a lack of testing to show if its blood-testing machine, the Theranos Blood Machine, could actually provide accurate results.

Myron Baum, an expert in information security and privacy, conducted an independent audit on behalf of the SEC. The agency was troubled enough to file a lawsuit against Holmes, the company and some of its officers.

As the proceedings kicked off Wednesday in an Alexandria, Virginia federal courtroom, Thomas Gold, an expert in public trust and allegations of kickbacks and bribery, presented his arguments. “What I’m saying is in business, we must protect ourselves from those who are trying to manipulate us,” he said. He said that Theranos chose not to maintain voluntary and open information management programs, following the company’s unusual model — if anything, he said, the company appears to have applied “self-licking ice cream” to its culture and its public persona. While this is not illegal, it puts corporations and consumers at risk.

The defamation lawsuit also moved into a new phase during the first day of testimony, following Holmes’ defense that she was not actually employed by Theranos. Instead, she continued to claim that she was merely invested in the company as a “director and shareholder.” During the testimony, she also claimed that she owned 0.2 percent of the company.

Last week, the biotech startup’s first outside auditors — from Ernst & Young — testified that they found a “systematic pattern of misconduct” and “a company hiding out in secrecy” even as it raised millions of dollars. They said that Holmes knew better than to keep her involvement with the company to herself and that Theranos was a “rich woman’s Ponzi scheme” — a bold statement.

In her testimony Wednesday, one of her former employees, Scott Grant, accused Holmes of treating Theranos like a “cult.” He suggested that Holmes was blinded by all the praise she received from major investors, and that she didn’t care about any of the fundamental questions about the company she had been asked. “Most of those questions, you weren’t able to answer, and you let it go,” he said. “The answer was more cash and more time.”

Grant said that the company attempted to over-control the information flowing from its labs to the rest of the world, explaining that many of the employees complained about being “forced to sign” a strict confidentiality agreement that they felt created a “chilling effect.”

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