The Theranos case

John Carreyrou is the Wall Street Journal investigative reporter who broke the story of fraud perpetrated by the Siicon Valley startup company Theranos and by its founder, Steve Jobs wannabe Elizabeth Holmes. Holmes had supposedly invented a breakthrough blood-testing technology. At one point the company was valued in the vicinity of $9 billion. There was just one problem. The vaunted technology didn’t work as represented. Maya Kosoff mentions Carreyrou’s contribution to the unraveling in the Vanity Fair summary “We set ourselves on fire” (full of relevant links).

The story led this past week to the consent decree that Holmes and Theranos reached with the SEC. It strips her of voting control, bans her from holding any office with a public company for 10 years, and requires her to pay a $500,000 penalty. Consistent with Carreyrou’s stories, the SEC charged that Holmes, former Theranos CEO Ramesh “Sunny” Balwani, and Theranos had committed “massive fraud.”

A copy of the SEC complaint against Holmes is posted online here. Quartz has a useful summary of the charges against her. Holmes continues to serve as chairman and chief executive officer of the company. The charges against against Balwani remain pending.

The SEC press release on the settlement is posted online here; the Theranos press release is here. Forbes covered the settlement here. The New York Post’s good but brief story on the settlement is here.

Holmes fooled prominent people and commercial partners including Walgreen’s and Safeway (referred to in the complaint as Pharmacy A and Grocery A). When it came to outside investors, of course, the company took their money. Thus the involvement of the SEC. The powers of the SEC, however, are limited to civil enforcement. It is hard to believe that there won’t be a criminal companion to the civil charges.

Even so, the charges of fraud seem to me to warrant harsher penalties than the measures to which the SEC agreed. By contrast, the press release quotes the SEC enforcement director touting the propriety of the measures: “This package of remedies exemplifies our efforts to impose tailored and meaningful sanctions that directly address the unlawful behavior charged and best remedies the harm done to shareholders.” In the welter of news stories published last week, I haven’t seen any commentary that addresses this question.

Theranos is not a publicly held company. Holmes and the company defrauded high net worth investors. Between 2013 and 2015 they had raised more than $700 million. That’s a lot of money. According to the complaint, they “deceiv[ed] investors by making it appear as if Theranos had successfully developed a commercially-ready portable blood analyzer that could perform a full range of laboratory tests from a small sample of blood.” One investor exercised self-help to recoup his investment through a lawsuit against the company.

Holmes recruited prominent directors to the company’s board. Recruiting a prominent board appears to have formed a basic component of the company’s business plan. (The complaint does not mention the company’s board.) Among the company’s directors were George Shultz, Henry Kissinger, James Mattis, David Boies, and William Foege. In the wake of the settlement last week Matthew Yglesias lamely tried to make something out of the Mattis connection.

In November 2016 Carreyrou reported on the efforts of Holmes, Balwani, and the lawyers at the Boies law firm representing the company to silence Tyler Shultz, the grandson of George Shultz. George Shultz was a member of the company’s board at the time of the events; Tyler had gone to work at Theranos after graduating from Stanford. He sought to raise questions of corporate misconduct internally with Holmes.

Carryerou’s profile of Tyler Shultz was published under the heading “Theranos whistleblower shook the company — and his family” (behind the Journal’s paywall). It is an incredibly interesting story. It is perhaps even more interesting now in light of last week’s settlement than at the time it was published. Carreyrou’s story opens this way:

After working at Theranos Inc. for eight months, Tyler Shultz decided he had seen enough. On April 11, 2014, he emailed company founder Elizabeth Holmes to complain that Theranos had doctored research and ignored failed quality-control checks.

The reply was withering. Ms. Holmes forwarded the email to Theranos President Sunny Balwani, who belittled Mr. Shultz’s grasp of basic mathematics and his knowledge of laboratory science, and then took a swipe at his relationship with George Shultz, the former secretary of state and a Theranos director.

“The only reason I have taken so much time away from work to address this personally is because you are Mr. Shultz’s grandson,” wrote Mr. Balwani to his employee in an email, a copy of which was reviewed by The Wall Street Journal.

Last week’s settlement certainly seems to vindicate Tyler Shultz, although I don’t find allegations of doctored research or failed quality control checks in the complaint.

Carreyrou’s forthcoming book on Theranos is titled Bad Blood: Secrets and Lies at a Silicon Valley Startup. This past week’s news about Holmes and Theranos is shocking, though it is a little less shocking for readers who have followed Carreyrou’s Wall Street Journal stories.