Today, Explained - Bad blood

Episode Date: September 5, 2018

The scandal-plagued blood-testing startup Theranos is shutting down. The Wall Street Journal’s John Carreyrou chronicles the rise and fall of a $10 billion business built on lies. Learn more about your ad choices. Visit podcastchoices.com/adchoices

Sarah Cliff, you're taking some leave from attorney leave to talk to me about your getquip.com slash explained experience today. And you brought young Max. I brought Max. Who seems to be doing well still. He's doing pretty well in the podcast studio. I think he's natural for podcasting. Can't wait to interview him about something. Yeah, once he learns to talk.

Silicon Valley really does have it all. Free lunches, luxury shuttle buses to take you to work. They even got unicorns. In Silicon Valley, a unicorn is a private startup that's worth more than a billion dollars. Theranos was a unicorn. Elizabeth Holmes was its founder. A healthcare pioneer is being compared to visionaries like Bill Gates and Steve Jobs. This is a revolutionary company that threatens to change healthcare the same way that Amazon changed retail or Intel and Microsoft

changed computing or Apple, yes, changed the cell phone. It could be that huge. Elizabeth Holmes is part of the new Time 100 list just out. Her mission is to allow blood testing in every drugstore at a fraction of Medicare costs. Technology can and is transforming our world. But this unicorn had a rough ride. Elizabeth Holmes went from the next Steve Jobs to facing 20 years in prison in just a few years. Investors lost a billion dollars on Theranos. And today we found out this unicorn is finally going to die.

Blood testing firm Theranos is formally dissolving, but that is not the final chapter in this story. The founder, Elizabeth Holmes, and another former executive await a criminal trial. It's the story of a Silicon Valley unicorn based on a scaffolding of lies that was exposed by a Wall Street Journal reporter. And the Wall Street Journal reporter is... John Carreyrou. And that's you.

That's me, yeah. John Carreyrou followed Theranos closely. So closely, he was the first person to really ring the alarm. He wrote a book about it called Bad Blood, and the story starts 15 years ago. This is 2003. Elizabeth Holmes drops out from Stanford. At that point, she's 19 years old. And she decides to found a diagnostics company called Theranos.

As a 19-year-old, how do you go about the process of convincing people that you know what you're doing and that you can pull it off? What she said she had invented was actually somewhat game-changing. to run comprehensive laboratory tests from a tiny sample or a few drops of blood that could be taken from a finger. No one had been able to run that many tests off a tiny sample of blood pricked from a finger. It's something that people in academia and industry had been working on for 15, 20 years. It sounds genius, but what about those who say that's not enough blood to do all the tests that need to be done, especially if someone's very sick and you're trying to figure out what it is?

Every time you create something new, there should be questions. And to me, that's a sign that you've actually done something that is transformative. And she proceeds to raise a lot of money over the course of 10, 12 years, telling investors and the public that she has invented this new technology that can run the full range of tests off just a drop or two of blood pricked from a finger.

My own life's work in building Theranos is to redefine the paradigm of diagnosis. Her greatest trick, and a trick that she used throughout the 15 years of the company, was to win the backing and the support of someone older and experienced who had a great reputation and to leverage that association. So she pivoted to George Shultz, the famous former Secretary of State under President Reagan. Elizabeth and I are going to have a conversation. We're going to sit over there.

He was introduced to Elizabeth Holmes by someone at Stanford Medical School in early 2011. I looked at her and I said, well, I'm about to have a meeting with a friend of my granddaughter. She wowed him with her vision. As soon as she started talking, I did a double take. And within weeks, he joined the board and then introduced Elizabeth to his buddies at the Hoover Institution, the think tank on the Stanford campus. And that's how she came to meet Henry Kissinger, Bill Perry, who was Secretary of Defense under Bill Clinton, Sam Nunn, Bill Frist, Admiral Roughead, all these aging former statesmen or retired military commanders who had these great reputations. And they eventually all joined the Theranos board. She lured them in part with grants of Theranos stock. And by the way, none of those aging board members had any understanding or particular expertise in medicine or laboratory science.

In its last round of funding, Theranos attracted some very high-profile people as investors. One of them was Rupert Murdoch, the owner of my newspaper, The Wall Street Journal, who, unbeknownst to me, invested $125 million in Theranos in March of 2015. Theranos also attracted our current Secretary of Education, Betsy DeVos, and her family invested $100 million. The heirs of Sam Walton, the founder of Walmart, invested $150 million. So it really was a who's who of billionaires that gave Theranos that $10 billion valuation.

In two years, the company's value grew larger than Uber or Spotify at the time. Holmes was named the youngest self-made female billionaire in the world. Whenever there's a quote-unquote glass ceiling, there's an iron woman right behind it. I think it's undeniable that Elizabeth's gender played a role. I think there was a great appetite in Silicon Valley and in American society at large to see a female tech founder rise and become a star. And in Elizabeth Holmes, the Valley suddenly had it because in late 2013, early 2014, Theranos raised money at a valuation of more than $9 billion. And so she was worth upwards of $4.5 billion there for a period.

The youngest billionaire in the world. Is that heady when you hear that? You know, it's not what matters. What matters is how well we do in trying to make people's lives better. She had incredible charisma, has incredible charisma and charm, and really sort of modeled herself after him. And she showed up to work on most days with a black turtleneck, just like Steve Jobs. The trait that she shared with Jobs is she had this reality distortion field. She was really able to cast her spell on people while in their presence with her big blue eyes and her deep voice and get them to suspend this belief.

I've always believed that we're here on this earth to try to make a difference in the world. As she became more famous later on in the 2013-2014 period. Holmes took on the trappings of power. She bragged bulletproof windows were installed in her office, and she traveled with a drive her around in a black Audi A8 that later became a black Cadillac Escalade. And they had a sort of a codename for her, which was Eagle One. And her boyfriend, who was the number two of the company, Sonny Balwani, his codename was Eagle Two. Sonny is actually a very central character to this Theranos saga. For the last decade, we have been working hard to build something which we think is magical

and highly beneficial. He met Elizabeth when she was just 18 years old, a couple months before she started her undergraduate studies at Stanford. They were both enrolled in Stanford's summer Mandarin program, which included several weeks of instruction in Beijing. There were some college kids on the trip who apparently bullied Elizabeth, and Sunny, who was the lone adult, came to her aid. And from that point on, they forged a bond. Then a few years later, after she dropped out of Stanford to found her company, they became romantically involved. He divorced his wife. It was clear that he was Elizabeth's sort of consigliere, her advisor. And then in late 2009, the company was running out of money and Sonny came to Elizabeth's aid,

personally guaranteeing a credit line Theranos took out from a bank. And at that point, he joined the company, became the number two, and wasted no time asserting himself. And really took to terrorizing the employees, the scientists, and the engineers. He took to firing people so often that it gave rise to new expression at Theranos, which was when someone didn't show up at work one day, colleagues would comment that Sonny had disappeared him. Early 2010, Elizabeth Holmes and her boyfriend Sonny Balwani approach Walgreens, the big drugstore chain headquartered in Chicago, and tell it falsely that they've

developed a device that can run hundreds of laboratory tests off just a drop of blood pricked from a finger. And Walgreens doesn't do much due diligence. And as a result, Theranos opens what it calls little wellness centers inside Walgreens stores in the Palo Alto area and in the Phoenix area. And starting in September of 2013, Walgreens consumers go to these stores and go to the little clinics inside these stores and get their fingers pricked and have their blood tests run by Theranos. Walgreens is peak Theranos. After that, it all comes crashing down. That's next on Today Explained. So, Sarah, you went to getquip.com slash explained.

How did it go? So I had heard myny harris on this very show talking about the nice chrome one so i decided to and we should mention neither of you are you know being sponsored no no someone on twitter asked me if i was paid to do this and i 100 was not out of your own just toothbrushing curiosity i decided to treat myself and go with the shiny chrome toothbrush a very popular choice i've heard on this very podcast. I probably didn't read things super closely because I wasn't aware it came with a bunch of toothpaste, which was a nice surprise when it showed up.

But I just thought I was just getting a toothbrush. People like to say that the packaging is interesting. Oh, yeah. Space age, I've heard. It's very sleek. It's even like a cool little pouch thing. And then there's this tube that the toothbrush was in. The pod. The toothbrush pod. Yep. Yeah. sleek. Yeah. Like a cool little pouch thing. Yeah. And then like there was this tube that the toothbrush was in. The pod.

The toothbrush pod. Yep. Yeah. Great. Cool. Cool. So how does all this come crashing down? So it comes crashing down when I start digging into the company in February 2015,

and the fruit of that effort is published in October of 2015. 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 at that point, Theranos of deceptive practices. And at that point, Theranos and Elizabeth Holmes go into spin mode and essentially deny my reporting and say that I've gotten my facts wrong. This is what happens when you work to change things. And first they think you're crazy, then they fight you. And then all of a sudden you change the world. And I have

to say, I personally was shocked to see that the journal would publish something like this when we had sent them over a thousand pages of documentation demonstrating that the statements in their piece were false. What made you take on this story to begin with, John? What made you interested in Theranos and Elizabeth Holmes? I wasn't aware of her until she was profiled in the New Yorker magazine in December of 2014. And there were a couple of things that seemed off to me immediately. One of them was this notion that a 19-year-old college dropout with just two semesters of chemical engineering courses under her belt pioneered groundbreaking new medical science.

That's something that happens in Silicon Valley with computers. But that's coding. Medicine is different. Medicine is a field in which you need to have proper training and schooling. And then once you have that training, you need to do years and decades of research to add value. And so I thought that was weird, but I probably wouldn't have done anything with it, to be fair, if I hadn't been approached by a tipster about three weeks or four weeks later. And that person was a practicing pathologist in Columbia, Missouri, who'd also read the New Yorker story. And obviously, knowing a thing or two about blood testing, he was immediately dubious that Theranos could actually do everything that Holmes claimed she could do in that story. And eventually, everything that I had reported in my stories up to that point becomes vindicated. The Securities and Exchange

Commission opens an investigation into the company. The U.S. Attorney's Office in San Francisco opens a criminal investigation into the company. Theranos founder Elizabeth Holmes has now officially been indicted on federal wire fraud charges. The U.S. Attorney's Office accusing her of engaging in a multi-million dollar scheme to defraud investors, doctors and patients. Theranos announced Holmes has stepped down as CEO. And the SEC charged Elizabeth Holmes with a massive fraud, to use their own words. And Theranos and Elizabeth settled those charges without admitting or denying wrongdoing. Did you ever get to interview Elizabeth Holmes for the piece that you were writing for the

Wall Street Journal? She has steadfastly for now three and a half years refused to talk to me or meet with me. And during that time, was she in communication with the owner of your newspaper, Rupert Murdoch? Because he was like a huge investor in Theranos, right? She actually tried to get him to quash the story. He visited Theranos in Palo Alto in July of 2015, a couple months before my first story was published. And she hoped that he would offer to kill the story and he didn't. And she went to see him again in late September of 2015, this time in New York in the News Corp building in Midtown Manhattan. Again, brought up the story and again hoped that he would quash it and he demurred and said he would let editors at the Wall Street Journal handle it and was sure that they would handle it fairly. And so that day, about two weeks before my story was published,

she was meeting with him in his office on the eighth floor of the News Corp building and the Wall Street Journal newsroom is in the same building. And so my desk is on the fifth floor. So she was three floors up from me and I had no idea she was there. So what does that tell us? Does he just love a good story more than he loves a good $125 million investment? At that point, I had no idea Murdoch was an investor. I suddenly was able to confirm that Rupert was not only an investor in Theranos, but he was actually the single largest investor having put $125 million into the company. And so I was stunned to learn that I had cost the owner of my employer $125 million. Has she kind of gotten off easy for the same reasons that she was a star to begin with? Because

she was a good talker and a compelling pitch person and a female in this industry that's mostly men? A lot of people certainly feel that she got off easy with the SEC because under the settlement, she only had to pay a half million dollar penalty. It does seem pretty small, especially when you consider that we just saw Martin Shkreli, another fraudster, get convicted to seven years in prison for a loss that amounted to $10 million. Has she owned any of this in a sort of mea culpa apologetic way? The closest she came to admitting problems was an interview with The Today Show on NBC in the I feel devastated that we did not catch and fix these issues faster. But it was never clear what she meant by that, whether she was devastated that Theranos had not lived up to what it had promised and put patients in harm's way, or that it was devastated that I had come along and uncovered this fraud. And I never sensed any real remorse, any real empathy, or really even that it ever really sunk in with her, that not only had the

company committed securities fraud, but it had literally gambled with people's lives. Was the media as sort of generally wide-eyed and excited about this female entrepreneur as the tech world was? You could make the argument that the press wasn't skeptical enough, but really in the end, I don't fault some of these reporters too much

because they were lied to, bald-faced lied to by Elizabeth Holmes about what the company could do. And so when you're dealing with someone who's a pathological liar and you're not really prepared for that, I don't think too much blame should be put on those guys. And, you know, it must be said that they weren't the only ones. This isn't just a story about, you know, a failure of the media. So many people came under this woman's spell and believed that she truly, you know, was achieving what she claimed to have achieved. What happened is a lesson in what happens when you leave people who are so young,

you give them so much money and you give them so much power. It's not to say that every startup in Silicon Valley is going to behave like Elizabeth Holmes did and be another Theranos, but certainly it is a cautionary tale. John Carreyrou is an investigative reporter at the Wall Street Journal and the author of Bad Blood, Secrets and Lies in a Silicon Valley Startup.

I'm Sean Ramos from This Is Today Explained. Sarah, the toothbrush comes with refills. Do the refills come immediately or do they come later? I think they come later because I've just had mine about a week and I've not received a refill. You haven't gotten them yet? No. So your getquip.com slash explained experience isn't yet over. Oh no, I'll have to come back and

I think it's in three months that they send me the new one. So mark our calendars for like December. At that point you won't be on maternity leave anymore. No, I'll be here. So I can just come tell you about my free refills. And poor Max will be like, whatever happened that one time at the podcast studio? That was fun. Right, Max?

Maybe you could come back. Babies don't always respond, I guess, is the thing. No, they rarely respond. I'm sorry. Kara Swisher, host of the Recode Decode podcast. You are here in the Today Explained studio with me. We're talking about your show. I'm here to talk about a new show that I just did, which I think you people in Washington will like.

It's with Matt Rivets. He's the founder of Sleeping Giants. Okay, what's Sleeping Giants? So it was a Twitter handle that he started right after the election. And he just started it himself. And this guy has managed through this Twitter handle to get all these encouraged advertisers to take their ads off Breitbart. And what he did is he just – he's very funny. He has now a network of people tweeting for him.

And they spent a lot of time tracking down advertisers who don't necessarily know they're on certain sites. And he started with Breitbart, but he's joined other actions. And I think he's gotten 4,000 advertisers off of Breitbart. Damn. Okay. And people can find that episode right now? Yes, right now. When they go and find Recode Decode, wherever they look for their podcasts.