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What Can We Learn from the Downfall of Theranos?

The health company’s plummet carries valuable lessons for Silicon Valley.

December 17, 2018

Theranos founder Elizabeth Holmes epitomized Steve Jobs, which attracted Silicon Valley investors who didn’t look too closely at the health company’s claims, says John Carreyrou, the Wall Street Journal reporter who investigated Theranos. | Reuters/Brendan McDermid

One of the most epic failures in corporate governance in the annals of American capitalism.

That’s how John Carreyrou described the high-profile plummet of health technology business Theranos from heralded Silicon Valley unicorn to disgraced cautionary tale, with founder Elizabeth Holmes and President and COO Ramesh “Sunny” Balwani facing multiple current fraud charges. Carreyrou, a Pulitzer Prize-winning Wall Street Journal reporter, chronicled the downfall of Theranos in his book Bad Blood .

Carreyrou recently visited Stanford Graduate School of Business as part of a program organized by the school’s Corporations and Society Initiative . He spoke before an audience in conversation with Michael Callahan , executive director of the Rock Center for Corporate Governance, which cosponsored the event.

The Theranos story was supposed to have a very different ending. In 2003, 19-year-old Elizabeth Holmes dropped out of Stanford University to start the company, which promised something revolutionary: accurate diagnoses of health conditions using a single drop of blood. Holmes’s passion for the venture and Steve Jobs-like image (black turtlenecks and all) gained her the support of luminaries like Oracle founder Larry Ellison and former Secretary of State Henry Kissinger.

But the suspect science behind Theranos and its paranoid, secretive culture of leadership eventually caught up to the business, leading to criminal charges.

Professor Anat Admati , faculty director of the Corporations and Society Initiative, noted in her introduction for the event that “Theranos raises many questions,” and that Carreyrou could help the Stanford community by shedding light on what happened and what the audience can learn from this story.

Here are the main takeaways from Carreyrou’s discussion of the scandal.

Dark Side of the Valley

“The culture of Silicon Valley created the conditions for someone like Holmes to come along, to thrive,” Carreyrou said.

For example, the valley is replete with mantras like “fake it until you make it” and “fail fast.” As Carreyrou noted, “Holmes’ grave error was to channel this culture, especially the fake-it-until-you-make-it part.” Applying such maxims to a medical product with life-and-death implications was a key driver of the Theranos downfall. The technology simply couldn’t deliver as promised.

The gender factor also played a role, as Carreyrou highlighted in his book: “There was a yearning to see a female entrepreneur break out and succeed on the scale that all these men have: Mark Zuckerberg, Larry Page and Sergey Brin, Steve Jobs, and Bill Gates before them.” As a young, conventionally attractive woman, he adds, Holmes was also able to charm many of the older men who eventually backed her.

Quote The culture of Silicon Valley created the conditions for someone like Holmes to come along, to thrive. Attribution John Carreyrou

Carreyrou’s outside perspective helped him break the story. The reporter entered Silicon Valley not as a tech businessperson or even a tech reporter but as a health care reporter pursuing a tip. “The reporters who had interviewed Elizabeth Holmes over the previous two years accepted the way she framed herself as heir to the throne of Steve Jobs,” he said. “I came at it from the medical perspective with my East Coast skepticism.”

No Checks, No Balances

The Theranos board and federal regulators provided insufficient oversight, Carreyrou noted.

When two would-be whistleblowers told the Theranos board that Holmes had exaggerated revenue projections, the board considered replacing her with an experienced executive. “They decided the company needed to be led by an adult,” Carreyrou said. But Holmes talked her way out of the decision and prevented subsequent intervention by multiplying the voting rights of her shares to give her 99% of total voting rights.

The board was a who’s who of big names — including Kissinger and current Secretary of Defense Jim Mattis — that boosted Theranos’s reputation and Holmes’s credibility, but was a “make-believe” board, Carreyrou said, due to Holmes’s voting control. “This board took her at her word,” he added.

Theranos also exploited a regulatory loophole: Laboratory-developed tests like those the business offered didn’t (and still don’t) fall under the exclusive purview of the Food and Drug Administration or other health care-focused agencies. No one was truly policing the business’s processes or offerings. Of course, Theranos was actively deceiving regulators, too. “I’m not sure what law you could pass that would catch someone intent on lying,” Carreyrou said.

From Confidence to Confidence Games

“Elizabeth Holmes is not Bernie Madoff,” Carreyrou said. “I’m pretty certain she didn’t drop out of Stanford premeditating a long con.” He pointed out how much entrepreneurs have to believe in their product, even if no one else does, especially to recruit investors.

“But there’s a line between that and hyping so much you cross over into outright lies,” Carreyrou said — such as when Holmes misrepresented the sources of finger-stick tests, most of which were done on Siemens machines rather than her company’s. Those tests — and Walgreens’ adoption of Theranos technology in its stores — led to $750 million in new funding.

“The gap between what she claimed and what she had really achieved became a massive fraud,” Carreyrou said.

Culture at the Core

“The culture at Theranos was toxic,” Carreyrou said.

Would-be whistleblowers were threatened with lawsuits. Criticism of leadership or practices was unwelcome. Those who pushed “were usually either fired or marginalized to the extent that they had to leave — they had an expression, which was to ‘disappear’ someone,” Carreyrou said. “The paranoia went into overdrive.”

He added, “If the culture had been more wholesome, then maybe Theranos would have actually made some headway toward achieving Holmes’s vision.”

A Dangerous Formula

At the time of this writing, Holmes and Balwani were facing fraud charges, including making false representations to investors, doctors, and patients. “I think the public health component of the criminal charges is going to resonate,” Carreyrou said. “It wasn’t just billionaires who were misled and bamboozled.”

Perhaps the biggest takeaway from the Theranos story is the expansion of Silicon Valley from its traditional roots to a much broader range of offerings. “It’s getting into new industries, getting into self-driving cars, getting into medicine,” Carreyrou said. “When you enter industries where lives are in the balance, you can’t really just iterate and debug as you’re going. You have to get your product working first.”

Combine that reality with the “myth of the brilliant Silicon Valley start-up founder who sees around corners and can never be wrong,” as Carreyrou described it, and you have a very dangerous set of circumstances — the kind that yield a business story that starts with sky-high valuations and ends in criminal charges.

For media inquiries, visit the Newsroom .

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U.S. v. Elizabeth Holmes, et al.

On June, 14, 2018, a grand jury returned an indictment charging Elizabeth Holmes and Ramesh “Sunny” Balwani with crimes in connection with their respective involvement with two multi-million-dollar schemes to promote Theranos, a private health care and life sciences company based in Palo alto, California.  The indictment was superseded on July 14, 2020, and again on July 28, 2020.   

As alleged in the operative indictment, Holmes and Balwani used advertisements and solicitations to encourage and induce doctors and patients to use Theranos’s blood testing laboratory services, even though, according to the government, the defendants knew Theranos was not capable of consistently producing accurate and reliable results for certain blood tests.  It is further alleged that the tests performed on Theranos technology were likely to contain inaccurate and unreliable results.

The indictment alleges that Holmes and Balwani defrauded doctors and patients (1) by making false claims concerning Theranos’s 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’s technologies.  The defendants knew Theranos was not capable of consistently producing accurate and reliable results for certain blood tests, including the tests for calcium, chloride, potassium, bicarbonate, HIV, Hba1C, hCG, and sodium. The defendants nevertheless used interstate electronic wires to purchase advertisements intended to induce individuals to purchase Theranos blood tests at Walgreens stores in California and Arizona.  Through these advertisements, the defendants explicitly represented to individuals that Theranos’s blood tests were cheaper than blood tests from conventional laboratories to induce individuals to purchase Theranos’s blood tests.

According to the indictment, the defendants also allegedly made numerous misrepresentations to potential investors about Theranos’s financial condition and its future prospects.  For example, the defendants represented to investors that Theranos conducted its patients’ tests using Theranos-manufactured analyzers; when, in truth, Holmes and Balwani knew that Theranos purchased and used for patient testing third party, commercially available analyzers.  The defendants also represented to investors that Theranos would generate over $100 million in revenues and break even in 2014 and that Theranos expected to generate approximately $1 billion in revenues in 2015; when, in truth, the defendants knew Theranos would generate only negligible or modest revenues in 2014 and 2015.

The indictment alleges that the defendants used a combination of direct communications, marketing materials, statements to the media, financial statements, models, and other information to defraud potential investors.  Specifically, the defendants claimed that Theranos developed a revolutionary and proprietary analyzer that the defendants referred to by various names, including as the TSPU, Edison, or minilab. The defendants claimed the analyzer was able to perform a full range of clinical tests using small blood samples drawn from a finger stick.   The defendants also represented that the analyzer could produce results that were more accurate and reliable than those yielded by conventional methods – all at a faster speed than previously possible.  The indictment further alleges that Holmes and Balwani knew that many of their representations about the analyzer were false.  For example, it is alleged that Holmes and Balwani knew that the analyzer had accuracy and reliability problems, performed a limited number of tests, was slower than some competing devices, and, in some respects, could not compete with existing, more conventional machines.

The indictment charges each defendant with two counts of conspiracy to commit wire fraud, in violation of 18 U.S.C. § 1349, and nine counts of wire fraud, in violation of 18 U.S.C. § 1343.

U.S. v. Ramesh "Sunny" Balwani

Ramesh “Sunny” Balwani was sentenced on Wednesday, December 7, 2022 to 155 months (12 years, 11 months) in federal prison for fraud that risked patient health by misrepresenting the accuracy of Theranos blood analysis technology and that defrauded Theranos investors of millions of dollars.

Balwani was tried separately from Holmes, and in her trial Holmes was not convicted of all counts. On January 3, 2022, a different federal jury convicted Holmes of one count of conspiracy to commit fraud on investors and three counts of committing fraud on individual investors, which involved wire transfers totaling more than $140 million. The jury acquitted Holmes of the patient-related fraud conspiracy count and the three counts of fraud against individual patients. The jury could not reach a unanimous verdict with respect to three individual investor fraud counts against Holmes. An additional count of wire fraud relating to a Theranos patient had been dismissed during trial. On November 18, 2022, U.S. District Judge Davila sentenced Holmes to 135 months (11 years, 3 months) in federal prison. She was ordered to surrender to begin serving her sentence on April 27, 2023.

In addition to the 155 month prison term, U.S. District Judge Davila sentenced Balwani to three years of supervision following release from prison. A hearing to determine the amount of restitution to be paid by Balwani is to be scheduled in the future. Balwani was ordered to surrender on March 15, 2023, to begin serving his prison sentence.

U.S. v. Elizabeth Holmes

Elizabeth A. Holmes was sentenced on Friday, November 18, 2022 to 135 months (11 years, 3 months) in federal prison for defrauding investors in Theranos, Inc. of hundreds of millions of dollars.

In addition to the 135 month prison term, U.S. District Judge Davila sentenced Holmes to three years of supervision following release from prison. The parties were instructed to meet and agree on a future date for a hearing to determine the restitution amount to be paid by Holmes. No fine was assessed. Holmes was ordered to surrender on April 27, 2023, to begin serving her prison sentence.

Next Court Dates

Due to the level of interest in this case, please see the following webpage for important news and information about access to proceedings and case information:

United States v. Elizabeth A. Holmes, et al. 18-CR-00258-EJD

Notice: Dates are subject to change on short notice. Please check Judge’s calendar before attending.

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Notice for Potential Victims

The United States Attorney’s Office for the Northern District of California and investigating agencies are seeking information from those who may be victims of the Defendants’ crimes. 

If you believe you are a patient victim, please fill out this questionnaire . Please read and follow the instructions on the form and submit it no later than September 6th, 2022. Email your submission to [email protected] with US v Holmes & Balwani in the Subject Line. We are unable to accept late submissions. 

All responses are voluntary, but complete submissions will be useful in identifying respondents as potential victims and supplying the Court with the information necessary for sentencing. It is requested that respondents submit their statements via email as indicated on those questionnaires. Based on the information submitted, respondents may be contacted by law enforcement agencies and asked to provide additional information.

This Office cannot act as your attorney or provide you with legal advice. However, you may seek the advice of an attorney with respect to this or other related legal matters.

• Holmes and Balwani Indictment

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Theranos verdict: five key moments from the trial that shook Silicon Valley

The trial of CEO Elizabeth Holmes saw several former employees, board directors and even Holmes herself testify

E lizabeth Holmes, the founder of blood testing company Theranos , was found guilty of four charges of fraud on Monday, ending a closely followed saga that could have major implications for the tech world.

Over the course of several months, federal prosecutors laid out a case to the jury that Holmes knowingly scammed investors and patients, artificially inflating the value of Theranos and lying about the capabilities of its technology.

The trial has been nearly as spectacular as the rapid rise and fall of the company, which at its height was hailed as a game changer and attracted hundreds of millions in investment. Here are five key moments to remember in the case that shook Silicon Valley.

High-profile investors takes the stand

Holmes managed to woo billionaire investors and assemble a board of directors comprising former US cabinet members spanning from the Nixon to Trump administrations.

While most of these early Theranos players did not appear in court, one did make an appearance: James Mattis was called to testify by the prosecution in the early days of the proceedings. He stated he personally invested $85,000 in the company, finding the technology “pretty breathtaking” but lost faith after the Wall Street Journal reporting.

“There came a point where I didn’t know what to believe about Theranos any more,” he said.

Former employees speak out

The prosecution paraded a number of former Theranos employees as witnesses during the trial, including three different lab directors.

Former Theranos lab director Kingshuk Das testified that Holmes seemed reluctant to acknowledge any criticisms of the Theranos technology, giving “implausible” excuses for apparent failures in the company’s tests.

“I found these instruments to be unsuitable for clinical use,” he said of the company’s proprietary Edison devices.

Other lab directors Lynette Sawyer and Sunil Dhawan said the job required “minimal” in-person work and that they spent the majority of their time doing paperwork, not testing the actual hardware used in blood analysis.

More key testimony came from Erika Cheung, a former Theranos employee, who took the stand for three days to detail shortcomings of the company’s blood testing processes. She said she was very concerned about the accuracy of the technology and occasionally refused to run patient samples on the devices.

Patients “don’t know the fact that behind closed doors we’re having all these problems and they think they’re getting correct results”, Cheung said. “It was starting to get very, very uncomfortable and very stressful for me working at the company.”

Holmes defends herself, alleges abuse

Perhaps the most shocking moment in the trial came when Holmes herself was called to the stand by her defense team to testify.

The risky move allowed her to make her own case to the jury, potentially garnering more sympathy ahead of deliberations. But it also opened her to cross-examination from the prosecution, during which attorneys grilled her for several days about inconsistencies in her story.

Holmes claimed on the stand that she trusted statements from her scientists that Theranos technology was working as planned and that she did not purposely mislead anyone. She also laid out bombshell allegations that her former business partner and lover, Sunny Balwani, abused her, influencing her to commit fraud.

The two met when Balwani was 38 years old and Holmes was only 18. She said Balwani wanted her to “kill the old Elizabeth”, controlling what she ate and who she spent time with so that she could become a successful CEO.

“He had taught me everything I thought I knew about business and he was the best business person that I knew,” Holmes said. “I didn’t question him in the way that I otherwise would have.”

The ‘smoking gun’: pharmaceutical logos

One integral piece of evidence prosecutors frequently returned to was that Holmes doctored documents sent to potential investors.

The Walgreens CFO, Wade Miquelon, said during his testimony that Holmes had implied the pharmaceutical firms Pfizer and Schering-Plough had validated the company’s blood-testing technology.

He said Holmes shared with investors and potential partners a document carrying the Pfizer logo, purportedly showing the drug company’s support. But the document had been forged, the prosecution claims.

“Pfizer did not write this,” prosecutor Robert Leach said in opening arguments for the trial. “Pfizer did not put its logo on this. Pfizer did not give its permission to put its logo on this. Pfizer did not make the conclusions in this report.”

In her testimony, Holmes admitted to personally manipulating those documents, saying she did so not to imply that the companies had vetted the technology but “because this work was done in partnership with those companies and I was trying to convey that”.

“I wish I had done it differently,” Holmes told jurors.

Evidence offers window into Holmes’s life

Submitted into evidence, amid the thousands of pages of dense laboratory tests and scientific data, were a handful of documents that offered a window into Holmes’s mindset as she stood at the helm of one of Silicon Valley’s buzziest companies.

“I do everything I say – word for word. I am never a minute late. I show no excitement,” one strict handwritten note to herself said. She obsessively tracked her food, drinking a daily green juice and avoiding sugar.

“ALL ABOUT BUSINESS.”

“I am not impulsive.” “I do not react.” “I am always proactive.” “I know the outcome of every encounter.”

“I do not hesitate.”

“I speak rarely. When I do – CRISP and CONCISE. I call bullshit immediately. My hands are always in my pockets or gesturing,” the note read.

Also in evidence were hundreds of pages of text messages between Holmes and Balwani, many amorous and others business-like. In some they referenced a bird they owned together. Also in evidence: an aerial photo of a home they owned together in Atherton.

“You are the breeze in desert [sic] for me – my water, and ocean,” she texted Balwani in May 2015, according to a recent court filing. “OK,” he replied.

The two frequently used the phrase “hmfr” which Holmes said references an Arabic phrase that translates roughly to “this too is my God’s glory”. In her journals and texts with Balwani, Holmes referenced a spiritual connection and a belief that God put Balwani in her life for a higher purpose.

“Love you,” one message from Balwani reads. “I prayed from the bottom of my heart for you. I have never prayed with this intensity in my life for anything.”

“I love this,” Holmes replied. “My nirvana.”

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More on this story

Elizabeth Holmes: from ‘next Steve Jobs’ to convicted fraudster

How Elizabeth Holmes' rhetoric changed over time – video

Elizabeth Holmes trial: jury finds Theranos founder guilty on four fraud counts

Holmes verdict an indictment of Silicon Valley’s ‘fake it till you make it’ ethos

US jury finds former Theranos CEO Elizabeth Holmes guilty of fraud – video

Theranos jury says it remains deadlocked on three of 11 fraud counts

Elizabeth Holmes fraud trial: jury begins second week of deliberations

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Theranos: How Did a $9 Billion Health Tech Startup End Up DOA?

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Theranos: The Unicorn That Wasn't

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Theranos: The Limits of the “Fake It Till You Make It” Strategy

Carrie H. Cohen , James M. Koukios , and Christine Y. Wong are partners at Morrison & Foerster LLP. This post is based on a Morrison & Foerster memorandum by Ms. Cohen, Mr. Koukios, Ms. Wong, Sophie H. Cash , and Rachael Hanna.

In a case that tested the limits of the “fake it till you make it” approach to a startup business, on January 3, 2022, a jury in the U.S. District Court for the Northern District of California  convicted  Elizabeth Holmes, founder and former CEO of now-defunct Theranos Inc., on one count of conspiracy to commit wire fraud and three counts of wire fraud against Theranos investors. Each count carries a maximum sentence of 20 years in prison. The jury failed to reach a verdict on three additional counts of wire fraud against Theranos investors and found Holmes not guilty on the multiple counts of conspiracy and wire fraud against Theranos patients.

The trial, which lasted for 14 weeks, called into question more than just Holmes’ questionable business practices and investment solicitation; it was arguably a referendum on “fake it till you make it” practices, such as intentionally overstating, and thereby misrepresenting, a fledgling company’s current capabilities, success, or profitability, while banking on the notion that its aspirations will eventually follow the desired trajectory and become a reality. The case also highlighted the importance of investors doing adequate due diligence.

Holmes was accused of defrauding investors by falsely touting that she had created technology capable of performing an expansive suite of blood tests on a tiny fraction of the blood required for traditional diagnostic testing, at significantly reduced  cost , so that “fewer people have to say goodbye too soon.” The tests, which were incapable of being performed as promised or produced inaccurate results, also defrauded patients, according to prosecutors. In order to perpetuate this falsehood, Theranos employees ran tests on third-party machines and presented the results as the work of the miracle mystery technology contained in Theranos’ compact devices.

Despite the fact that the technology continued to fall short of its lofty ambitions, Holmes was able to raise close to a billion dollars from many influential  donors , including Rupert Murdoch, Tim Draper, Betsy DeVos and others. Likewise, the Theranos board  was packed with big names, including former Secretary of State Henry Kissinger, former Defense Secretary James Mattis, and former Secretary of State George Shultz. Holmes also inked significant and lucrative deals with retailers, notably Walgreens and Safeway, to conduct in-store testing using Theranos’ “revolutionary” technology.

At trial, multiple witnesses for the prosecution chronicled the impressive claims Holmes made to investors, prospective partners, and the media about Theranos’ ability to provide affordable, quick blood tests that proved to be fantastical, demonstrating how Holmes and Theranos “faked it” for years but ultimately were unable to “make it.” For example:

• Holmes repeatedly claimed that Theranos’ blood testing technology could accurately and reliably perform a full array of blood tests with less blood and at a lower cost than traditional testing. In fact, Theranos’ blood tests frequently produced irregular and inaccurate results, one test was so inaccurate it had “lost any diagnostic value,” and Theranos had received many patient complaints about unreliable test results.
• To solicit investors, Theranos created a  report  that included logos of pharmaceutical companies to represent that each had endorsed Theranos’ technology. In fact, Theranos had used these logos without authorization and the pharmaceutical companies had never validated Theranos’ technology.
• During the lead-up to Theranos’ commercial launch with Walgreens, Holmes informed Walgreens executives that Theranos was using its own technology to run blood tests. In fact, Theranos used third-party devices to perform its tests, which Holmes concealed from Walgreens over trade-secret concerns.
• Holmes told an investor that Theranos technology was being used in medevac helicopters on the battlefield. In fact, Theranos technology was never used  by the Department of Defense or deployed in military conflict settings.

While Holmes can be dismissed as a one-off prosecution of a modern-day Icarus, there are a few lessons to be learned:

First, a company’s media strategy can cause the company to fall squarely within a prosecutor’s bullseye. As the focus of so many media profiles, Holmes’ conduct was hard to ignore. Holmes made bold, and later demonstrably false, claims in various profiles, including the now infamous  Fortune Magazine  cover article. While these profiles may have benefited Theranos at publication time, at trial, the government was able to introduce evidence of Holmes’ false statements to the press. Moreover, not all press is good press. Government investigations are often triggered by press reports of malfeasance, as was the case here following  The Wall Street Journal ’s investigative reporting.

Second, companies need to take issues raised by internal whistleblowers seriously. The issues that Theranos faced were repeatedly raised internally by employees. After being ignored again and again, it should come as no surprise that those whistleblowers eventually reported their concerns to external parties, including the primary federal regulator of medical laboratories.

Third, founders and high-level executives cannot simply disclaim responsibility for the actions of their employees. Particularly where there is evidence that an executive was deeply involved in the development of specific products and presentations, the strategy of pointing to others—up, down, and all around—cannot always succeed.

Finally, claims about any products, especially healthcare products, must be thoroughly vetted. While it is certainly not advisable to make false claims about any products, the government often investigates fraudulent claims involving healthcare products, as those products and any fraudulent conduct related thereto can have a real and tangible impact on public health.

The case also highlighted the other side of the same coin: How important it is for investors to do adequate due diligence. While Holmes fostered Theranos’ fake it till you make it culture by selling exaggerated and outright false claims and by providing limited information about her company to outsiders, the defense highlighted the lack of due diligence by sophisticated financial actors to validate the company’s claims. For example, Black Diamond Ventures founder and managing director Chris Lucas  testified  that, despite investing millions in Theranos in 2006 and 2013, he had little visibility into the company and had invested based on his strong relationship with Holmes. The defense strategy appears to have had some limited success as the jury could not reach a verdict on the wire fraud count that related to the investment by Black Diamond Ventures.

As the allegations against Holmes played out at trial, Holmes’ defense team claimed that “failure is not a crime.” However, this case demonstrates that the optimistic bluffing that is tolerated, expected, and even encouraged within startup culture can cross the line into prosecutable fraud.

As Assistant U.S. Attorney Jeff Schenk  emphasized during the prosecution’s closing argument, “[Holmes] chose fraud over business failure. She chose to be dishonest. That choice was not only callous, it was criminal.”

Enjoyed reading this article but I couldn’t help but continually notice how you seemed to dodge the board responsibility and duty of care. Especially Schultz whose grandson repeatedly tried to educate him on the internal workings. This would have been the perfect example to hold the board accountable in this scam as well due to their total lack of oversight and downright negligence.

Interesting that the Theranos board of fancy folks has not been asked how they let this happen.

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How Theranos founder Elizabeth Holmes went from the cover of Forbes to being found guilty on charges of fraud

As the saying goes, confidence is key in business. And Elizabeth Holmes was confident.

It was an apparently unshakable belief in her product that helped her to raise hundreds of millions of dollars from investors, including some of the world's most powerful people.

With their backing, her company, Theranos, promised to revolutionise medical diagnostics with technology that could conduct clinical blood tests with just the prick of a finger.

Hidden from the public was the fact the technology never worked as intended.

But her sales pitch did.

Buzz surrounding her company's potential propelled her into the Forbes Rich List as the youngest female billionaire and wealthiest self-made woman on the planet — on paper at least.

Despite a patchy record, Theranos's blood work services were offered to doctors and patients, many of whom put their trust its technology and the promises Holmes made.

However, by the end of 2021, she faced an altogether different sales job.

Taking the stand over the course of two weeks, Holmes tried to convince 12 men and women she shouldn't be sent to prison for defrauding investors and patients.

The start-up

If you've ever been to the doctor to have a blood test, you'll know it can be an uncomfortable experience.

A significant amount of blood is drawn and the results can take hours or days. That's not even mentioning the physical discomfort that patients can experience.

It was this that Elizabeth Holmes — who often made a point in interviews to mention her phobia of needles and blood — said she wanted to change by starting the company at age 19.

She envisioned a testing revolution that would remove the need for a needle.

"We've made it possible to run comprehensive laboratory tests from a tiny sample, or a few drops of blood that could be taken from a finger," a 30-year-old Holmes told a 2014 TED talk.

"We've made it possible to eliminate the tubes and tubes of blood that traditionally have to be drawn from an arm."

With that promise, she found support from bigtime investors, including Rupert Murdoch and the family of former US education secretary Betsy DeVos.

After operating in "stealth mode" for years, the company exploded onto the Silicon Valley scene in the early 2010s, bringing Holmes's profile to the fore.

She soon had the pose perfected. Imitating an "OK" sign, she'd perch one of Theranos's tiny test containers between her thumb and forefinger, mere drops of blood inside, to show off the technology at photo shoots.

"This woman invented a way to run 30 lab tests on only one drop of blood," one headline declared.

"This CEO is out for blood," said another.

The company appeared to be moving from strength to strength, with Holmes the skivvy-clad visionary at its helm.

She welcomed a visit to the company from then-vice president Joe Biden and shared stages with Bill Clinton and Chinese billionaire Jack Ma as the press compared her to her idol, Steve Jobs.

But cracks began to appear in late 2015, when a now-famous article from the Wall Street Journal took a different angle.

"Hot startup Theranos has struggled with its blood-test technology," its headline read.

Bleeding credibility

The finger prick blood tests were meant to be analysed with a proprietary machine called a Theranos Sample Processing Unit (TSPU).

It was advertised as being able to perform a full range of tests but, in reality, it struggled badly.

"Faking it until you make it has always been part of Silicon Valley's DNA," Wall Street Journal reporter John Carreyrou told the ABC in 2018, shortly before criminal charges were filed.

"Unfortunately [faking it], in this case, was defrauding investors, making claims to investors that were absolutely not true."

Eventually, The Wall Street Journal's reporting was echoed by criminal and civil action against Ms Holmes and Theranos's president, Ramesh "Sunny" Balwani.

The criminal indictment alleged the TSPU had problems with accuracy and reliability, could not perform the number of tests advertised, was slower than some competing technology, was unable to compete with conventional machines, and could not manage simultaneous testing from multiple patients.

When some of these issues were first made public, Theranos initially went on the defensive, and Ms Holmes personally appealed to investor Rupert Murdoch, who owns The Wall Street Journal, to kill the story.

She also went on US TV to defend her life's work.

"First they think you're crazy, then they fight you, and then, all of a sudden, you change the world," a defiant Ms Holmes said.

Just a year later, Forbes Magazine — which had estimated Ms Holmes' net worth at $US4.5 billion ($6.2 billion) due to her controlling stake in the business — changed its assessment of her net worth to "essentially nothing".

However, claims about the failures of Theranos went beyond the inadequacies of its blood-testing technology.

It was also alleged the company knew about the problems and lied repeatedly to cover them up.

In 2018, the US Securities and Exchange Commission brought civil fraud charges against Ms Holmes and Theranos, alleging she was responsible for misleading investors over the TSPU's performance.

"They deceived investors by, among other things, making false and misleading statements to the media, hosting misleading technology demonstrations, and overstating the extent of Theranos's relationships with commercial partners and government entities, to whom they had also made misrepresentations," it said in its complaint.

Among the allegations levelled by the regulator were that Holmes and Theranos raised $US700 million ($975 million) from investors by:

• tricking investors with demonstrations of the TSPU by secretly using traditional third party machines 
• using the same, modified third-party analysers instead of its own machines for some retail testing, despite advertising that was not the case
• overstating the breadth of a contract Theranos had signed with the US military
• misleading investors about the progress of its retail contracts
• claiming it would make $100 million in revenue in 2014 and $1 billion in 2015, despite actually making negligible amounts in those years.

Ms Holmes agreed to settle the civil action in exchange for giving up her majority stake and voting rights in Theranos, being barred from heading a company for 10 years, and paying a $US500,000 fine.

While the settlement did not amount to an acceptance of wrongdoing, just months later she found herself facing more serious criminal charges of wire fraud, linked to her conduct as head of Theranos.

The testing problem

It wasn't just millionaire investors and large corporate partners who were stung by problems with Theranos's technology.

When the company secured a deal with pharmacy chain Walgreens to offer "wellness centres" in store, regular people came into the firing line.

The centres were advertised as a place where patients could have blood "either taken from a tiny finger stick or a micro-sample taken from traditional methods, eliminating the need for larger needles and numerous vials of blood".

However, when the technology was offered to patients, the problems only became more apparent.

Testimony from the trial included a woman who received a false positive result, suggesting she had HIV antibodies, and another with a history of miscarriages who was told her pregnancy had failed, despite it later resulting in a healthy baby.

US media reporting of the trial also included evidence that Holmes resisted and ignored advice from her own experts that the tests would sometimes show up PSAs while testing women's blood — a clear error as PSA stands for prostate-specific antigen and can only come from males.

Was Elizabeth Holmes in control?

But the breadth of Theranos's technological failings became a side issue in the trial when Holmes took the stand.

Suddenly, her personal life was thrust into the spotlight in the US District Court of Northern California.

The key issue in the trial was whether she intended to mislead investors and patients, or whether she was a failed businesswoman, naive to how bad the situation was.

Was she deliberately lying to trick people into giving her money, or was she acting in good faith, even as her business began to crumble? Was she even acting under her own free will at the time of the charged offences? 

The man behind the last question is Ramesh "Sunny" Balwani, Holmes's former boyfriend, ex-business partner and co-accused.

While the two faced identical charges, they are being tried separately.

During at-times tearful evidence, Holmes made allegations of how their intense relationship included emotional and sexual abuse.

She said she fell under the spell of a man 19 years older than her, who had offered solace at a difficult time in her life — she turned to him for support after she was raped as a student.

"[He] impacted everything about who I was and I don't fully understand that," she told the court. 

She was made to read out saccharine texts between the two while on the stand, becoming visibly upset at the request by prosecutors to verbalise texts calling him her "tiger".

But much of her testimony — which spanned more than 25 hours, spread over two weeks — was spent blaming Mr Balwani, who had also served as president and chief operating officer of Theranos. 

She told the court that Mr Balwani had neglected to fix problems with the blood-testing technology, and that he was controlling in the extreme. 

Mr Balwani did not give evidence in the trial but has denied all claims of abuse, for which he has not been charged. He has also pleaded not guilty to fraud charges and will be tried in early 2022.

However, Holmes did give some concessions about things she would do differently at the helm of Theranos if she had her time over.

She admitted to adding the logos of Pfizer and other drug makers to reports, which gave the impression Theranos technology had been validated by other industry figures.

Holmes also acknowledged that she did not pay heed to warnings from lab staff that the technology did not work as intended.

But she also framed her time as chief executive as being driven by a belief in the potential of her product.

She said some of her furtive behaviour could be explained by a desire to protect Theranos's trade secrets, and her lawyers painted her as the captain of a sinking ship, not a criminal trying to get away with fraud.

"Did she leave? No, she stayed. Why? Because she believed in this technology," her lawyer, Kevin Downey, told jurors.

But her position as "captain" was used against her by prosecutor Robert Leach, who had her concede that she was the person with the most power and influence over Theranos.

"Is that fair? The buck stops with you?" Mr Leach asked her at one point.

"I felt that," Ms Holmes said.

The mammoth trial of Elizabeth Holmes began in September and wrapped up just before Christmas, with the jury sent into deliberations in December.

It had heard from 30 witnesses, with Holmes being given the last word before closing arguments, where she was alternately painted as "building a business, not a criminal enterprise" and "choosing fraud over business failure".

Jury members were required to parse masses of evidence in their deliberations before they eventually delivered their verdict, finding her guilty of four charges, not guilty on another four. They were unable to reach a verdict on a further three counts.

The materials they viewed ranged from scientific testimony to internal emails, personal notes, memos and texts.

Tendered at the trial was a daily schedule belonging to Ms Holmes, scrawled on paper from a Singapore hotel.

Below its details of her 4am wakeup, her diet for the day and her meals was a series of affirmations by which to abide throughout the day. 

"I show no excitement … ALL ABOUT BUSINESS," she wrote, shortly above another rule:

"I call bullshit immediately."

It was advice reporters, prosecutors and regulators also took when it came to Theranos's claims of a finger-prick blood test, sparking a litany of investigations that ultimately led to her downfall.

She now faces up to 20 years in prison for each of the four guilty verdicts.

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What silicon valley can learn from the theranos fraud case, march 19, 2018 • 27 min listen.

The SEC's verdict in the Theranos case raises broader questions on how much leeway to give startup founders and when controls need to be put in place.

Wharton's Wayne Guay and Georgetown's James Angel discuss the SEC's fraud case against Theranos CEO Elizabeth Holmes.

Once a darling of the start-up world, Elizabeth Holmes has now become a cautionary tale.

The founder of Palo Alto, Calif.-based Theranos has been charged with fraud by the U.S. Securities and Exchange Commission for misrepresenting the facts about its so-called revolutionary technology to carry out multiple blood tests using small blood samples and defrauding investors of $700 million. The case brings up a number of questions about how much leeway to give start-up founders and when controls need to be put in place, and also about how and when regulators should be involved.

Holmes, who graced the covers of numerous magazines and was once called “the next Steve Jobs,” must pay a $500,000 penalty and will be banned for serving on the board of publicly traded companies for the next decade. She will serve no jail time. The SEC has filed a separate case against Ramesh Balwani, who served as president and COO of Theranos between 2009 and 2016.

“I look at this largely as a corporate governance failure or a breakdown, where you had a founder that had complete effective control,” said Wharton accounting professor Wayne Guay , who is also editor of The Journal of Accounting and Economics . Theranos had a dual-class shareholding structure where Holmes had 100 votes for every one vote of other shareholders, and she retained total control of the composition of the company’s board.

“The board of directors was not filled with the types of professionals that we would expect — medical professionals and financial professionals and others,” said Guay. “It was filled with politicians and military advisers and others, and the oversight wasn’t there.” Among the board members of Theranos were former U.S. Secretaries of State Henry Kissinger and George Schultz, and former Secretary of Defense William Perry.

“The SEC is sending a very strong signal: Don’t lie to investors,” said James Angel , professor of business at Georgetown University’s McDonough School of Business and an expert in the structure and regulation of financial markets worldwide.

Guay and Angel discussed the takeaways from the Theranos case on the Knowledge at Wharton show on SiriusXM channel 111 . (Listen to the full podcast using the player at the top of this page.)

Back in 2003, when Holmes was barely 20, she dropped out of Stanford University to launch Theranos based on proprietary technology for an analyzer that promised to conduct multiple blood tests with a single drop. Investors shelled out $700 million, lapped up visions of the Theranos technology serving a simple and affordable solution for billions of patients that need multiple blood tests and would welcome a product that called for only one pin prick.

“I look at this largely as a corporate governance failure or a breakdown.” –Wayne Guay

The SEC found that Theranos did not have the technology to deliver all that it promised, and that it was actually earning only a fraction of the projected revenues and making false statements to investors. Specifically, the SEC found that the company’s proprietary analyzer conducted only a dozen of the 200-odd tests it promised, and that it conducted the remaining tests on third-party, modified devices, and on commercially available analyzers. Holmes had also assured investors in 2014 that privately-held Theranos would earn $100 million in revenues, but it managed just a little more than $100,000 that year, the SEC said. Theranos had also falsely claimed that the U.S. Department of Defense had deployed its technology, the regulator added.

Robert Hughes , Wharton professor of legal studies and business ethics, highlighted the broader ethical issues raised by the Theranos case. “It is not a scandal when a startup’s new technology doesn’t work out as executives and investors hoped,” he said. “It is a scandal for a startup’s executives to lie about their technology’s current state of development, about where that technology has been used or about the company’s revenues.”

Hughes said startups should take to heart advice that Jina Choi, director of the SEC’s San Francisco regional office, dispensed in the Theranos case: “Innovators who seek to revolutionize and disrupt an industry must tell investors the truth about what their technology can do today, not just what they hope it might do someday.”

Dual-class Shares: Pros and Cons

Highlighting his argument that the central problem with Theranos was a travesty of good corporate governance controls, Guay said the culprit was the dual-class shareholding structure. Holmes did not have the requisite track record to be vested with the “trust and complete control of the company,” which she had because of the disproportionate voting control she possessed under the company’s dual-class shareholding structure, he added. Drawing from the Theranos case, he said the question facing other companies with dual-class shares is: “At what point might [companies] put some effective controls in place to give that control and the voting rights back to shareholders?”

Guay recalled that the SEC had disallowed dual-class shares some three decades ago before it permitted them to be used. Such shares are not uncommon, and are in place at Google, where founders Sergey Brin and Larry Page have effective voting control, and also at Facebook and Snap, the parent of the messaging app Snapchat, he said. “It’s been a big issue over the last couple of years, and it is something that should be debated,” he added, noting that it had been hotly debated during Snap’s initial public offering last year.

Guay noted that some advocates argue in favor of founders retaining control with dual-class shares during the formative years of a startup. But once the enterprise grows and reaches critical mass, it would make sense to have “sunset provisions [where they would] release that voting control to another group of investors,” he added.

“Some would argue that having a big block holder is actually a good thing,” said Angel. He recalled that Ford Motors, where the Ford family has long held dual-class shares, survived the Great Recession of 2008, whereas General Motors went through a bankruptcy. He explained why having a large, single block of voting shares helps.

“The reality comes down to problems of corporate governance in that the shareholder base is so widely dispersed that most shareholders don’t have any real power or influence or even the incentive to exercise power or influence — when you have an atomistic shareholder base,” Angel said. Yet, it remains a controversial subject, he added: “I don’t pretend that one type is always the best or always the worst.”

“In many fraud circumstances, they sometimes start with small lies, and then those small lies have to be backed up with bigger and bigger lies.” –Wayne Guay

Guay pointed to the risks with such excessive voting power. He noted that “plenty of empirical evidence” exists to show that the holder of a large block of shares can help with governance and monitor what the company is doing. “[But] in many cases, untested individuals who may be great developers of products, such as scientists and programmers, may not be the best persons to actually run the day-to-day operations of the company, or at least not once the company gets to be a certain size,” Guay said. “[Theranos] is a good case study in some of the dangers or the problems that crop up when you have a founder that [makes] some missteps and you don’t have that oversight or the ability to look over the founders’ shoulder and say, ‘I don’t think you should do that because you don’t have the voting rights.’”

“Does it really matter?” asked Angel. “One could also argue that the vast majority of shareholders don’t have any effective power, because management is entrenched and your shares are such a tiny fraction of total shares outstanding,” he said. He noted that the share price differentials between companies that have voting and non-voting stock “is not zero, but it’s not large, either.”

Crime and Sufficient Punishment

The SEC penalty for Holmes — a fine, debarment from being a public company director and no jail term — has also been controversial. “I can feel my blood pressure going up at the fact that so many people in the Great Recession got away with fraudulent behavior and did not go to jail,” Angel said. He noted that in the Theranos case, the SEC doesn’t have direct criminal enforcement ability, but passes on that role to the Department of Justice.

“Lawbreaking in business can result in both regulatory and criminal prosecution,” said Hughes. “The SEC settlement does not preclude criminal prosecution.” He noted that a criminal investigation is underway in the Theranos case, though no charges have been filed.

All the same, “the SEC has done what it can,” said Angel. “They’ve extracted a huge settlement. They’ve basically banished [Holmes] from the industry for a decade. It remains to be seen what the Department of Justice will now do.” Guay said the justice department would also want to send out a broader warning in any action it may take in the Theranos case. “In any [such] situation, there’s always a desire to punish people, but at the same time the role of punishment is often to serve as a deterrent,” he added.

Guay said what the justice department will do depends on “what they think they can prove.” He noted that “the burden of proof” is higher in a criminal case than it is in a civil case. “Typically, the SEC and the DoJ want to get to some settlement that looks like justice.” According to Guay, putting a CEO behind bars is “a very hard thing to do,” and the company and the CEO will “fight tooth and nail” against such a move. Angel noted that the justice department also “has other fish to fry” and would make choices in sharing its limited resources between chasing drug dealers, terrorists and errant CEOs.

“The SEC is sending a very strong signal: Don’t lie to investors.” –James Angel

“No matter what the Department of Justice does to her, she’s already tarnished; she’s already punished big time,” said Angel. Guay noted that Holmes, who owns 50% of the stock in Theranos, has also lost some $4.5 billion in personal wealth in the Theranos scandal, based on an estimate by Forbes magazine in June 2016. A year earlier, she had topped the Forbes list of America’s Richest Self-Made Women .

Angel expected Theranos to now become “a good candidate for an acquisition from someone else who wanted to get their hands on the technology without dealing with the scandal-ridden reputation.”

“Being acquired is certainly a possibility,” said Guay. “It would take them out of the public limelight and put them under the umbrella of another company. To the extent the technology they have is in fact very valuable, that would be certainly one way to go.” The company could also demonstrate to investors and regulators that it is “cleaning house” by replacing unsuitable board members and executives and putting in place the requisite oversight structures to prevent future frauds, he added.

Meanwhile, Theranos would not be completely out of the woods. Angel predicted that after the SEC verdict, it would see lawsuits alleging fraud, breach of contract, lack of performance, and so forth. In that setting, he said he would not be surprised if Theranos files for Chapter 11 bankruptcy protection. “Then someone else will probably pick up whatever technology assets are there out of the wreckage.”

“It is a scandal for a startup’s executives to lie about their technology’s current state of development, about where that technology has been used, or about the company’s revenues.” –Robert Hughes

Those court cases could make it difficult for Theranos to be acquired any time soon. “Anybody who is going to buy that company is going to want to get a handle on what the litigation risk is,” said Guay. “If all these lawsuits get filed, the acquirer is going to have to be really leery about what they’re taking on if they buy this company.” Added Angel: “That is another reason why the cleansing of Chapter 11 might actually be the best step forward, because that way you isolate all the claims from the old company and then the buyer could buy the assets and move on with it.”

As for Holmes’s future, Angel said, “she is very tainted, so no public company would really want to have her on board.” At the same time, he described her as “very intelligent, very talented and a great salesperson, [who] will land on her feet eventually.” Guay agreed. “Any kind of public role where a company would put her forward as a spokesperson or as a person of importance — that’s going to be a non-starter, at least for a while.”

Guay wondered how things may have come to such a pass at Theranos. “In many fraud circumstances, they sometimes start with small lies, and then those small lies have to be backed up with bigger and bigger lies,” he said. “[It is about] understanding how that all evolved here — whether this was something that [Holmes] felt she had to do or wanted early on, and then she dug herself a hole that she couldn’t get out of. It’s hard to know exactly how that evolved.”

Photo of Elizabeth Holmes by Max Morse for TechCrunch  – TechCrunch Disrupt San Francisco 2014, CC BY 2.0, https://commons.wikimedia.org/w/index.php?curid=45609023

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Create a new account, forgot password, sign in to myima, theranos: cautionary tale of ethical failings.

June 01, 2022

By: Tala Khalifeh , CMA

• Absence of a CFO: If we look closely at the hierarchy of the company, we can spot the absence of a CFO except for about eight months between the time that Mosley was hired and subsequently fired by Holmes. This lack of a CFO is unusual. A big part of a CFO’s job, besides managing the finances of a company, is to be involved in strategic planning and making decisions to fuel sustainable growth. Also, CFOs are investors’ financial guardians who must be skeptical in their work since they’re managing the finance function of a company that other people invest in.
• Absence of an auditor’s opinion report: The absence of an official auditor’s opinion is a serious red flag. An external auditor’s reports are supposed to grant financial statements credibility based on which investors and financial institutions make their decisions. It shows how much investors trusted Holmes because they invested in her company without even requesting an auditor’s opinion report.
• Culture of extreme secrecy: Employees should respect the ethical standard of confidentiality. But imposing extreme secrecy on employees raises a red flag. Employees should feel free to ask any question or raise their concerns, which wasn’t allowed at Theranos.

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• Theranos: A cautionary tale of ethics and entrepreneurship

Investigative journalist John Carreyrou speaks at CU Denver

The story of Theranos has dominated headlines for years now. From the initial excitement of a revolutionary biotech startup, to the sudden suspicions and accusations, to the jaw-dropping exposure of a multibillion-dollar fraud, the journey of Theranos has been nothing if not captivating.

Theranos promised to deliver a groundbreaking blood testing technology that could revolutionize health care, and it was led by a young, charismatic, Silicon Valley sensation named Elizabeth Holmes, who turned out to be nothing but a fraud, fooling the media, the public, and stealing millions from savvy investors.

The Daniels Fund Ethics Initiative (DFEI) at the University of Colorado Denver Business School brought John Carreyrou , the two-time Pulitzer Prize-winning investigative reporter at The Wall Street Journal and author of the National Bestseller Bad Blood: Secrets and Lies in a Silicon Valley Startup to Denver to share the full inside story of the breathtaking rise and shocking collapse of Theranos. The event was moderated by Melanie Kay , DFEI Director at the CU Law School, with over 400 attendees joining either in person or via live stream in Boulder.

Early in 2015, Carreyrou got a call out of the blue, from Dr. Adam Clapper, a pathologist who often blogged about scams in the laboratory space. He asked, “Have you heard of this ‘wunderkind’ out of Silicon Valley named Elizabeth Holmes and her startup, Theranos?” Carreyrou had, in fact, read a New Yorker profile and had already been skeptical.

“Holmes was a Stanford dropout with barely a year and a half of medical studies under her belt, who had apparently revolutionized medicine, and I knew that’s just not how things work,” Carreyrou said.

Overpromising and Underestimating

Carreyrou said he believes that Holmes did not start off with fraudulent or malicious intent. She was instead simply full of ambition and dreams of becoming the “next Steve Jobs” from the start. However, the industry and technology proved more difficult than Holmes probably anticipated. The pressure and unrealistic expectations she created formed an incredibly toxic work culture.

The pressure and unrealistic expectations she created formed an incredibly toxic work culture.

“She was very secretive,” Carreyrou said. “She didn’t want to hear ‘No’. People were constantly being hired and fired. The lies became bigger. The corners that were cut became bigger.”

Carreyrou said “the big red line” was crossed when, in 2013, Holmes and her business/romantic partner made the decision to go live with their flawed blood testing technology instead of pulling back. They made this decision, of course, to continue to solicit funding, even though they were now unquestionably not delivering on their promises.

“I think this was a case of someone with real vision and dreams, getting ahead of herself and getting caught in the cycle of lies,” said Carreyrou.

“I think this was a case of someone with real vision and dreams, getting ahead of herself and getting caught in the cycle of lies.” – John Carreyrou

Investors Get Swindled

But how was this young woman able to gain such trust and enthusiasm from so many respected investors to begin with? As a 19-year-old college dropout, Holmes didn’t have much credibility, but she did have passion and an innate sense for business.

Her first key connection was Don Lucas, a well-known venture capitalist (VC) in Silicon Valley, and he, as the Chairman of the Board of Theranos, introduced Holmes to his VC contacts. Before long she had developed a pattern, befriending older man after older man to believe in and champion her. She connected to former Secretary of State George Schultz and wowed the ninety-something year old, who then opened up even more well-known and respected connections to join him on a Board of Directors stacked with stars from the political and military worlds.

“Holmes seems to have used all of these older men for credibility. In hindsight, the Theranos Board was a big red flag,” said Carreyrou.

While the Board was made up of successful and well-respected older men, none had any knowledge of medicine or diagnostics. Investors saw this impressive Board though, and opened their checkbooks.

Whistleblowers

There was a long and well-documented history of Theranos employees raising concerns and suspicions, often at great personal risk. Theranos’ first CFO raised concerns early on, questioning Holmes when he learned the blood testing machine demos for investors were essentially fake. He was fired on the spot for not being a “team player.”

Carreyrou said that he’d worked on many stories before involving whistleblowers, but never encountered a situation where the accused organization counter-attacked so aggressively. Theranos had by this time gone live with faulty medical technology that was endangering tens of thousands of patients. This was the aspect that was sure to outrage the public the most, and Holmes and her lawyers seemed willing to stop at nothing to prevent the exposure.

But even with the threats from Holmes and her lawyers, Carreyrou secured several key sources needed to corroborate the stories. “These whistleblowers put themselves in great personal, professional, and legal risk,” said Carreyrou. “But this wouldn’t have been possible without them. They truly acted as heroes.”

“These whistleblowers put themselves in great personal, professional, and legal risk. But this wouldn’t have been possible without them. They truly acted as heroes.” – John Carreyrou

Toxic Narcissism

With the fraud exposed, Elizabeth Holmes drew harsh criticism from the media and public, but never showed any signs of regret, remorse, or even responsibility. On the day Theranos’ doors were closing, Holmes chose to attend the Burning Man festival, wearing fur.

Carreyrou said, “This is someone with a great sense of entitlement. She has developed a sense of persecution and still refuses to concede that she did anything really wrong.”

The “cult of the genius young founder” has been a problem in Silicon Valley for decades, Carreyrou said. So many stereotypical Silicon Valley men have used the “fake it ‘til you make it” mentality to climb to the top, and Holmes felt entitled to do the same.

“Silicon Valley’s culture made someone like Elizabeth Holmes possible and able to thrive,” Carreyrou said.

“Silicon Valley’s culture made someone like Elizabeth Holmes possible and able to thrive.” – John Carreyrou

“The Daniels Fund Ethics Initiative has allowed us the opportunity to bring fascinating speakers like Mr. Carreyrou to the Business School,” said Ira Selkowitz, DFEI Director at CU Denver. “The Theranos story is a real-world example of what happens when ethics are not a part of a business’ foundation. We work to provide opportunities and tools to help students develop life-long integrity and ethical fortitude.”

The CU Denver Business School and the CU Law School each received a five-year grant in 2015 from the Daniels Fund to participate in the Daniels Fund Ethics Initiative Collegiate Program, aimed at strengthening ethics education for students and extending ethical behavior beyond campus and into the community. The grant is used to instill a deep and unwavering ethical foundation through course curricula, events, and community collaboration.

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The Intellectual Property Law Blog at Loyola University Chicago

Whistleblowers and trade secrets: a theranos case study.

Silicon Valley , located in the San Francisco Bay Area, is well known as the global center for innovation and technology. Given this reputation, it's no surprise that numerous different tech companies and startups call this place home – companies like Apple , Google , and Meta , just to name a few. With an industry as competitive as technology, failures in Silicon Valley are commonplace. That’s where Theranos comes in. A tech start-up that was once valued at $10 billion , Theranos was eventually brought down by claims of fraud that stemmed from information released by two whistleblowers .  Whistleblowers are people who disclose information regarding wrongdoing committed by an organization that would otherwise be unknown. This information is often obtained by insiders who work within the organization.

The two whistleblowers in this case, Tyler Schultz and Erica Cheung , were former employees of Theranos. Over the course of their employment, they grew increasingly concerned by what they saw behind the scenes in terms of whether or not the company’s technology actually worked. After raising their concerns to Theranos’ upper-level management with no success, both Tyler and Erica left the company. However, their involvement with Theranos did not end there.

Theranos’ blood-testing technology (which we’ll get into later) had a significant impact on the important medical decisions of patients that used it. Tyler and Erica both felt strongly about the moral issues implicated by their concerns – that Theranos was claiming to have developed revolutionary blood-testing technology that didn’t actually work. These fraudulent claims, if true, would result in potentially millions of patients making life-changing decisions based on inaccurate health data. When they didn’t lower their concerns, both Tyler and Erica reported facing immense pressure and legal threats from Theranos, such as potential suits for trade secret misappropriation . In other words, Theranos suggested that if they disclosed concerns, they would be sued for stealing trade secrets involving functional aspects of the technology and testing results and procedures used by the laboratory. Essentially, Theranos did not want anyone to know that their technology didn’t work at all.

Many companies economically benefit from having and maintaining trade secrets, and therefore, protection is important to enhance any company’s bottom line. But what happens when a company’s fraudulent and illegal behavior can only be exposed by disclosure of this protected information?  Let’s start by first explaining what a trade secret is.

What is a “Trade Secret?”

Almost any information can be a trade secret . A trade secret is any information that has actual or potential value from not being generally known, and is subject to reasonable secrecy. Trade secrets can potentially last indefinitely, so long as the information continues to be both valuable and actually secret. If the information is disclosed, the trade secret is terminated. A trade secret owner might still have rights to seek damages against the person who improperly disclosed it, however there can never be a trade secret once it is out in the open. However, it is important to note that absolute secrecy is not required, as the information can be shared in a controlled and limited way as reasonably necessary.

Information can have economic value even if it is only potentially valuable due to the fact that it is unknown to the general public.  In the case of Theranos, the fact that its technology did not work was valuable as a secret because it helped them get investors and deals with major companies, such as Walgreens. If this information was not secret, no one would have likely continued to invest in or partner with Theranos.

Reasonable secrecy measures , on the other hand, focus on the measures taken to keep the information secret. Some common measures to maintain secrecy include keeping sensitive information in password protected files, having employees sign confidentiality agreements, labeling and identifying confidential information, restricting access to information to limited amount of people or requiring employees to attend training for trade secret handling. However, a single measure alone might not be sufficient. Generally, as long as the information is secret and treated with care to keep it as such, it will meet this requirement.

Trade secrets can be important to any company, new or old. It can be said that a company’s trade secrets are exactly what gives it its competitive edge. But does such importance warrant complete protection with no exceptions? In my opinion, definitely not. While protection is important, it is equally important to maintain a balance between trade secret protection and identifying the misconduct of companies like Theranos.

Theranos: An Investment in the Future, or a Failure?

What if I told you that there was a machine that could change the future of health care? A machine that could perform hundreds of blood tests within minutes, just from a single drop of blood? Technology of this kind would be revolutionary – if it actually worked.

Welcome to Theranos: a failed tech start-up that claimed to invent the revolutionary technology mentioned above. You may be asking yourself, what makes the story Theranos so unique? Tech companies fail all of the time! What sets this story apart is not failure, but rather the extent of the deceit and fraud on which the company was built. At least temporarily, Theranos concealed fraudulent activities and deception by categorizing them as trade secrets.

Theranos’ founder, Elizabeth Holmes , raised over $700 million in financing and sought partnerships with companies such as Safeway and Walgreens to offer blood testing at various locations to the public. The problem? The technology never worked.

Investors spent millions of dollars financing the company based on a lie. Even worse, real patients received inaccurate blood test results that likely influenced important medical decisions. Arguably the worst part – Elizabeth Holmes, as well as other high-level Theranos executives, knew the whole time. Trade secret or not, Theranos’ fraud needed to be brought to light to prevent further harm, which was the goal of the Theranos whistleblowers.

Some of the information disclosed by the Theranos whistleblowers included inaccurate test results obtained by Theranos’ technology, false validation reports, protocols used by the lab, and the functions of the machines themselves. In retaliation, Theranos threatened litigation against the two whistleblowers. Among the threats was one for a suit of trade secret misappropriation, a valid claim under the Defend Trade Secrets Act (“DTSA”) .

What is the DTSA?

In 2016, Congress enacted the Defend Trade Secrets Act (“DTSA”) . The main goal of the DTSA was to provide trade secret owners with a federal cause of action against misappropriation in addition to varying state laws.

Trade secret misappropriation consists of an acquisition of a trade secret by improper means (e.g., theft, espionage, etc.) or an unauthorized disclosure of the trade secret. Remember: once a trade secret is disclosed, it is no longer a secret and therefore not subject to protection.

Under the DTSA, a plaintiff asserting trade secret misappropriation claim must prove that the information at issue was a trade secret, the defendant misappropriated the trade secret, and the misappropriation damaged the plaintiff.

Barring any exceptions, Theranos could have had a valid trade secret misappropriation claim under the DTSA.  Let’s first explain why there was a trade secret.

The information disclosed by the Theranos whistleblowers was central to the fact that the company’s technology did not work. The tests results varied greatly from machine to machine, any unfavorable testing data was deleted and replaced with edited data, and inaccurate statistic validation data of the technology was presented to both investors and the public. This information was valuable as a secret because its secrecy helped Theranos maintain funding from current and new investors, and create lucrative partnerships with other companies. If this information were publicly known, such investments and partnerships would likely never have developed.

There was plenty of evidence of measures to keep the information secret. For example, the lab protocols included extraordinary measures to be keep information and lab activities secret. Such measures reportedly included barricades that acted as organizational silos (separation of employees into groups with limitations on communications between different groups), and prohibiting communication between employees in different roles .

Trade Secret Misappropriation

Now let’s talk about the misappropriation, which basically means taking the trade secret without permission.

Theranos did not authorize the disclosure of the information. Since both whistleblowers had signed NDAs upon employment at Theranos, they breached their duty to maintain secrecy when they disclosed the information. According to the DTSA, a breach of duty to maintain secrecy satisfies the ‘improper means’ requirement for misappropriation.

Damage to Theranos is indisputable. Following the disclosure, Theranos lost valuable partnerships and was eventually forced to close its doors. 

Even though Theranos could fulfill all elements of trade secret misappropriation, Tyler Schultz and Erica Cheung can likely avoid liability for their disclosures. This is likely all thanks to Whistleblower Provision of the DTSA, which helps to strike the important balance between trade secret protection and public welfare.

Whistleblower Provision of the DTSA

Although the DTSA was enacted to protect trade secrets, it has some important exceptions, like the Whistleblower Provision. This provision precludes liability in specific  circumstances like public welfare.

The Whistleblower Provision provides that there will be no liability for an individual who discloses a trade secret to report illegal conduct. This provision therefore protects whistleblowers who disclose trade secrets to expose wrongdoing – as long as the disclosure is made in accordance with the requirements. The Whistleblower Provision requires that a disclosure must only be made to a government official, an attorney, or via a sealed document for court proceedings.

With Theranos, the information disclosed by the whistleblowers was all tied to the fraud committed by the high-level executives of the company. Theranos used test results, false validation reports, lab protocols – essentially everything –  to cover up their failing technology and defraud investors. Given that fraud is a crime – of which Elizabeth Holmes was eventually convicted – Tyler Schultz and Erica Cheung fell under the protection of the Whistleblower Provision when they bravely came forward to expose Theranos’ secrets – assuming their disclosure was made in accordance with the requirements discussed above.

Interested in learning more about the story of Theranos? Check out the podcast Bad Blood , hosted by Rebecca Jarvis at ABC News.

Hannah Dawson Associate Blogger Loyola University Chicago School of Law, JD 2025

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Eating a dozen eggs a week doesn't hurt your cholesterol: Study

The study found no meaningful change in levels of "good" and "bad" cholesterol.

Eating more than a dozen fortified eggs each week did not negatively affect cholesterol levels compared to an egg-free diet among U.S. adults aged 50 or older, according to a new study to be presented at the American College of Cardiology's Annual Scientific Sessions in Atlanta.

The study adds evidence that eggs -- once vilified as an unwanted cause of high cholesterol -- could be part of a healthy and balanced diet, even for people with a higher risk of heart disease.

In the study, a total of 140 adults older than age 50, who also had heart disease or at least two risk factors for developing heart disease, followed either an egg-free diet (less than two eggs per week) or a diet of eating more than 12 fortified eggs each week. Fortified eggs contain additional amounts of vitamins (such as vitamin D) or omega-3 fatty acids, typically through nutrient-enriched hen feeds. The study participants' cholesterol levels were monitored at the beginning of the study, then again at four months.

Results did not show any meaningful change in levels of HDL ("good" cholesterol) or LDL ("bad" cholesterol) between these two groups, suggesting that eating at least 12 fortified eggs each week did not have any negative effects on cholesterol levels.

MORE: Why you will likely see higher egg prices ahead of Easter

Fortified eggs were chosen as they may contain enriched levels of "vitamins D, B and E, omega- fatty acids, iodine along with lower saturated fat," wrote Dr. Nina Nouhravesh, research fellow at the Duke Clinical Research Institute in Durham, North Carolina, and the study's lead author.

Nouhravesh noted that in the study, among patients with "heart disease or at risk of developing heart disease, the consumption of 12 fortified eggs per week did not negatively impact their cholesterol over 4 months, when compared to patients who were on a non-egg supplemented diet."

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"The urban myth out there is that eggs are bad for your heart. It's not a total myth, but we've known that guidelines for healthy eating took out previous advice to limit dietary cholesterol, because it really didn't make a big difference in overall cholesterol. The cholesterol is in the egg yolk," said Dr. James O'Keefe, Professor of Medicine at the University of Missouri-Kansas City and cardiologist at Saint Luke's Mid America Heart Institute.

"As we get older, we need higher amounts of protein to maintain muscle mass. Muscle mass and physical strength are two predictors for healthy aging. It's important to maintain and build muscle mass at middle age and beyond. Eggs are an inexpensive, widely available source of protein," said O'Keefe.

MORE: How long eggs stay fresh, tips to store them and how to check if eggs are still safe to eat

For most people, eggs are nutritious and an excellent source of protein. But medical experts say each person should speak to their health care providers about whether a diet heavy in eggs is appropriate given their individual cholesterol levels and dietary needs.

Dr. Jennifer Miao is a cardiology fellow at Yale School of Medicine/Yale New Haven Hospital and a member of the ABC News Medical Unit.

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Study says U.S. maternal death rate crisis is really a case of bad data

A new study calls into question the extent of the maternal mortality crisis in the United States, which has long posted a disproportionately high rate of maternal deaths compared with peer nations.

Data classification errors have inflated U.S. maternal death rates for two decades, according to the study , published Wednesday in the American Journal of Obstetrics & Gynecology. Instead of the maternal death rate more than doubling since 2002, it has remained flat, researchers found.

“There has been a lot of alarm and apprehension surrounding the fact that some of these reports show a threefold increase in maternal mortality, and that is not what we found. We found low and stable rates,” said K.S. Joseph, the study’s lead author and professor in the departments of obstetrics and gynecology and the School of Population and Public Health at the University of British Columbia in Vancouver.

A change in the way pregnancy was noted on death certificates 21 years ago to improve the detection of maternal deaths led to “substantial misclassification” and an “overestimation of maternal mortality,” the study found.

In 2003, the National Vital Statistics System added a checkbox to death certificates to note whether the deceased person was pregnant or had recently been pregnant to address concerns that pregnancy-related deaths were being undercounted.

But the box was checked for many deaths that were unrelated to pregnancy or childbirth, researchers found. For example, hundreds of deaths of people 70 or older were mistakenly classified as having been pregnant. Deaths from cancer and other causes also were counted as maternal deaths if the box was checked. As a result, the maternal mortality rates showed a dramatic increase since 2003.

Researchers noted that gaping racial disparities remain — especially between White and Black pregnant people. Black pregnant people die at nearly three times the rate of their White peers because they face higher rates of pregnancy complications such as ectopic pregnancy and eclampsia, as well as chronic diseases such as high blood pressure, heart disease and kidney failure, researchers found.

Some experts say the study’s biggest takeaway is the persistent racial disparities, with many pregnant Black people experiencing more medical complications involving Caesarean sections, postpartum hemorrhaging and preterm births. However the data is calculated, the pattern remains the same, said Colleen Denny, an associate professor in the department of obstetrics and gynecology and director of family planning at NYU Langone Hospital as well as a fellow of the American College of Obstetricians and Gynecologists.

“We should be targeting a lot of our public outreach to focus on conditions that are affecting patients of color while they’re pregnant,” said Denny, who was not involved with the study.

Joseph, whose 2017 paper previously noted the inflated U.S. maternal mortality rates, said: “Many maternal deaths, perhaps more than a half of maternal deaths, are preventable, so we have to initiate programs that address these specific causes of death and prevent them.”

The impetus for the new study was researchers’ confusion over why the U.S. maternal mortality rate was so high compared with other high-income nations, said Cande Ananth, a senior author of the study and chief of epidemiology and biostatistics at Rutgers Robert Wood Johnson Medical School. The authors said U.S. maternal mortality is actually comparable to that of Canada and Britain. Even with the adjusted rate, however, the U.S. rate would remain higher than most peer nations.

The authors decided to ignore the checkbox and count only deaths that listed a cause related to pregnancy.

Under the new criteria, researchers found that the mortality rates were 10.2 per 100,000 live births from 1999 to 2002 and 10.4 from 2018 to 2021. In contrast, the National Vital Statistics System method produced a mortality rate of 9.65 from 1999 to 2002 and 23.6 from 2018 to 2021.

An agency spokesman declined to comment on the new study and instead pointed to its own 2018 report .

In that report, the National Vital Statistics System reviewed several studies that found the pregnancy-and-birth checkbox was being used in error, particularly for people 45 and older. At that time, the agency’s report said that without the checkbox, the rate for maternal mortality would have remained flat since 2002.

To correct for misuse of the checkbox, the agency changed the way it counted deaths. It stopped classifying deaths as pregnancy-related for people over age 44 unless there was a specific cause of death tied to pregnancy or delivery. But for those 44 or younger, the agency continued to classify every death with the box checked as being related to pregnancy or delivery — even if the specific cause of death was unrelated.

Despite the study’s conclusion that use of the checkbox led to excessively high calculations of maternal mortality, the National Vital Statistics System said in its 2018 report that it would continue to calculate rates from the checkbox to avoid undercounting maternal mortality.

Other experts say the new study can be helpful to expand the ways public health initiatives are targeted to yield better outcomes.

This is an opportunity to rethink how the nation tracks maternal health outcomes and create a better system to help identify problems and interventions, said Chiamaka Onwuzurike, medical director of the gynecology clinic at Brigham and Women’s Hospital and an instructor at Harvard Medical School who was not involved with the study. “If we keep our blinders up and think that things are working well and our systems are tracking things appropriately, what good does that really do us?”

In 2022, the White House released a blueprint to address the maternal health crisis, outlining federal actions and long-term goals for improvement. But the federal government needs to better track progress toward achieving these goals, according to a February report from the Government Accountability Office .

Examining indirect causes of maternal deaths, including mental health, can lead to policies and interventions aimed at minimizing the instances of non-obstetric causes of death, according to Amita Vyas, a professor in the department of prevention and community health and director of George Washington University’s Center of Excellence in Maternal and Child Health.

“When we think about maternal deaths, it’s not just in pregnancy or during childbirth,” Vyas said. “We lose the ability to design lifesaving interventions if we disregard other indirect pregnancy-related factors in the postpartum period.”

Michigan housing isn’t affordable. Here’s how we can fix it. | Opinion

The takeaway here is housing affordability will remain hamstrung by the nimby status quo until pretty much every town moves with urgency to remove the inherent barriers to building housing..

We have a housing affordability crisis. To be more accurate, we have a housing supply crisis that has created a housing affordability crisis. A 2023 Zillow study concluded the U.S. is short 4.3 million homes. 

Gov. Gretchen Whitmer addressed the issue during her 2024 State of the State : “The rent is too damn high, and we don’t have enough damn housing! Our response will be simple: Build, baby, build!” 

It sounds like a simple enough proposition. Unfortunately, decades of obstruction from “not-in-my-backyard" NIMBYists and racially motivated regulations blocking new multifamily and affordable housing have created a climate in which building the supply of housing demanded by the market is easier said than done.   

When communities reject NIMBYism, and aggressively pursue new housing development, prices stabilize . Cities like Minneapolis and Austin are building housing at such a pace that it’s driving rent prices down . They aren’t just building affordable housing, either. Even new market-rate housing, including those oft-maligned million-dollar condos, is helping to quell marketplace demand, with more supply. 

So, Whitmer’s words were a refreshing change after generations of politicians who are often quick to defer to noisy, obstructionist voices perpetually in fear of anything that might “change the character of the neighborhood.”  

Coded language

Historically, if we’re honest, the change most often feared by incumbent residents is Black neighbors.  

In Florence, South Carolina , officials reversed support for a development of 60 subsidized apartments in 2022 after prominent local citizens held a meeting at — seriously — the local country club to rally opposition. Racism is suspected to have played a role. The developer sued , claiming Florence violated the Fair Housing Act and Civil Rights Act.  

NIMBY activists have even championed parking spaces over housing . That happened in Ontario last month, where the Hamilton City Council deadlocked on approval for a project that would have built 67 affordable housing units at the expense of 27 parking spaces in a municipal lot. Hamilton Mayor Andrea Horwath is trying to revive the project, but for now, the natural habitat of 2007 Honda Accords remains protected. 

Last year in Harlem , affordable housing was actually used as a cudgel against ... affordable housing. A developer proposed to build about 900 apartments. The Manhattan borough government demanded that 50% of the project’s units be affordable in exchange for necessary zoning changes. The developer agreed. The civic process works, right? 

Nope. Then-City Council member Kristin Richardson Jordan effectively vetoed the project because she wanted 100% of the developments housing to be affordable. Instead, the developer built something on the site that met existing zoning rules — a truck depot. Zero new homes, affordable or otherwise, but probably lots more pollution and noise.  

Ann Arbor, a case study 

Unfortunately, the effects of NIMBYism go beyond opposition to specific projects. The legacy of knee-jerk opposition to development has constructed a regulatory rampart against building housing at a scale demanded by the market. Even communities with pro-development leaders and willing developers are handcuffed in efforts to build necessary housing, especially the reasonably dense and vertical multifamily housing. 

Ann Arbor is a case in point. Housing affordability in the university town is a real challenge. Zillow reports the median rent for a two-bedroom apartment is $1,975 per month ; in comparison, a median two-bedroom rent in Ypsilanti is $1,202 a month. Ann Arbor rents outpace a desirable metro Detroit suburb with a tight housing supply like Ferndale, where Zillow lists the median rent is a still-too-damn-high $1,657 per month .  

The University of Michigan has expanded enrollment by 12,000 students over the last 20 years, Ann Arbor City Councilwoman Jen Eyer told me, but only added 1,000 new student beds. Even with additional private sector student housing, the state’s flagship university is still short about 5,700 beds. 

As the university has grown, the city has experienced significant economic expansion. Over the last decade, Eyer says, U-M has grown its workforce by 6,000 new jobs, and Ann Arbor’s private sector employers have added 22,000 new jobs.  

But virtually no new housing has been built to keep pace with this economic growth. 

Ripple effects

City officials estimate about 80,000 workers commute daily to Ann Arbor, a city regularly ranked as one of the most desirable places to live in the country. Do many of these workers commute by choice? Sure. But it’s also clear that high housing costs take that choice away from many Ann Arbor workers, including teachers, nurses and first responders, who have no choice but to accept longer commutes to reach affordable housing.  

“This lack of housing supply, coupled with high demand, has driven up prices so much that many people who work or go to school here are unable to find housing they can afford,” Eyer says. “Our rental vacancy rate is practically zero, while a healthy rate that keeps rents stable is 7%. This pushes rents ever higher. And the wealthiest home buyers get into bidding wars over the few houses available, causing gentrification of our neighborhoods.” 

A housing market that forces people to live further than they like from work means more miles driven and more carbon billowing into our atmosphere. That means the housing shortage is also a climate problem.  

Given the city’s progressive electorate, Ann Arborites with NIMBYist impulses should consider that climate change just might be the greatest threat to the character of their community.  

Policy changes, practical changes

The good news for Ann Arbor is that pro-housing candidates have decisively won the city’s last two municipal elections, and seem genuinely committed getting housing built, both market-rate and affordable.   

This new government has enacted zoning changes to allow for more multi-family development along the city’s transit corridors, and city leaders are working to eliminate zoning regulations that prevent building multifamily housing in some parts of town.  

The city is exploring the creation of an economic development office with a focus on housing development and the goals supporting “overall affordability, placemaking, tax base improvements, and in pursuit of sustainability in the built environment.” 

They’ve made legislative recommendations to Lansing that, if enacted, would allow communities to enact split-rate property taxes so the value of owned land would be much higher than the value of the buildings on them — essentially incentivizing more vertical development over sprawl.  

All these efforts, necessary though they are, feel far upstream from families moving into new housing.  

Even something as straightforward as selling city-owned land to potential developers is a challenge. Currently, a land sale requires an eight-vote supermajority of Ann Arbor’s city council. To change that rule requires a charter amendment approved by voters. Eyer hopes the city can put the issue before voters in November. 

“It’s a policy to protect the status quo,” Eyer said of the supermajority rule. “The status quo has created our housing crisis.” 

Housing affordability demands urgency  

The takeaway here is housing affordability will remain hamstrung by the NIMBY status quo until pretty much every town — not just Ann Arbor — moves with urgency to remove the inherent barriers to building housing. 

Local governments must modernize planning and liberalize zoning so that housing supply can meet demand. NIMBYs need to accept that a new condo building, or in-fill duplexes, won’t destroy their quality of life. Progressives should stop making market-rate housing into the enemy. Everyone should recognize that keeping certain communities lily white like it’s 1954 is neither virtuous nor advantageous for anyone.  

More importantly, there needs to be recognition that the housing shortage won’t get fixed overnight.  

Too often our political imagination has the attention span of a news cycle or TED Talk season. Look how quickly the chattering class got bored with STEM education or “bridging the digital divide.” Housing cannot become another fashionable cause … wired now, but tired by 2025. 

It will take years, perhaps a generation, to really rebuild our housing stock to meet demand. Even in the best of environments, 4.3 million new housing units can’t be built overnight.  

Whitmer is right: We need to build, baby, build. For a good long time.  

Jeff Wattrick   is a freelance writer who lives in Grosse Pointe Park. Submit a letter to the editor at  freep.com/letters .

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Taxpayers Were Overcharged for Patient Meds. Then Came the Lawyers.

A group of politically connected lawyers teamed up to go after insurers and made millions from one of the largest Medicaid settlements in history.

By Shalina Chatlani

Shalina Chatlani examined the health care system in Mississippi as a part of The Times’s Local Investigations Fellowship .

In 2018, when Mike DeWine was Ohio’s attorney general, he began investigating an obscure corner of the health care industry.

He believed that insurers were inflating prescription drug prices through management companies that operated as middlemen in the drug supply chain. There were concerns that these companies, known as pharmacy benefit managers, or P.B.M.s, were fleecing agencies like Medicaid, the government-run health insurance program for the poor.

Three years later, after Mr. DeWine became governor of Ohio, the state announced an $88 million settlement with one of the nation’s largest insurance companies, Centene.

The case led to a nationwide reckoning for the company, as attorneys general in one state after another followed Ohio’s lead, announcing multimillion-dollar settlements and claiming credit for forcing Centene to reform its billing practices.

On the surface, it appeared that these settlements, which now total nearly $1 billion, were driven by state governments cracking down on a company that had ripped off taxpayers.

But a New York Times investigation, drawing on thousands of pages of court documents, emails and other public records in multiple states, reveals that the case against Centene was conceived and executed by a group of powerful private lawyers who used their political connections to go after millions of dollars in contingency fees.

The lawyers were first hired in Ohio, without competitive bidding. Then, they gathered evidence against Centene of questionable billing practices across the country.

Using information they acquired from Centene and other sources, they negotiated with the company to set the basic framework of an agreement that could be applied in other states. With that in hand, they approached attorneys general in multiple states and made a compelling offer: hire them, at no direct cost to taxpayers, and recoup millions of dollars Centene had already set aside.

So far, the lawyers have been awarded at least $108 million in fees.

The Centene case is just one example in a thriving industry that allows private lawyers to partner with elected attorneys general and temporarily gain powers usually reserved for the government. Under the banner of their state partners, these lawyers sue corporations and help set public policy while collecting millions of dollars in fees, usually based on a percentage of whatever money they recoup. The practice has become standard fare in the oversight of major industries, shifting the work of accountability away from legislators and regulators to the opaque world of private litigation.

Private lawyers do not have to publicly defend the deals they make or prove how aggressively they went after a company accused of wrongdoing. Nearly all their work happens in secret, especially if companies settle before the stage of a lawsuit when evidence is filed with the court.

The lawyers do not even have to disclose who worked on a case or who was paid, so the public may be left unable to monitor potential conflicts of interest even as the lawyers pursue litigation on behalf of the people.

The Centene case was organized by the Mississippi-based law firm Liston & Deas along with at least three other firms, several with close ties to former Gov. Haley Barbour of Mississippi, who was once considered one of the most influential Republican power brokers in the nation.

The lawyers included Paul Hurst, who served as Mr. Barbour’s chief of staff when he was governor and who married into Mr. Barbour’s family, and David H. Nutt, one of the richest men in Mississippi, who amassed a fortune funding state lawsuits against tobacco companies. Cohen Milstein, a huge national law firm with deep experience in contingency work for state attorneys general, was also part of the venture.

Though he is not listed in any government contracts as a lawyer of record, Mr. Barbour himself was a member of the legal team when Liston & Deas vied for the contract in Ohio.

At the time, Mr. Barbour also worked for Centene as a federal lobbyist .

Even now, close to three years after Centene signed its first settlements, no one has fully explained Mr. Barbour’s role in the case for the company. There is no way for the public to know whether he influenced the outcome or to measure whether Centene paid its full share, because the data used to calculate what Centene overcharged remains hidden from the public under provisions designed to protect attorney work product.

Mr. Barbour and other lawyers said that the former governor worked on the case for less than a year when the group was examining several insurance companies, and that he cut ties when Centene emerged as the primary target. Mr. Barbour said he informed Centene and his colleagues about the development and was never involved in negotiations or legal matters. He continued representing Centene as a lobbyist, he said, but his role in the case on behalf of the company was as “more of an observer.”

The lawyers said that Mr. Barbour was never paid for his work and that the settlement was not influenced by Mr. Barbour’s connections to Centene or to the lawyers who remained. They said each state attorney general reviewed Centene’s billing practices when deciding whether to enter a settlement agreement.

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In recent years, P.B.M.s have been widely criticized , including by members of Congress, who have held multiple hearings and proposed legislation. The Centene settlements stand as the most successful attempt to hold a company operating in the industry accountable.

Liston & Deas and its partner law firms uncovered that Centene had arranged discounts with CVS Caremark on certain drugs and then pocketed the savings instead of passing them on to Medicaid. In some states, they revealed that Centene layered on unnecessary management fees that it had not disclosed. Although Centene settled without admitting guilt, the company agreed to be more transparent in how it sets reimbursement rates.

The lawyers noted that they spent several years investigating Centene and negotiating with the company at their own risk, saving states the cost of building a case.

Mr. Nutt, one of the lawyers who pursued the case, said states were happy with the terms of the settlements.

“Almost every one of those states audited to determine if our damage model was fair,” Mr. Nutt said.

“The formula was based on a triple damages model that we developed. And everybody was quite satisfied with it, because it was three times what anybody could have proven in court.”

Hiring Outside Counsel

For most of their history, state attorneys general were largely focused on advising state officials on legal matters and representing local agencies in court.

That changed drastically almost 30 years ago, when states came together to sue tobacco companies and won a $206 billion settlement to cover the cost of medical care related to smoking. The lawsuit helped redefine the role of the attorney general as one of the most powerful positions in state government and a natural place to start a political career.

Through high-profile lawsuits against corporations, an attorney general could directly affect policy and build a reputation as a champion of the people.

But complex litigation against large companies can require years of investigation and legal work, with no guarantee of success. Increasingly, states have turned to private lawyers willing to work on contingency as a way to stretch limited resources.

The rise of contingency fee cases kicked off a new wave of lobbying across the nation. Law firms looking for contracts have poured money into attorney general election campaigns and sponsored conferences at high-priced resorts, where private lawyers mingle with attorneys general and pitch their latest ideas for lawsuits.

Many states have capped how much lawyers can be paid in contingency fees and have increased oversight of private firms working for the government. But there remains concern about undue political influence and potential conflicts of interest.

“In theory, there’s an incentive to have the settlement be as big as possible, and of course that’s great for the state,” said Paul Nolette, a professor at Marquette University who has studied how the role of attorneys general has changed over time.

But in reality, lawyers have an incentive to recover the largest amount of money in the shortest amount of time, which could pressure them to water down settlements and compromise on punitive measures, Dr. Nolette said.

“I think that does raise some questions about how forcefully A.G.s and private attorneys are prosecuting a particular case,” he said.

Several experts said that contingency cases had recouped billions of dollars on behalf of the public and had become a critical way to regulate the behavior of powerful industries and large corporations.

But inviting private lawyers to help set public policy has inherent risks, they said.

Private lawyers may be more likely to have conflicts of interest because they generally represent many businesses and individuals, not just the citizens of a state.

And unlike most attorneys general, private lawyers are not elected officials. They are not generally governed by open records laws or subject to public pressure, as from legislators setting their budgets.

In the Centene case, Mr. Barbour’s associations with both Centene and the private lawyers raise “important questions” about who controlled the case to make sure it was pursued in the best interests of states that settled, said Kathleen Clark, a professor of legal ethics at Washington University in St. Louis.

“Did state A.G.s proactively pursue these cases, or did they passively accept the ‘free money’ or ‘easy money’ of the proposed settlements that the law firms had already negotiated with Centene?” Ms. Clark asked.

Christina Saler, a partner at Cohen Milstein, said Mr. Barbour’s early association with the legal team was not a conflict of interest because Mr. Barbour withdrew from the case before lawyers started investigating Centene.

“After Mr. Barbour’s disassociation, we had no further contact with Mr. Barbour on this matter,” she said.

A Well-Connected Team

Mr. Barbour’s involvement in the Ohio case against P.B.M.s illustrates the potential for favoritism when states hire private lawyers.

Mr. Hurst noted the involvement of Mr. Barbour when seeking the contract in Ohio, according to emails acquired from the Ohio attorney general’s office through a public records request.

In a June 22, 2018, email exchange, just a few days before the state hired Liston & Deas, Mr. Hurst recalled meeting with the attorney general’s staff in Ohio.

Mr. Hurst went on to note that members of his team had worked with Governor Barbour while he was in office and that they all “continue to work together now.”

In an email a week later, an assistant attorney general shared Mr. Barbour’s cell number with Mr. DeWine, saying that Mr. Barbour had shared it so he could “call him about this case anytime.”

Mr. Barbour, who had served two terms as governor of Mississippi, was a former chairman of the Republican Governors Association and a former chairman of the Republican National Committee. Known as a prolific fund-raiser , he was credited with bringing in hundreds of millions of dollars to support Republican candidates across the nation.

In 1991, Mr. Barbour co-founded BGR Group, a lobbying firm that quickly became one of the most influential in Washington.

Mr. Barbour had known Mr. DeWine since he was first elected to the Senate in 1995.

Two decades later, when Mr. DeWine was in the midst of a hard-fought campaign for governor, Mr. Barbour’s close associates solicited him for the legal work on the Centene case. In October 2018, less than three months after Mr. DeWine hired Liston & Deas, he traveled to Washington to visit Mr. Barbour’s lobbying firm for several hours, according to calendar records.

At the time, Mr. Barbour and others at BGR were registered lobbyists for Centene.

Mr. Barbour has never been named in state contracts as one of the private lawyers on the case in Ohio or anywhere else. His involvement has rarely, if ever, been publicly reported.

Ms. Saler, of Cohen Milstein, said there was no need to inform state officials because Mr. Barbour had not been involved in the Centene portion of the case and had exited the venture several years before states hired the lawyers.

At least four law firms were involved in the case in two or more states, according to retainer agreements and financial records showing broadly how settlement funds were disbursed.

According to Max Littman, a former data analyst with HealthPlan Data Solutions, the analytics firm that helped identify Centene’s overcharges in Ohio, one important role for many of the lawyers was to use their connections as they presented the overcharges to various states.

Mr. Littman, who said he worked closely with the legal team, described the dynamic: Liston & Deas, with roots in a deeply red state, would approach Republican attorneys general, and Cohen Milstein, “who were our Democrats,” would focus on Democratic states.

When The Times asked for records showing Liston & Deas’s qualifications to be hired to represent the State of Ohio, the attorney general’s office said no records existed. Cohen Milstein and other law firms had submitted such documentation in the past when seeking contracts in Ohio.

Settling With States

In June 2021, nearly three years after Ohio hired its outside counsel, two states announced the first settlements with Centene on the same day: Ohio would get $88 million, Mississippi $55 million.

After that, Centene settled in one state after another, often with just months between announcements.

In fact, Centene had already set aside $1.1 billion to handle all subsequent cases. The company estimated the amount after early discussions with the private lawyers that did not involve the state attorneys general who would later work with them.

With a settlement in hand and an estimate of how much each state could collect, the private lawyers had a powerful pitch. The team also had the option to file whistle-blower lawsuits, which can advance without a state attorney general’s having to hire outside counsel.

The team pursued whistle-blower lawsuits in Texas, California and Washington.

In Texas, the whistle-blower lawsuit came with a benefit for Attorney General Ken Paxton: Under Texas law , his office is allowed to recoup “reasonable attorney’s fees” for work associated with such cases. It collected nearly $25 million in legal fees on the Centene case while spending just 561 hours on it, financial records show. That comes out to more than $44,000 per hour of work. The Texas attorney general’s office declined to comment.

Ms. Saler said all the state attorneys general decided their own strategies in reaching settlements with Centene based on the best interest of taxpayers in their states.

In states that hired the lawyers on contingency, the attorney general closely reviewed Centene’s billing practices. But no state has revealed whether its own overcharge calculations matched those of the private lawyers.

State officials who hired Liston & Deas and the other firms knew that the lawyers had previously negotiated with Centene. But in a vast majority of states, officials did not explicitly address that fact when talking publicly about the settlements.

In addition, Liston & Deas and most of the states the firm worked for have not revealed exactly how much Centene overcharged for drugs or how settlement amounts were calculated. A few states have offered sparse descriptions, which vary widely.

The New Hampshire attorney general’s office wrote in its settlement announcement that Centene’s activities had a “$2.4 million negative financial impact.” Centene agreed to pay the state nearly 10 times that amount.

The attorney general’s office in Washington, one of the few states where officials agreed to discuss basic details about the settlement with The Times, said the $33 million it recovered amounted to treble damages.

A news release from the California attorney general’s office said the state recovered double its damages, for a total settlement of more than $215 million.

As of last month, Centene had settled in at least 19 states. The Liston & Deas website says Centene will ultimately pay about $1.25 billion to 22 states.

A Sweetheart Deal?

Some observers believe Centene would have faced stricter penalties if the federal government had taken up the case instead of private lawyers hopscotching from one state to the next.

Several experts in health care fraud litigation and whistle-blower cases said the best way to recoup money for taxpayers would have been to file a federal whistle-blower case, similar to what the lawyers did in state court in Texas and California.

A federal case could have triggered the involvement of the Justice Department, which might have investigated Centene more thoroughly. And a federal case probably would have gotten more attention and media coverage, required more transparency and taken longer to complete, the experts said.

Mr. Hurst and other lawyers in the case said they had not filed any type of federal action against Centene.

A spokesperson for the Justice Department confirmed that it had inquired about the P.B.M. and Centene cases in Ohio, but no further federal action was taken. The department declined further comment.

Mary Inman, a lawyer at Whistleblower Partners L.L.P. with decades of experience, said one of the reasons Liston & Deas wound up in state court might have been that its case relied on whistle-blowers the federal government was unlikely to approve.

The whistle-blower in Texas was Mr. Hurst. In California, the whistle-blower was Matthew McDonald, a lawyer at David Nutt & Associates and the son of Bryan McDonald, who worked in Mr. Barbour’s administration when he was governor.

Ms. Inman said whistle-blowers are typically insiders with firsthand knowledge of wrongdoing who share information at some risk to themselves, not lawyers who gain information while on the job.

“It’s very unusual,” Ms. Inman said. “And it’s something that I, as a longtime lawyer in this space, I would not want to do because atmospherically and reputationally it doesn’t look great.”

Mr. Barbour said he believes everyone walked away from the settlements happy — including executives at Centene. As evidence, he cited the company’s stock performance.

“I can’t speak for them, but if I had agreed to pay a big settlement and my stock went up after the first day, I would think it was a pretty good settlement,” Mr. Barbour said.