The ongoing federal prosecution of fallen biotech wunderkind Elizabeth Holmes showcases the dangers investors—along with patients and doctors—face as companies make encouraging promises in a climate of rapidly emerging technology. Elizabeth Holmes dropped out of Stanford University and founded Theranos, Inc. (“Theranos”) in 2003 seeking to “revolutionize the blood-testing industry.” (Sara Randazzo, The Wall Street Journal; Eric Mack, CNET; Daniel Thomas, BBC News). The Silicon Valley firm claimed to be developing technology that required a smaller draw of blood than traditional lab tests and touted the convenience of using its test kits compared to sending samples into lab centers. (Eric Mack, CNET). After crafting partnerships with healthcare and consumer giants Walgreens Boots Alliance and Safeway, Inc., Theranos’ valuation skyrocketed to a peak of approximately $10 billion. (Sara Randazzo, The Wall Street Journal; Zaw Thiha Tun, Investopedia). Then, in 2015, a whistleblower alerted the Wall Street Journal to Theranos’ allegedly deceptive practices. (Sara Randazzo, The Wall Street Journal).  

Following media scrutiny and a settlement with the Securities and Exchange Commission (“SEC”), Theranos liquidated in 2018. (Sara Randazzo, The Wall Street Journal). Ms. Holmes settled a separate lawsuit with the SEC, pleading nolo contendere—neither admitting nor denying the SEC’s charges—and paying a $500,000 penalty. Id. The United States Attorney’s Office of the Northern District of California indicted Ms. Holmes in June 2018 on charges of wire fraud and conspiracy to commit wire fraud. (Public Notification, United States Department of Justice; Indictment, United States Department of Justice). Starting on September 8, 2021, Ms. Holmes’ trial in the United States District Court for the Northern District of California focuses squarely on Theranos’ practices. (United States District Court for the Northern District of California).

As of October 2021, Ms. Holmes faces “charges of two counts of conspiracy to commit wire fraud and [ten] counts of wire fraud” under 18 U.S.C. § 1349 and § 1343, respectively. (Sara Randazzo, The Wall Street Journal; Public Notification, United States Department of Justice). The indictment alleges that Ms. Holmes and Ramesh “Sunny” Balwani, former Chief Operating Officer at Theranos, defrauded doctors and patients “(1) by making false claims concerning Theranos’ ability to provide accurate, fast, reliable, and cheap blood tests and test results, and (2) by omitting information concerning the limits of and problems with Theranos’ technologies.” (Public Notification, United States Department of Justice). Interestingly, Mr. Balwani plays a key role in Ms. Holmes’ defense strategy. The defense argues that not only were the pair business partners at Theranos, but also were involved in an “abusive intimate-partner relationship.” (Attorneys for Defendant Elizabeth A. Holmes, United States District Court for the Northern District of California). The defense contends that Mr. Balwani’s sexual and emotional “coercive control” over Ms. Holmes affected her mental state during the period of her crimes, “dominating her and erasing her capacity to make decisions” such as “deceiv[ing] her victims.” (Id.; Bobby Allyn, NPR). This argument could make it difficult for the prosecution to convince the jury that Ms. Holmes had the requisite mental states for the crimes: knowledge that her disclosures were false and intent to deceive investors. (Caroline Polisi, CNN).

The prosecution has organized its charges into two categories, (i) misrepresentations made to doctors and patients, and (ii) misrepresentations made to investors. (Public Notification, United States Department of Justice). The U.S. Attorney’s Office claims that Ms. Holmes and Mr. Balwani defrauded doctors and patients by advertising cheap and reliable tests. Id. They allegedly did so with the knowledge that Theranos “was not capable of consistently producing accurate and reliable results for certain blood tests.” Id. Ms. Holmes and Theranos’ actions also allegedly hurt the startup’s investors, who included Mexican billionaire Carlos Slim, media magnate Rupert Murdoch, and the heirs of Walmart founder Samuel Walton. (Sara Randazzo, The Wall Street Journal). The indictment claims that Ms. Holmes and Mr. Balwani defrauded these investors by making false claims about Theranos’ financial condition. (Public Notification, United States Department of Justice). The indictment further claims that the defendants distributed numerous marketing materials and communications concerning Theranos’ revolutionary “analyzer” that was supposedly capable of performing a variety of blood tests after a simple prick of a finger. Id. The prosecution alleges that Ms. Holmes and Mr. Balwani distributed these communications with the knowledge that they were all false. Id.

According to a study of Department of Justice data by Syracuse University, federal white-collar crime prosecutions have steadily declined over the past twenty years. (Transactional Records Access Clearinghouse (TRAC), Syracuse University). Nevertheless, the charges brought in Ms. Holmes’ case rank among the most frequently prosecuted economic crimes in federal courts. Id. 18 U.S.C. § 1343 (wire fraud) ranked first in September 2021 while 18 U.S.C. § 1349 (conspiracy to commit wire fraud) ranked second. (Transactional Records Access Clearinghouse (TRAC), Syracuse University). Federal prosecutors’ favoritism for these charges likely shows that they are the most successful in holding corporate executives responsible for crimes.

Ms. Holmes’ trial is expected to last through mid-December 2021. (Sara Randazzo, The Wall Street Journal). Hearings in October 2021 focused on whether Theranos intended to make its alleged misrepresentations, and Ms. Holmes’ defense team attempted to discredit key prosecution witnesses such as whistleblower Erika Cheung. (Joel Rosenblatt, Bloomberg Law; Sara Randazzo, The Wall Street Journal). If the jury finds Ms. Holmes guilty, it could point to 18 U.S.C. § 1343 and 1349 being useful prosecutorial tools against corporate wrongdoers. The charges carry a hefty sentence; Ms. Holmes faces a maximum of twenty years in prison for each count of wire fraud. (Sara Randazzo, The Wall Street Journal). If the jury finds Ms. Holmes not guilty, it could explain why white-collar criminal prosecutions have declined in recent years: prosecutors are less likely to pursue cases with a lower probability of success.

Regardless of Ms. Holmes’ outcome, investors should be wary of fantastical promises in the current age of rapid technological and biological advancements. Sure, it is important to hold a company’s top brass legally accountable for misleading investors after the fact. Yet investors can take measures on the front end to avoid being misled, such as verifying clinical results with industry experts and ensuring that clinical experts have a loud voice in the corporate suite. (Jessica Dickler, CNBC). Take Theranos as an example: investors should have raised such questions in the face of the company’s reluctance to explain its technology and the media’s fascination with the company’s college-dropout founder. Id. Investors are not at the mercy of corporations or the courts. This technological age has also blessed investors with the opportunity to inform themselves and take advantage when a truly legitimate investment presents itself.