The Daily - The United States v. Elizabeth Holmes

Episode Date: September 16, 2021

When Elizabeth Holmes founded Theranos, the blood testing start-up, she was held up as one of the next great tech innovators.But her company collapsed, and she was accused of lying about how well Theranos’s technology worked. Now she is on trial on fraud charges.The case against Ms. Holmes is being held up as a referendum on the “fake it till you make it” culture of Silicon Valley, but it’s also about so much more.Guest: Erin Griffith, a reporter covering technology start-ups and venture capital for The New York Times. Sign up here to get The Daily in your inbox each morning. And for an exclusive look at how the biggest stories on our show come together, subscribe to our newsletter. Background reading: The trial of Ms. Holmes will cap a saga of Silicon Valley ambition and deception.For more information on today’s episode, visit nytimes.com/thedaily. Transcripts of each episode will be made available by the next workday.

From The New York Times, I'm Michael Barbaro. This is The Daily. Today, the saga of Theranos and its founder, Elizabeth Holmes. As her highly anticipated trial gets underway, my colleague, Aaron Griffith, explores what we're learning about tech startup, startup culture, and the nature of Silicon Valley. It's Thursday, September 16th. Thursday, September 16th. Erin, you are one of the few reporters who's been allowed to cover this trial from inside the courtroom. So set the scene for us. What has that been like?

So outside the courtroom is kind of chaos. You know, there was a line that started in the dark at 4.30 in the morning on the first day of the opening arguments last week. Wow. I showed up at 5 and I was already pretty far back in the line. There are reporters. There are people waiting in line for reporters. There are members of the community who are curious. There were a few Holmes fans that were dressed in what looked like a costume of kind of the way she dressed with her blonde hair and black suits.

So they were there supporting her. And there are just cameras everywhere. And so when lawyers walk in, when she walks in, there are camera people just sprinting, surrounding her. There was a guy wearing a helmet and a GoPro taking pictures. I mean, so it's just kind of chaos going in and out.

But once you get into the courtroom, it's this very quiet, beige room that's packed with people. You can kind of hear laptops clacking. People are kind of whispering amongst themselves. And in the center of the room, Elizabeth Holmes is sitting at a table with a bunch of lawyers around her. She's whispering to them. I'm sitting there a few rows back, just looking at the back of her head. She's wearing a gray suit. She's looking around, you know, occasionally waving or looking back at her family members who are in the gallery with the rest of us.

And so I'm obviously eager to try to fathom what is going on in her head. I mean, that's difficult. She's wearing a mask and, you know, she hasn't testified and it's not clear whether she will or not. But, you know, this is not where she saw herself ending up. And describe the charges against her, what this trial is technically about. So the United States has charged Elizabeth Holmes with 12 counts of wire fraud and conspiracy to commit wire fraud.

So the case is essentially she lied and misled investors in order to get money for Theranos, her blood testing startup, which raised more than $700 million and came to be worth $9 billion. But beyond that, this case is being held up as kind of a symbol and a referendum on the culture of Silicon Valley, which often encourages visionary founders like Elizabeth Holmes to fake it till they make it, to exaggerate and use hype and sort of create this grand vision of the future that may or may not be true on the way to building the next Facebook or Apple or Google. And so Elizabeth Holmes was following the same playbook that allowed Silicon Valley to create some of the most powerful companies in the world right now.

So the question at the center of this trial is, when does fake it till you make it okay and results in all of the success stories that we know? And when does it become fraud? So with that in mind, remind us of the story of Elizabeth Holmes and of her company, Theranos, and how that fits into this culture that you just described of Silicon Valley.

Right. So she went to Stanford, which is the beating heart of Silicon Valley. Right. And she dropped out as many of our most famous and successful entrepreneurs did. And she started Theranos around the age of 19 in 2003. And, you know, she had a really big vision. I've always believed that when people find

what they're truly passionate about and they make a decision to do that and stick with that, they can build great things. And that is, of course, key to the Silicon Valley playbook. You have to pitch not just I'm going to make one little incremental improvement in the world. I'm going to transform the world with my grand idea. And her idea was my life's work is in being able to leverage technology to totally transform the cost structure of testing. To make blood testing faster, cheaper, and more accessible to more people. So that people who don't have insurance can begin to get access to the information they need to be able to make decisions about their health that can change outcomes. And it makes a lot of sense.

I mean, in order to get your blood tested, you have to go to a lab. You have to have a big needle stuck in you. They take a lot of blood. You know, it's not cheap. It can take a long time. And not a lot of people like to do it. Healthcare in our country today is the leading cause of bankruptcy. And the lack of it, the leading cause of the suffering

that's associated with saying goodbye too soon. And so you can see the value in what she was pitching. By making it possible for every lab test to be affordable for every person. She was pitching a machine that essentially would test almost any test that you wanted to do very quickly, very cheaply, with just a finger stick of blood. So a tiny little prick on your finger.

No needle. Yes. And we've done that by making it possible to do any lab test from a tiny drop of blood from a finger instead of having big needles stuck in your arm and tubes and tubes of blood taken out. And so Theranos had these little things that they called nanotainers that would contain this tiny little drop of blood and you could do all these tests on Theranos machines with it. You could get tested and in a couple hours, you know, you could find out your thyroid levels.

So we've built what we call our wellness centers, which are our service centers, so that people can go get a test done after work or on a weekend and begin to engage in this process of getting information about their bodies, which can change their life. The grand idea really was that consumers could be in charge of their own health care. They could go and order their own lab tests and sort of take control of their medical decisions. So that's a really big idea. How could we help to create a world in which people don't have to say goodbye too soon? And so a lot of investors got very excited about that. And a lot of them bought into her personally.

She was cultivating this sort of esoteric image that you kind of hear about from a lot of other male tech founders. You know, she wore the same outfit every day. She dressed like Steve Jobs in black turtlenecks. She talked about how she never slept. She was deeply passionate about this. And anyone that she spoke to about it really got sucked in by her vision. How do you make people believe in you? How do you make people believe in you?

You know, I think you have to believe in yourself. So a lot of investors were really excited about this idea and really excited about Elizabeth Holmes and her passion for it. I mean, one part of that is that she was a woman and she's being positioned as the next Steve Jobs. And there are so few prominent women in tech that I think a lot of people were just really excited to see her succeed.

Have you seen the technology? Oh, yeah. You've seen it. I've done it. And there were 50 tests run on one drop of blood. Two drops of blood. Two drops of blood. Tim Draper, who is a prominent investor in the Valley,

was an early backer. Do you trust the results? Yeah, I do. Would you bank your life? Yeah, I do. Would you bank your life? Yeah, they came up similar to the test results that I had in the doctor's office. She managed to get a lot of very powerful, very wealthy people on board. One of the first was George Shultz, who's a former Secretary of State. When John brought her over about three years ago, I looked at her and I said, well, we're about to have a meeting with a friend of my granddaughter.

As soon as she started talking, I did a double take. He then recruited a lot of other people from the upper echelons of the government, retired four-star General James Mattis, former secretary of state Henry Kissinger, David Boies, who's a very powerful litigator, William Frist, a former senator, and the list goes on and on. And these men all sat on her board. It's a very prestigious board. Yeah, and they were all vouching for her.

And that gave her a lot of credibility. And that also helped her get a lot of media attention. Elizabeth Holmes is here. She is the founder and CEO of Theranos. It is a blood analytics company that has developed an innovative approach to blood testing. She appeared on the cover of Fortune, on the cover of Forbes. Forbes recently named Elizabeth Holmes the youngest self-made billionaire in the world. They called her the world's youngest self-made female billionaire. Oh my God.

Elizabeth Holmes. And she was really held up as this role model for, you know, women in tech. 31 years old, and she's worth $4.5 billion. $4.5 billion. And at this point, as everything is going so well, and she's raising all this money, and she herself is worth all this money. Is this just a good idea, Theranos, or is this a technological reality?

I mean, yes and no. On the surface, it looks very real. They have a lab that's doing a lot of testing. They have a lot of funding. And, you know, they start doing their tests on real people. They have a partnership with Walgreens and they start putting these machines into pharmacies in Arizona. They have a lot of patients and they've hired some very credible scientists. And they have a $9 billion valuation. There's a lot of promise here. But it's still mostly promise. Right. But that is sort of the currency of Silicon Valley. I mean, companies are able to raise money and get off the ground based on what is going to happen in the future. So they had a prototype. They had technology that

they were developing and improving. And that's sort of what got them to this point. So in the fake it till you make it world of Silicon Valley, she's still kind of faking it, but in some sense, she's also really making it and people are believing. I mean, what we didn't know at the time, because, you know, investors didn't really dig in and the media sort of believed her based on the credibility she had created was that Theranos was faking it a lot. What do you mean? Lately, one of the most exciting privately held companies in Silicon Valley has come

under fire. I'm talking about Theranos. In 2015, the Wall Street Journal publishes this story. But now the company is on its heels after the Wall Street Journal reported today its tests are unreliable. With sort of an understated headline, it said, Hot Startup Theranos Has Struggled With Its Blood Test Technology. It's written by John Kerry Roo. And just this morning, the Wall Street Journal ran a pretty scathing article about the company,

alleging that the company's proprietary testing devices may be inaccurate and basically accusing Theranos of deceptive practices. And the revelations in it were kind of earth-shattering for the company's narrative. This article raising questions about how accurate this technology is, whether Theranos falsified proficiency tests. I mean, the story said that Theranos was not using its own proprietary technology. It was not using its mini- lab machines for the majority of its tests because it wasn't able to perform those tests. It was only performing a dozen or so tests.

And those that it was performing were not working very well. They were giving, you know, unreliable results or inaccurate ones, and that the company had been struggling to deliver on all of the things that it said it was already doing. struggling to deliver on all of the things that it said it was already doing. So the core of this vision, this technology that would make it possible to test with a pinprick, not a needle, that's not really functioning. Exactly. People go into Walgreens in Arizona, and more likely than not, they're going to get their blood drawn the normal way. And they're going to get their test results done through the same labs that Theranos claimed that it was disrupting. And so immediately, Theranos denied this.

But it sort of began to spiral as more and more people started looking into all of the claims that they had made. New troubles for the blood testing startup Theranos. The company tells Bloomberg... I mean, immediately, reporters that had written positive stories about the company start digging in. More problems for Palo Alto-based Theranos. Government agencies are, you know, set on high alert and start their own investigations.

FDA agents recently showed up unannounced at Theranos amid concerns over the company's testing methods. And they find some major problems there. Theranos facing new trouble this morning as they shut down multiple labs. The SEC starts an investigation. Elizabeth Holmes will have to pay $500,000 in fines. She will no longer be able to serve as an officer or director of any public company for the next decade. Investors start suing Theranos over claims that they had made. Partner fund management says Theranos repeatedly lied. That's a direct quote. The suit's being brought by Robert Coleman. He's a Silicon Valley dealmaker who invested

in the company back in 2013. Trouble for Theranos, the embattled blood testing company now offering shares to investors who promise not to sue them. And all of this reveals major, major problems within Theranos. We learn that Elizabeth Holmes had been claiming that Theranos machines were being used in Afghanistan on the battlefield, and that was simply not true. We learned that some of the revenue claims that she had made to investors, at one point, she said the company would make a billion dollars in 2015, and that real number was maybe closer to $100,000. Wow, that's a big difference. There were, yeah, there were a lot of issues. And of course, Theranos had to void two years of their test results.

Wow. And that includes a lot of patients who got inaccurate results. I mean, there was a man who tested positive for HIV when he didn't have it. There are people that got very critical results and had to make important medical decisions based on them. And they're now learning that those results might not have been accurate. Wow. So naturally, there's a lot of lawsuits that follow in a situation like that. So by 2018, Theranos is about to run out of money.

Elizabeth Holmes' reputation is disgraced and her career is essentially over. The coverage of her has turned completely negative. There's a best-selling book about the town fall, and there are documentaries being made. It's kind of almost become a meme, you know? People are dressing up as her for Halloween and not in a flattering way. And a lot of the women in tech who were cheering her on are, you know, really let down. And that seemed like it would be the end of the story. And in any normal case, it probably would be.

But then the U.S. government issued these indictments. Twelve counts of fraud. We'll be right back. Silicon Valley in the national spotlight tonight as a trial of Theranos founder Elizabeth Holmes began in San Jose in a federal courtroom. Tonight, Elizabeth Holmes facing the test of her life. Holmes has been charged with multiple counts of fraud and conspiracy to commit fraud. She's facing up to 20 years in prison if she's found guilty of the 12 charges against her. Okay, so let's turn to this trial. As you said at the start of our conversation, the question that would seem to be at the center of it is whether what Elizabeth Holmes did is overzealous salesmanship, Silicon Valley on steroids, or just plain old fraud. So how are

both the prosecution and the defense approaching this? And let's start with the defense because it would seem like it has the hardest job here, given everything you've already told us. That's right. The defense kind of opened up by throwing almost everything they could at the wall. It's kind of opened up by throwing almost everything they could at the wall. It seems like they are letting themselves have the option to take any number of arguments down the road. You know, this is a long trial. It's going to last three months. But the biggest theme that they were really hammering is that Elizabeth Holmes is an entrepreneur who is passionate and she tried hard. She did her best.

She came up short, but failure is not a crime. And they really, really worked to humanize her and try to make this seem like a sympathetic human story. They tried to just kind of say, listen, she made some mistakes. She relied on other people to tell her what was going on in the labs. And she truly believed that this would work and that Theranos technology was on the path to really changing the world. And that's kind of what they're trying to do is just get one or two jurors to, you know, be sympathetic to her and relate to that coming up short on your big goals. So that really is the Silicon Valley ethos version of a defense, right?

That she was a visionary, the vision didn't pan out, but that's not illegal. Do you think that that will be convincing to members of a jury? I mean, what's interesting about it is we are here in Silicon Valley right now, and the jury is aware of the tech industry. It looms large over everything around here. They're aware of tech culture. And so I think they'll be at least aware of this kind of argument. And depending on their relationship to the tech industry, you know, that could really affect that. You know, some people might kind of feel resentful toward all the money and power that has been accumulated and others might work in the tech industry and say, oh, I see a little of myself in that. What do you mean? I

see a little bit of myself in that. Well, you know, I've worked for a company and, you know, sometimes we were so close to getting that deal or, you know, all the things that we were trying to scramble and hustle to put together. Sometimes it was a total mess on the inside, but we actually pulled it off and it worked. Or, you know, sometimes we came up short and failure is just sort of a part of the ethos here. I mean, most investors, they expect the majority of startups to fail. Right. Because they're going after huge, sometimes impossible sounding goals. And if they pull them off, it's almost like a miracle. But if they fail, it's almost common. But presumably in most, if not all of those cases, failure does not mean deceiving investors,

deceiving patients, saying that one machine is doing something when in fact it's an entirely different machine that you don't even own. Yes. I mean, that is the most generous interpretation of their argument that I'm trying to make here. But yes, your point is well taken. So this leads us, I think, quite naturally to the prosecution. So how, in the prosecution's opening statements, have they approached this question of salesmanship versus fraud, failure versus deception? So the prosecution made the case just very flatly and unemotionally that Elizabeth Holmes lied and

misled investors in order to get money. And they had this refrain that they repeated over and over, which was, out of time and money, Elizabeth Holmes decided to lie. And they're kind of making the case that there were many times over the years when Theranos was almost out of money or about to go out of business. And in order to keep the company going, she built this web of, you know, increasingly sophisticated lies. And they pulled up some pretty damning evidence, including an allegedly falsified report that Theranos had created showing that pharmaceutical

companies were endorsing the technology that she then passed on to investors. And in fact, pharmaceutical companies had never endorsed Theranos' technology. And there were many examples like that that just did not look good. And they addressed head-on this argument about the culture of Silicon Valley. They said straight up, this is a case about lying and cheating to get money. That's a crime on Main Street, and that's a crime in Silicon Valley. Right. In other words, the prosecution is saying there's no double standard. There's no Silicon Valley version of fraud that's acceptable. Fraud is fraud. And they say they have the evidence that she personally was involved in the kind of deceptions that would

have misled investors and clients. Yes. But the prosecution has to prove that she intended to defraud investors and not just that she was sharing lies, but she was aware that this was a fraud that she was perpetrating, which is a little bit trickier. Well, how do they intend to show that she intended to lie? Well, they have a lot of evidence. They have all of her text messages. They have many emails, many internal documents where employees are raising red flags and saying, we're having problems or these tests aren't necessarily returning the best results. There are text messages between her and Sunny Balwani, who is the president of Theranos and also her romantic partner, talking about problems in the labs that they needed to solve. And at the same time, there are investor presentations and public statements that she's

making that sort of directly contradict some of the internal problems that were clearly happening at the company. Got it. So it seems clear that Holmes knew about problems, and the suggestion from the prosecution is that she withheld that information from investors. But Aaron, you describe these investors as luminaries, smart people with a lot of money. And so I'm curious how this trial will address the question of investor responsibility. responsibility. What obligation did these big-time investors have to look under the hood of Theranos, to challenge Elizabeth Holmes, to demand to look at the financial books, to

understand whether the machines were functioning properly? That is a big challenge in this trial, is that the investors that backed Elizabeth Holmes, they were private market investors. They're very sophisticated. They have a lot of money. And you would think that these kinds of people would do their diligence, you know, really dig into the company and know what they're backing. And it's going to be really hard to make jurors sympathetic to, you know, a billionaire who loses a few million making one bad bet. And the defense has even talked about this in their opening arguments. They're basically saying investors were dying to get into this company.

It was a hot company. They were eager to take a risk, and they were aware of the risk. They had to, you know, sign documents saying that they knew that. And that is the nature of Silicon Valley. Some of these companies can fail. Right. That's the other side of fake it till you make it, which is buyer beware. Yes, exactly. But the government's case is that it doesn't really matter who the investors are, how much they lost. What matters is that she violated securities laws.

She misrepresented her company to investors. She, as an officer at a company that is, you know, selling securities lied. And that is a crime no matter who the victims are. And just to drive their case home, they are bringing in, you know, some people who took Theranos tests and got faulty results, just to illustrate the point that there are real world victims to the alleged fraud that Elizabeth Holmes perpetrated. Mm-hmm. So you mentioned that this trial has just started. It could take months of back and forth from the prosecution and the defense,

so a lot could happen. But let's start to imagine that the verdict is at hand and what it will mean either way. What do you think it will mean if Elizabeth Holmes is found guilty here? I think it could have a little bit of a ripple effect on the tech industry, which has really been freewheeling for the last decade

and everything has just been going up and it's generated a lot of wealth and a lot of interest from new investors who are wanting to take on a little bit more risk. And I think founders and people across the business world, but particularly startup founders, are going to look more carefully at some of the claims that they're making because this would show that they could go to jail for misrep know, misrepresenting their company. And that would be a real change from what we've seen in the past. I mean, we've had a lot of very famous, well-publicized crash and burns and startup downfalls. Some of them, you know, veered closer to fraud. Some of them were just, you know, collapsed in bad behavior or flamed out because they were terrible ideas.

But almost none of those executives behind those companies have gone to jail or even, you know, had charges brought against them. So this would mark a real change. Right. In most of those cases, they lost their money, maybe they lost their reputation, but they didn't do time. This would change that dynamic. Yes. And on the flip side, what would it mean if Elizabeth Holmes prevails here and she's found not guilty? I mean, at the end of the day, Silicon Valley is a place that tries to build things that people use, and the hope is that they make the world better. And with Theranos, you know, people use. And the hope is that they make the world better. And with Theranos, you know, they were trying to do that and it ended up having consequences for people's health. And so I think, you know, if Elizabeth Holmes, she lost her company, she lost her reputation. The company,

you know, hasn't been around for years now, but this is the kind of final chapter, the final note on this very long saga. And I think if she is let off, there's is the kind of final chapter, the final note on this very long saga. And I think if she is let off, there's just this kind of cynical understanding that, yes, Silicon Valley gets to play by different rules. And that could be a problem because this is a place that needs trust in order to function. I mean, we have to trust these tech companies to sort of build the future that they are envisioning and promising to us. And so if Theranos is let off, I think that just sort of creates this impression

that everyone here plays by different rules and they can get away with things. And it really erodes that trust that the industry needs in order to actually build really great things. Well, Erin, thank you very much. Thank you. We'll be right back. Here's what else you need to know today. The full results of the recall election in California show that Democratic Governor Gavin Newsom easily defeated an attempt to remove him from power.

Nearly 64% of voters rejected the recall effort. No is not the only thing that was expressed tonight. I want to focus on what we said yes to as a state. Exit polls and interviews show that the pandemic was the number one issue for voters, who endorsed Newsom's aggressive policies demanding vaccines and masks for Californians. We said yes to science. We said yes to vaccines. We said yes to ending this pandemic. And...

Well, good morning from Australia. I'm very pleased to join two great friends of freedom and of Australia, Prime Minister Johnson and President Biden. On Wednesday, the United States and Britain took a major step toward countering China's military influence in the Pacific, announcing that both countries will help Australia to deploy nuclear-powered submarines that will patrol the region. To help deliver the security and stability our region needs, we must now take our partnership to a new level.

The submarines are designed to alter the balance of power in the South China Sea, a major waterway over which China has claimed exclusive authority, despite objections from neighboring countries. Today's episode was produced by Michael Simon-Johnson and Claire Tennesgetter, with help from Nina Potok and Diana Nguyen. It was edited by Paige Cowett, contains original music by Marion Lozano, and was engineered by Chris Wood. Our theme music is by Jim Brunberg and Ben Landsberg of Wonderly.

That's it for The Daily. I'm Michael Bilbaro. See you tomorrow.