An outright fraud is looking for new investors - she'll get them too. Credit Max Morse for TechCrunch via Wikipedia

Elizabeth Holmes, and her sidekick, have just been hit with criminal charges over in the US. Which seems reasonable enough, given that they raised $700 million in funding for something that never was going to work and, objectively at least, then spent near a decade lying about it all. However, there is a certain weakness in the case against them as they’ve been charged with wire fraud. This is something of a ragbag, catch all, charge. Pretty much everyone is close at least to being guilty of wire fraud which is why it’s such a useful charge. But the use of it and the use of it alone does indicate a certain weakness in the prosecution case.

The founder of a US start-up that promised to revolutionise blood testing has been hit with criminal charges.

US prosecutors said Theranos founder Elizabeth Holmes engaged in a multi-million dollar scheme to defraud investors, doctors and patients.

The charges come three months after Ms Holmes settled charges from financial regulators that she lied about the capabilities of her firm’s blood tests.

The civil charges from the SEC have indeed been laid and settled:

The criminal charges come three months after Holmes was charge in a civil suit by the Securities and Exchange Commission with “massive fraud”. Theranos and Holmes agreed to settle the charges without admitting or denying any wrongdoing. She paid a $500,000 penalty, returned millions of shares to the company and relinquished her company voting power under the terms of the settlement. She was also banned from serving as an officer or director of a public company for 10 years.

The full press release on the charges is here.

A federal grand jury has indicted Elizabeth A. Holmes and Ramesh “Sunny” Balwani,

Well, OK. But it’s this which is interesting:

…accusing them of two counts of conspiracy to commit wire fraud and nine counts of wire fraud.

If convicted, the pair face a maximum of 20 years in prison and a fine of $250,000 per count.

Don’t get this wrong, wire fraud is a real crime and people do indeed serve significant time if found guilty. But it’s also one dragged out by prosecutors when they think that the real and underlying crime is going to be difficult, perhaps too difficult, to prove. For example, if actual fraud is tough to prove to a jury, accuse people of conspiring to commit fraud using a telephone conversation – that’s conspiracy to wire fraud. A much easier thing to show.

My read on this is that only the charges of wire fraud show that the prosecution here think their case about actual fraud to be a little weak. Which is odd, given what went on, but that is my read on it.

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6 COMMENTS

  1. ‘Elizabeth Holmes, and her sidekick, have just been hit with criminal charges over in the US. Which seems reasonable enough, given that they raised $700 million in funding for something that never was going to work and, objectively at least, then spent near a decade lying about it all. ’

    For a moment there I thought this was about renewable energy.

  2. Thing about intentional frauds rather than simple cookin’ o’ de books is they’re a species of con game. Which is a bit like judo. Using your opponents weight & strength to defeat him. So it’s hard to separate out the bits that are actually fraudulent. A lot of commercial transactions are cons (See any mobile phone contract). Few are actually criminal. Con games are all about assumptions & belief (see any religion). And the ironic thing’s they’d never face charges if their behaviour had been in pursuit of elected office as politicians. Politicians exempt themselves from the consequences of perpetrating frauds (See Gordon Brown on election manifestos). So the system’s trying to indict them for something the system itself does on an everyday basis. So tricky.

  3. I disagree that the gadget “was never going to work.” Star Trek showed us the communicator, a fantasy gadget that would put you in contact with anyone else anywhere. It identified a problem and presented a “vision statement” (like the movie Trump showed Kim to try to coax him further out of his rabbit-hole). It did not contemplate cell towers or coexisting with wall telephones, but that is how engineers solved the problems and delivered the solution.

    Holmes, Theranos, and its investors likewise identified a problem (the need to wait days while blood goes off-site for lab analysis) and presented a vision statement (a gadget the size of a mini-tower PC) that would do thousands of tests while you shop for groceries. Like any start-up, it wrestled with the number and magnitude of technical and personnel problems versus the limits of its capital. The honest answer was that it was going to burn through its funding before solving even a handful of the problems. At that point Holmes’s emphasis turned to lying, and to coercing her confederates to align with the lies. What has happened is what should happen: bankruptcy, and disqualification of Holmes et al. from being in the same role again for a decade. I don’t see what more it accomplishes to send Holmes to prison; seconding BiS above, the fact that she transmitted her lies by telephone should be set against the overtly political behavior of the US criminal justice system disclosed recently.

    But someone is going to produce that product someday, partly guided by the vision of Theranos.

    • I believe she is disqualified from serving as an officer of a public firm for 10 years. Theranos was private. She’s suggested she wants to start another business, and to my knowledge she is not prevented from being a principal in a private firm.

      Reportedly she fired her CFO for questioning the accuracy of information she was providing investors, which does certainly suggest (but not necessarily prove) she was committing fraud, though the credibility of said CFO is questionable as there were also allegations that he was looking at porn sites while at work.

      While not a technologist, I’ve been in the Silicon Valley area for 35 years and have been pulled into a few startups a long the way. A lot of smoke gets blown here. Sometimes it crosses into dishonesty. Often it comes right up to the line. Reams of investment documents would have been prepared for the investors, whom Mr Worstall has observed often didn’t seem all that sophisticated despite their wealth. If there prove to be substantial discrepancies between what those documents said about the firm’s financials and development status at the time the money was raised vs the actual circumstances, the young lady may need to swap her trademark black for orange, and she deserves it.

    • I support full disclosure of Holmes’s past for that next set of private investors, though if they want to place their funds with someone known to circle the wagons rather than come clean when the vision can’t be realized with the available funds, I don’t know who we are to stop them or why we think we know better. “Allegations that he was looking at porn sites while at work” are easy to throw around, and are the order of the day at a company where everyone knows that layoffs are imminent. But I agree with your final sentence.

      I hope the jury distinguishes between fraud and high-pressure cheerleading. In the WorldCom fiasco, some of the “crimes” were simply failing to lead the passengers to the lifeboats, which would have accelerated the company’s demise, and the touted “victim” was an employee who foolishly put all of his retirement savings into stock of his employer.

      • My observations is that institutional investors often prefer to stay as far from the authorities as permissible. They generally figure they are smart enough to ferret out baloney or fraud, and if tricked prefer to take their lumps than pursue it legally. Individuals, however, another story. At least some of them will want her head on a platter.

        The thought the Worldcom mess was largely about capitalizing local access charges rather than expensing them, and thus overstating profits greatly. I do think that 25 years for Ebbers was over the top.