Bad Rx: Elizabeth Holmes and Theranos

February 9, 2022

Note: On July 10, 2022 this post was updated. A section at the end discusses the conviction of former Theranos Chief Operating Officer Ramesh “Sunny” Balwani on July 7, 2022. Another update to this post was entered on Nov. 22, 2022. It reflects the sentence that Elizabeth Holmes received on Nov. 18.


The story of Elizabeth Holmes and the company she co-founded, Theranos, is one of the most sensational rags-to-riches-to-rags tales of the modern corporate age.  This tale is now winding toward its conclusion.  It will likely spark some new regulations in the health-care industry, and it may well change the behavior of private firms funded by venture capital.  One of the interesting features of this saga is the fact that the revelations about the practices of Theranos and their false and misleading claims to investors, doctors and patients came from a single investigative journalist, John Carreyrou of the Wall Street Journal.  Beginning in fall 2015, Carreyrou published a series of shocking articles about Theranos.  Carreyrou’s articles caused Theranos to be placed under the spotlight, and as we will see, his allegations about the company turned out to be true. 

Figure 1: A photo of the health-care entrepreneur Elizabeth Holmes, by Jenny Hueston.  Here, Holmes’ wardrobe is chosen to emulate Steve Jobs.

In 2018, Carreyrou published a book Bad Blood: Secrets and Lies in a Silicon Valley Startup.  His book gives the definitive history of Theranos and Elizabeth Holmes.  In this post we summarize Carreyrou’s work along with other sources about the company and its practices, and we bring the story up to date through Ms. Holmes’ 2021 trial for fraud and other charges. 

Figure 2: The 2018 book Bad Blood by John Carreyrou.

The Genesis of Theranos

Elizabeth Anne Holmes was born in February, 1984.  Her family moved around as her father took various jobs, and she attended St. John’s School in Houston.  Elizabeth was smart, articulate and ambitious.  When she was roughly ten years old, one of her relatives inquired about her aspirations.  “I want to be a billionaire,” Elizabeth answered.  Her relatives queried her: Wouldn’t you rather be president?  “No – the president will marry me because I have a billion dollars,” she replied.  Holmes’ family was descended from Charles Louis Fleischmann, who made a fortune from his Fleischmann Yeast Company.  And Elizabeth’s great-great-grandfather was Dr. Christian Holmes, who had founded the Cincinnati General Hospital and the University of Cincinnati Medical School. 

Figure 3: The young Elizabeth Holmes.

But Holmes’ grandfather and great-grandfather had largely squandered the family’s fortunes, in part because of issues with alcoholism.  According to Ms. Holmes, these circumstances had a profound effect on her family.  She would later tell New Yorker writer Ken Auletta, “I grew up with those stories about greatness, and about people deciding not to spend their lives on something purposeful, and what happens to them when they make that choice.”  So, Elizabeth Holmes would make a sense of purpose and a striving for greatness as central themes of her life.  When Elizabeth headed off to Stanford University to begin her undergraduate career as a Presidential Scholar, her parents gave her a copy of Marcus Aurelius’ Meditations.  According to her father Christian Holmes, the gift was meant “To convey to her: Live a purposeful life.” 

Even in high school, Elizabeth Holmes was determined to make her mark.  Her father had traveled to China frequently on business, and he had his children tutored in Mandarin Chinese.  Elizabeth applied to a Stanford program of intensive study of Mandarin; however, that program was not open to high school students.  She badgered the director of that program mercilessly, until in frustration he gave her a test of her facility in Mandarin.  When Elizabeth passed, she was admitted to that program.  It involved five weeks study on the Stanford campus in Palo Alto, California followed by four weeks in Beijing.    

In 2003, as a 19-year-old undergraduate chemical engineering major at Stanford, Elizabeth Holmes considered dropping out of college in order to found her own health-care technology company.  Holmes had been an undergraduate researcher with Channing Robertson, the chair of the Stanford Engineering Department.  Early in her internship with Robertson, Ms. Holmes came up with the idea for a wearable patch that would use microneedles to draw tiny samples of blood from a patient, and then analyze them in real time.  A sufficiently sophisticated patch could determine whether a prescribed medication was working, or whether the dosage should be increased or decreased. 

As Ms. Holmes pondered the idea of the wearable patch, she greatly expanded her ambitions.  In theory, the patch could monitor not only the effects of a single medication, but it could provide continuous feedback on any number of factors: the patient’s blood pressure; levels of various chemicals, nutrients and vitamins; and it could search for the presence of toxins or markers of impending disease.  Holmes could foresee this device revolutionizing health care.  Patients could monitor their own health without relying on a doctor’s prescriptions or analyses; the device could theoretically operate continuously; and one could even imagine that over time, the patch could use adaptive learning to determine whether the patient’s health was improving or deteriorating.  In theory, diseases could be detected long before they had become serious. 

Elizabeth then talked with various Stanford faculty members about the feasibility of her idea.  One of the first was Stanford professor of medicine Phyllis Gardner.  After she pitched her ideas to Prof. Gardner, Elizabeth was told “I don’t think your ideas are going to work.”  Prof. Gardner explained that in her opinion, it was not possible to produce so many tests and achieve such accuracy with the device that Holmes was considering.  Apparently several other medical professors told Elizabeth the same thing.  But Elizabeth Holmes was not deterred.  She continued to push her idea; and she found one Stanford faculty member who enthusiastically endorsed her proposals: this was Channing Robertson, in whose research lab she had been an intern. 

Figure 4: Stanford faculty member Phyllis Gardner, who told Elizabeth Holmes that her proposed medical patch would most likely not work.

Channing Robertson

Channing Robertson was a “star” faculty member at Stanford.  He was a chemical engineer and had been an Associate Dean of the Stanford School of Engineering.  Robertson was a founding Fellow of the American Institute for Medical and Biological Engineering.  He first became famous when he served as an expert witness regarding the safety of the Dalkon Shield interuterine device (IUD).  When asked his opinion about that product’s use of multiple fibers to remove the device, Robertson said “That’s probably not a good idea … Multiple strands could host bacteria and lead to pelvic inflammatory disease, gangrene and loss of extremities, or worse.”  Robertson agreed to provide expert testimony in lawsuits against the company, on the condition that he could test the product in his labs.  He managed to demonstrate thatthe multifilament string was indeed ‘wicking’ bacteria into the vulnerable environs of the uterus.” 

Figure 5: Channing Robertson, a chemical engineering professor at Stanford; Elizabeth Holmes interned in his laboratory, and he became a consultant to Theranos.

Robertson’s testimony played a significant role in the awarding of hundreds of millions of dollars in damages against the manufacturing company A.H. Robins, and in the closing of Robins within two years. 

Robertson later played a role in major lawsuits against major tobacco companies.  When asked by a lawyer why tobacco companies used large quantities of ammonia in making cigarettes, Robertson replied that adding ammonia to nicotine raises the pH of that molecule.  This caused nicotine molecules to pass through biological membranes at a much faster rate.  “In essence,” said Robertson, “Tobacco companies are helping smokers freebase nicotine.”  Robertson’s testimony in a suit filed by the state of Minnesota against Big Tobacco helped to pave the way for an eventual $206 billion Master National Settlement between the tobacco firms and the states. 

Robertson was also the recipient of an award for his contributions to undergraduate education.  He mentored many undergraduates in his laboratory, which is where he met Elizabeth Holmes when she interned in his lab in her freshman year.  Robertson was impressed by Ms. Holmes’ intelligence and ambition.  “I never encountered a student like this before of the then thousands of students I had talked to.”  In fact, ‘impressed’ is not a sufficiently strong word to describe Robertson’s opinion of Elizabeth Holmes.  Perhaps ‘dazzled’ is a more accurate term.  And when Holmes described her idea for a patent for a wearable medical patch, Robertson was bowled over.  “She had somehow been able to synthesize these pieces of science and engineering and technology in ways that I had never thought of,” he said.  “I encouraged her to go out and pursue her dream.”  Robertson considered Elizabeth Holmes to be a once-in-a-generation genius.  Describing his interactions with her, he said “You start to realize you are looking in the eyes of another Bill Gates, or Steve Jobs.” 

Channing Robertson was one of the first, but by no means the last, adults to be captivated by Elizabeth Holmes’ ambition and drive.  As we will see, Ms. Holmes was able to convince scores of men, many old enough to be her grandfather, that she was a rare genius.  She sold them on her vision of revolutionizing the delivery of health care and empowering people to take charge of their own health.  Whatever else we discover about Elizabeth Holmes’ personality and her actions in the corporate world, one should acknowledge her amazing ability to “sell” her inspiring vision, and to “sell” herself as well. 

At Elizabeth Holmes’ trial in fall 2021, one of the items introduced into evidence was a list of instructions that Elizabeth had written to herself.  It outlines her goals for herself, but also a list of principles that she used for dealing with others and for her management style at Theranos (“rules for success in business”).  You can find those instructions here.

Theranos: The Early Years  

Elizabeth Holmes shared with Channing Robertson her interest in dropping out of Stanford and founding a health-care delivery company.  Robertson gave her unalloyed encouragement in this endeavor.  In 2003, she founded a company that in a few months became Theranos.  The name was a combination of “therapy” and “diagnosis.”  Holmes’ co-founder was Shaunak Roy.  Roy was a Ph.D. student who had been supervising Elizabeth’s work in Channing Robertson’s lab.  Once Roy received his Ph.D., he joined Holmes at Theranos.  Roy was provided with a minority stake in the company, and Channing Robertson signed on as a consultant. 

The original idea of a wearable patch was replaced by the vision of a new method to analyze blood samples.  The standard method of analyzing blood requires initial authorization by a physician.  Then, a hypodermic needle draws vials of blood from the veins of a patient.  The blood is then sent to laboratories where it is analyzed by commercial machines.  The largest laboratories, such as Quest Diagnostics and Labcorp (Laboratory Corporation of America), use machines that can be the size of an SUV to run a series of diagnostic tests.  In a few days the patient receives the results. 

Holmes’ latest idea was to develop a machine that would take only a couple of drops of blood through a finger-stick (she explained that she was terrified of needles, and she hypothesized that fear of needles was a likely cause of the fact that a significant number of patients never follow through and have their blood analyzed when their doctor recommends it).  The drops of blood would be inserted into a cartridge, and the cartridge would be fed into a small machine, roughly the size of a toaster.  The machine would perform a series of diagnostic tests on the sample.  Holmes proposed to develop new cutting-edge technology in microfluidics for this analysis. Specifically, the blood would be pumped through tiny channels in the cartridge; in those channels the plasma would be separated from the blood cells, and the plasma would flow into tiny wells that contained antibodies.  Chemical reactions between the plasma and antibodies would test for various conditions.  The result would then be output to the patient. 

Figure 6: Theranos would take a few drops of blood using a finger-stick.  The blood would be placed in a ‘nanotainer.’  Blood plasma from the nanotainer would be fed into a Theranos machine that would perform blood tests.  Here, Elizabeth Holmes holds a nanotainer, emphasizing the small amount of blood that would be used for analysis.

Initially, Holmes intended that the blood-analyzing machines could be used in pharmacies or supermarkets.  It was claimed that Theranos charges for blood-work would be about 10% of current commercial charges; furthermore, the results would be generated within a few minutes rather than days.  But Elizabeth had much loftier goals for her blood-analysis machines.  Eventually, she reasoned that people could purchase Theranos machines for their homes.  They could perform their own blood analyses rather than having to rely on a doctor’s recommendation.  In principle these machines might perform many different functions.  For example, when a doctor prescribed a course of medication, Theranos machines could monitor the patient’s vital signs; this could be used to adjust the medication, or it could provide an early warning of side effects of the meds.  All of this would be garnered from just a couple of drops of blood. 

Eventually, one might imagine that Theranos analyzers could use “machine learning” to assess the state of an individual’s health.  The analyzer could detect any adverse changes in a number of different measurables.  In this way, Theranos machines might prove to be “early warning” devices that could spot the onset of diseases or conditions before they became serious.  It was estimated that 100,000 Americans died every year from adverse drug reactions.  Elizabeth argued that Theranos could eventually eliminate all these unnecessary deaths.  This was part of the inspiring vision that Elizabeth Holmes was able to transmit to venture capitalists, employees, and the public. 

Next, Elizabeth set about gaining the support of some of the most powerful and wealthy men in the Palo Alto and Silicon Valley area.  She gained some entrée through the enthusiastic support of Channing Robertson.  She also had some contacts from a brief period when her family lived in northern California.  For example, she convinced Tim Draper to invest $1 million in Theranos.  Elizabeth’s family had known the Drapers, and Elizabeth was friends with Tim’s daughter Jessie.  Draper’s contribution represented a propitious start for Theranos.  “Tim’s grandfather had founded Silicon Valley’s first venture capital firm in the late 1950s, and Tim’s own firm, DFJ, was known for lucrative early investments in companies like the web-based email service Hotmail.”  In addition, Elizabeth befriended Donald L. Lucas.  Lucas was one of the original venture capitalists in Silicon Valley.  He spent several years as a partner in Draper, Gaither and Anderson, the first West Coast venture capital firm.  Lucas served for many years on the board of Oracle Corporation, and had been a director of 20 public and private companies.  Lucas’ friendship with Elizabeth played a significant role in her ability to connect with venture capitalists.  Lucas would serve as the first chair of the board of directors of Theranos, and Lucas’ son Donald A. Lucas would later be a major venture capital donor to the company.  

Figure 7: Donald L. Lucas. He was one of the original venture capitalists in Silicon Valley. He served as the founding chair of the Theranos board of directors.

After its beginning in 2003, Theranos continued its steady growth in the next few years.  Elizabeth Holmes used her powers of persuasion on both corporate investors and on her employees.  She was able to hire a group of talented scientists and engineers, and she directed the operations of all of the Theranos staff.  In retrospect, Theranos had embarked on a gigantic undertaking.  They needed to reduce the size of commercial blood analyzers by at least a factor of 100.  This required the development of microfluidic techniques that did not currently exist. Furthermore, they had to take tiny samples of blood and break those down into smaller and smaller amounts, in order to run hundreds of tests on the blood samples.  In order to accomplish this, the blood needed to be diluted with a saline solution, in order to obtain sufficient volumes of liquid to run tests.  However, diluting the already tiny sample of blood made it that much more difficult to obtain precise and reliable results. 

Elizabeth Holmes was inspirational and incredibly ambitious.  In addition, she had phenomenal stamina and was able to exist on only four hours of sleep each night.  However, she was also quite rigid in her demands of the company.  Although she had only two undergraduate courses in chemical engineering, she insisted that the blood draw be no more than a few drops of blood, and that the reader be no larger than a microwave oven.  Many people have remarked that Elizabeth Holmes seemed to be obsessed with Steve Jobs and his accomplishments at Apple.  In many ways, her vision for Theranos seemed to be based on an analogy with Jobs and the development of the iPod.  Steve had miniaturized the electronic components for the iPod, so Elizabeth would do the same with blood analysis. 

However, development of the iPod was based on the application of known technology.  Steve Jobs knew that disc drives were available that met Apple’s miniaturization requirements, and he also knew that existing operating software could be utilized for his product.  On the other hand, there was no existing technology that could perform the tasks envisioned by Theranos; it essentially had to be developed from scratch.  The teams assembled by Holmes were highly skilled and creative, but they were unable to overcome all the obstacles needed in order to produce machines that were ready for the commercial market. 

In Nov. 2006, an event occurred that had ominous ramifications for the future of Theranos.  The company had produced a model that was capable of performing a few blood tests from a very small sample of blood.  Elizabeth Holmes and a few staffers had flown their prototypes to Switzerland, where they were scheduled to give a demonstration to the pharmaceutical firm Novartis.  The Theranos staff were told that the demo had gone off perfectly, and that Novartis had shown interest in investing money in Theranos and using their machines.  The company’s chief financial officer, Henry Mosley, went to congratulate Holmes’ co-founder, Shaunak Roy, for the “perfect” demonstration at Novartis.  He was surprised to find that Roy seemed unhappy about the Novartis visit.  

Eventually, Roy told Mosley that their blood-analyzing machines were seriously unreliable.  Sometimes they worked, sometimes they failed, and sometimes they produced erroneous results.  At Novartis, the prototype had failed.  However, to mask that failure, a staffer in Theranos’ Palo Alto labs had wired a result from a successful trial, and that “result” was what was presented to Novartis as the output from the machine.  Mosley was stunned.  He had started working with Intel in the 1970s, and been the CFO for several startup companies.  Later that day when he talked with Elizabeth Holmes, he raised this incident.  He pointed out that in his opinion, this behavior crossed the line into unethical practices, and he told Elizabeth that they could not deceive potential investors. 

Holmes’ reaction was immediate and surprising.  “Henry, you’re not a team player,” she said“I think you should leave now.”  Her CFO, Henry Mosley, had been fired on the spot.  It became clear to him that Elizabeth was willing to continue deceiving investors and the public, if that would generate more contracts and more venture capital. 

By the end of 2006, Theranos had raised a total of $45 million from investors.  This was largely due to the inspiring picture of Theranos’ future that was narrated by Elizabeth Holmes.  It also reflected the impressive group of scientists, engineers and management that she had recruited.  The following year, Theranos raised an additional $45 million from investors; at that point, Theranos was valued at $1 billion. 

Figure 8: The logo of the Theranos company, which was headquartered in Palo Alto, California.

However, the company was still struggling to produce a machine that could successfully miniaturize a blood-analysis lab capable of running hundreds of blood tests on a couple of drops of blood.  Finally, in 2007 an engineer named Tony Nugent produced a prototype.  Nugent made videos of lab technicians carrying out chemoluminescent assays of blood.  He then purchased a robot arm, and he programmed the arm to perform the same steps as the lab technicians.  The analysis worked in the following way.  The blood draw was inserted into a tube in the cartridge, which was inserted into the reader.  The robot arm grabbed the tip of a pipette and used it to aspirate and dilute the blood sample.  The arm then grabbed a second pipette tip and aspirated the diluted blood.  The second pipette contained antibodies which would attach to molecules in the blood.  The arm then aspirated reagents with the molecules in the blood sample.  This would produce a chemical reaction which led to the emission of light.  The intensity of the light was proportional to the concentration of the molecule in the blood. 

Nugent’s “robot arm” device, called the “Edison” by Theranos, was able to measure some elements of a sample of blood a few times larger than Elizabeth Holmes’ requirements.  And Nugent managed to miniaturize the system so that it fit in a box roughly the size of a toaster.  However, this device was nowhere close to Holmes’ dream of a fully miniaturized system that could perform hundreds of tests on a drop of blood.  Furthermore, the performance of the Edison was far inferior to a commercial blood analyzer.  When the Edison worked at all, it proved very difficult to replicate results reliably.  There were also technical issues that had to be surmounted.  For example, over time results produced by the pipettes would “drift,” so this had to be corrected before a commercial version could be rolled out.  Tony Nugent was happy to have produced the Edison, but he considered it simply a prototype that needed extensive engineering work before one could think of using it with actual patients.  Elizabeth Holmes, on the other hand, was delighted with the Edison.  In retrospect, it was not clear that she fully understood the difference between a prototype and a fully functioning commercial device.   

Figure 9: The exterior of the ‘Edison’ blood-analysis machine developed by Theranos.

Channeling Steve Jobs:

In her role as a tech entrepreneur, Elizabeth Holmes had a clear role model: Steve Jobs.  She saw Jobs’ success with the iPod, the iTunes store and the iPhone as a model for what she wanted to accomplish.  She was fond of calling her Theranos blood-analyzing device “the iPod of health care.”  Holmes noted that Jobs had a penchant for secrecy in his product development, and that he took great pains to ensure that rivals would not discover what he was working on and steal his trade secrets.  Holmes also worried that the giants in the blood analysis business, such as Quest Diagnostics, would steal the intellectual property of Theranos.  As a result, the company went to great lengths to spy on their staff.  Surveillance cameras were ubiquitous at Theranos. 

Figure 10: Because Steve Jobs was a role model for Elizabeth Holmes, and because she modeled both her business practices and even her wardrobe after Mr. Jobs, she was increasingly compared to Steve Jobs as Theranos gained more and more fame.

Figure 11: Elizabeth Holmes on the cover of Inc magazine.  The headline identifies her as “The next Steve Jobs.”

In addition, the Theranos IT department instituted many security measures.  They carefully monitored the e-mail of their employees, to make sure that their staff were not communicating with people outside the company.  Inserting a USB flash drive into a computer without permission was a serious offense.  Theranos IT staff even “friended” other employees on Facebook, so they could monitor what they were saying about the company.  And they insisted that their employees not mention that they were Theranos employees on social-media sites such as LinkedIn. However, Elizabeth Holmes also instituted measures that went far beyond the secrecy employed by Apple.  For example, staff from engineering groups were prevented from working with biochemists.  Each individual group reported to Holmes, and she was loath to share information between the groups.  This impeded progress on technical issues; for example, engineers having difficulties with the blood analysis were often unsure whether the issues were with engineering aspects, or whether they might represent problems that could be solved by the biochemists. 

Because Elizabeth Holmes was fascinated with the great success of Steve Jobs and Apple, Theranos hired a number of former Apple employees, in areas ranging from computer technicians to management to design.  Theranos even employed the same advertising firm as Apple.  However, the employees from Apple did not stay very long.  They missed the ability to collaborate freely with colleagues from different areas of the company.  In addition, the top bosses at Theranos knew relatively little about the details of their machines.  So, most of the former Apple staff left the company after a short time. 

Enter Sunny Balwani:

In 2009, Theranos announced that they were hiring Ramesh “Sunny” Balwani as their president and chief operating officer.  It was asserted that Sunny would bring great experience in computing to the company.  Also, it was mentioned that Sunny had valuable experience as a tech entrepreneur, as he had held a senior position at a successful e-business company. 

Figure 12: Ramesh “Sunny” Balwani and Elizabeth Holmes.  From about 2003 to 2016, Balwani was romantically involved with Holmes, although that information was not revealed to Theranos investors or board members.  In 2009, Balwani was hired as the president and chief operating officer of Theranos. 

Sunny was born and raised in Pakistan, and his family emigrated to the U.S. in 1986.  He obtained an undergraduate degree in information systems at the University of Texas.  He worked for Microsoft, and in 1999 he was one of the founders of CommerceBid.  This was a “business to business e-commerce” venture.  The idea was that instead of purchasing goods from suppliers, companies could use CommerceBid’s software to hold online auctions.  Various suppliers would bid against one another, and through this competitive bidding process, a company would presumably end up paying much lower prices for supplies. 

CommerceBid was formed in the heyday of the “ boom.”  There was tremendous optimism over the prospects for this technology sector.  As an example, the leader in the business to business e-commerce field was Commerce One, a company that had seen phenomenal growth in the few years after its founding.  Five months after Sunny Balwani had been named president and chief technology officer at CommerceBid, Commerce One acquired Sunny’s company for $232 million in cash and stock.  John Carreyrou remarks that this was a lot of money for a firm, CommerceBid, which at the time had “just three clients testing its software and barely any revenues.”  But this was the height of the dot-com bubble, and it was not unusual for tech companies to be purchased for outrageously high prices.  Sunny Balwani’s cut of the CommerceBid purchase amounted to $40 million. 

An example of the ridiculous purchases for Internet startups at this time was Yahoo’s purchase of Mark Cuban’s company  Yahoo paid $5.7 billion in Yahoo stock for the company, a purchase that made Cuban a billionaire, particularly when he rapidly hedged his bets by trading Yahoo stock for other securities and cash.  “Yahoo’s costly purchase of is now regarded as one of the worst internet acquisitions of all time.”  Like Mark Cuban, Sunny Balwani lucked out through great timing, as within five months following the purchase of Sunny’s company, the dot-com bubble burst.  Not long after, Commerce One would file for bankruptcy. 

Mark Cuban is refreshingly frank in admitting that the timing of his sale was completely fortuitous, and that he was simply lucky to have cashed in when he did.  Sunny Balwani took a very different approach: he attributed his windfall from CommerceBid as the result of his great entrepreneurial talent.  Theranos portrayed Balwani as a successful businessman and entrepreneur.  In fact, he had no background in either medical devices or biology, and thus lacked a technical background that would have been extremely important to Theranos, particularly since their corporate board remarkably had no experts in blood work. 

Sunny Balwani was arrogant and overbearing.  He claimed to have written a million lines of code while at Microsoft, a claim that was almost certainly false. He was known to throw around technical buzzwords to give the impression that he was an expert in technology, but this affect would occasionally backfire.  For example, at some point Theranos lab technicians were discussing “end effectors,” gripping devices that attach to the end of robot arms.  Sunny mis-heard the term as “endofactor.”  For some time after that, he would insert “endofactor” into conversations about Theranos technology, much to the delight of the lab staff.  In fact, one employee even created a PowerPoint presentation that had a page header that read “Endofactor Update.”  When they reached that point in the presentation, the lab workers surreptitiously observed Sunny to see if he caught on to the prank (he didn’t). 

Perhaps Sunny’s greatest asset at Theranos was that he was living with Elizabeth Holmes, even though he was 19 years older than she was.  Many Theranos employees realized that Sunny and Elizabeth were an item; however, Elizabeth went to considerable lengths to hide this affair from the Theranos board of directors and investors.  Apparently, Elizabeth met Sunny in Beijing while she was a junior in high school and attending Stanford’s summer intensive Mandarin program.  It is thought that their romance began in 2003. In any case, Sunny purchased a condominium in Palo Alto in 2004, and Elizabeth moved in with him in 2005, four years before Sunny joined Theranos. 

Sunny did not let his lack of knowledge of health care or biochemistry interfere with his opinions about management.  He was supremely confident that he was an excellent tech entrepreneur and business leader.  Although Sunny alienated a large number of the staff at Theranos, he was afforded a great deal of deference because of his connection to Elizabeth.  One area where Sunny clearly played a major role at Theranos was in the area of security.  Elizabeth Holmes was also very concerned about security – she was certain that the major diagnostic laboratories like Quest Diagnostics and Labcorp (Laboratory Corporation of America) would try to steal Theranos’ intellectual property.  However, the staff at Theranos report that Sunny seemed obsessed with security.  Surveillance cameras were installed all over the Theranos headquarters.  Fingerprint sensors were installed at the entrance to many offices.  Employees were discouraged from talking with staff in different areas. Sunny Balwani routinely monitored employees’ emails and internet browser history. It seemed that the company went to extravagant lengths to maintain secrecy. 

After about a year at Theranos, Sunny became the leader in firing employees, which had become commonplace at the company.  This was something that Sunny appeared to enjoy.  In fact, when an employee had been fired, their colleagues at Theranos would say that “Sunny disappeared them,” a remark that referred to Sunny as though he was a Mafia don.  In one instance, a senior scientist named Seth Michelson became tired of being the object of constant harassment from Sunny.  He found a job at another company, but when he presented his resignation letter to Elizabeth Holmes, Sunny, who was in Elizabeth’s office at the time, shouted “I won’t accept this!”  When Michelson reminded him that he didn’t need Sunny’s approval to resign, Sunny had him thrown out of the Theranos building.  The only way that Michelson was able to retrieve his belongings from his old office was to enlist the help of a Theranos lawyer to let him into the building on a weekend, when Sunny was not there. 

Slouching Towards the Big Time:

For several years after its inception, Theranos operated under a contradictory set of circumstances.  Elizabeth Holmes turned out to be a spell-binding visionary.  She was able to sell her vision of a revolutionary blood-analysis company to venture capitalists, and to create and dominate a board whose members had impressive credentials (although not in the specific area of blood analysis).  Theranos continued to attract large amounts of venture capital.  Holmes was also able to attract both scientific and management staff with considerable skill and talent.  Although there was significant staff turnover, Holmes recruited an increasingly large number of creative employees. 

With respect to her board and to the venture capitalists who bankrolled Theranos, Elizabeth’s personal magnetism allowed her to overcome hurdles and missteps that would likely have derailed a less imposing figure.  This should be added to the fact that Elizabeth Holmes was only a few years out of college (and dropped out after her sophomore year), while she was often dealing with seasoned professionals who would normally ask tough questions about the company and its prospects.  As we will see in the next section, even when serious questions were raised about the reliability of Theranos’ claims regarding its finances and technology, people were inclined to believe Holmes while discounting very real concerns about the company. 

While Theranos’ fund-raising was extremely impressive, the blood-analysis machines produced by the company were plagued by serious failures.  Elizabeth Holmes insisted that the machines had to operate under a fixed set of criteria: first, the blood sample had to be a finger-stick containing no more than a few drops of blood; second, the blood sample had to be inserted into a cartridge roughly the size of a credit card; and third, the cartridge had to be inserted into an analysis machine that was the size of a microwave oven.  That machine would analyze the sample for up to 200 different factors, and it would report its results in a very short time. 

The scale of the operation, and the incredible number of different tests that the machine could run, were central to the vision that Ms. Holmes presented to investors, to corporations that could potentially utilize the machines, and to individuals.  Holmes emphasized that machines of this size and capability could eventually be placed in homes where people could run their own blood samples on a regular basis. 

The vision presented by Elizabeth Holmes was truly compelling.  It resonated with the desire for revolutionary developments in health care, and for empowering citizens to make their own health decisions.  Unfortunately, the restrictions on the size of the sample and the analyzer, and the required number of blood tests, were essentially impossible to achieve. The Edison machines developed by Theranos used a method called “chemiluminescent immunoassay” to test for the presence and amounts of various chemicals in the blood.  A reagent would interact with the blood plasma, which caused a chemical reaction that would emit light.  The device would detect and measure the light signal, and the strength of that signal would be proportional to the density of the chemical in the plasma.  But, of the approximately 200 blood tests that Theranos promised their machines would be able to carry out, roughly half of those tests did not use chemiluminescent immunoassay.  Thus, even in principle, the Edison machine by itself could not carry out those tests. 

This was only the beginning of the problems with the Theranos Edison machines.  In order to carry out so many tests on a tiny sample of blood from a finger-prick, the blood plasma would have to be diluted, in order to produce a volume of liquid sufficiently large to carry out the test.  Diluting blood samples was nothing new – commercial blood analyzers would also dilute their blood samples.  However, the labs were operating with several vials of blood from a venous draw, and not a couple of drops of blood.  Furthermore, if one was going to carry out 200 different tests on two drops of blood, it would require enormous dilution of the sample to achieve that.  But as the dilution was increased, the amount of blood plasma decreased, and the light signal would correspondingly decrease.  This meant that the precision of the analysis would progressively decrease. 

But wait, there’s more!  The Edison machines would only provide precise and reproducible results if the interior of the machine was kept at a constant 34o Celsius.  The machine contained a small heater in order to maintain a constant temperature; however, in areas with relatively low room temperature, or where there was significant air flow, the heaters could not maintain a constant temperature.  In order to carry out more tests, Theranos scientists tried to stack several layers of analysis hardware; once again, it proved impossible to maintain precise temperatures throughout the apparatus.  The pipettes used in the Edison machines also tended to “drift” over time, and had to be recalibrated frequently. 

In short, the devices produced by Theranos were inaccurate and their results were not reproducible.  They could only carry out a tiny fraction of the 200 blood tests advertised by the company.  In fall 2009, one of the first companies that had signed a collaboration agreement with Theranos, the pharmaceutical giant Pfizer, cancelled their project with Theranos, because Theranos had been unable to meet the specifications promised in the collaboration agreement. 

The employees at Theranos would regularly meet to celebrate a new milestone reached: a new joint venture with another firm; contracts with state health departments to perform blood tests; certification by government regulatory agencies of the Theranos devices.  The loss of the Pfizer contract, on the other hand, was not shared with the general staff at Theranos. 

The Unicorn:

In early 2010, Dr. Jay Rosan heard about a small company, Theranos, that was promising new technology and a business model that “could change the face of the pharmaceutical industry.”  Those promises resonated with Rosan, who was a member of Walgreens’ “innovation team.”   He met with Elizabeth Holmes and Sunny Balwani, and he was extremely energized by their presentation.  First, Rosan (who went by the nickname “Dr. J”) felt that “bringing the startup’s machines inside Walgreens stores could open up a big new revenue stream for the retailer and be the game changer it had been looking for.”  The Theranos vision also resonated with Dr. J’s personal values – he was a fitness nut and was seriously interested in empowering individuals to make their own healthy lifestyle choices. 

Rosan led a team of Walgreens executives that met with Elizabeth Holmes and other management at Theranos headquarters in fall 2010.  They agreed to a plan that would install Theranos blood-analyzers in a number of Walgreens stores.  A trial period involving between 30 and 90 stores would be launched by summer 2011.  If the trial was successful, Walgreens would then install Theranos machines in Walgreens stores across the U.S.  Theranos assured the Walgreens executives that they had machines that were ready for commercial installation – as we will see, that claim was definitely false.  They also stated that their machines could perform 192 different blood tests. 

As we will detail in the next section, one member of the Walgreens team, a consultant named Kevin Hunter, had serious misgivings about the Theranos promises.  During the visit to Theranos, Hunter was not allowed to view their blood analyzers and was unable to take a blood test, whose results he was going to compare with tests at Stanford Hospital.  However, Hunter’s qualms were not shared by the Walgreens brass. 

The Walgreens contract was a feather in the cap for Theranos.  They could now tell potential investors and other companies that the second-largest chain of pharmacies in the U.S. was installing its machines in their stores.  This was crucial to Theranos, since the income and profit projections they were providing to investors were completely fictitious.  Now, once their machines were installed in Walgreens, they could count on a steady stream of revenue and great public exposure. 

That is, Theranos could count on revenue from Walgreens, provided their machines could actually live up to their promises.  And this proved extremely difficult for Theranos.  As we have mentioned, their Edison machines were unreliable and often failed; furthermore, they could only do a small fraction of the blood tests that Theranos claimed. 

But Elizabeth Holmes was undaunted.  She was also courting Steven Burd, the CEO of Safeway, one of the country’s largest supermarket chains.  Burd was also fascinated by the vision of Theranos.  Like Jay Rosan, Burd was deeply interested in health care issues.  First, because he noted that health care costs for Safeway employees were the most rapidly increasing cost of his business; and second, because he had pioneered innovative wellness and preventive health programs for his employees.  Like the Walgreens people, Burd had been fascinated when he attended a presentation on Theranos by Elizabeth Holmes.   Burd was impressed by her presentation, and the idea of installing Theranos blood-analyzing machines in Safeway stores seemed like a win-win proposition: it would constitute an additional stream of revenue to his stores and help to accomplish his aspirations to improve wellness. 

Figure 13: Steven Burd, the CEO of the Safeway supermarket chain.  Burd signed a collaborative agreement whereby Theranos would install blood-analysis machines in Safeway stores.

So Safeway also signed a contract with Theranos.  The contract provided Theranos with $30 million in cash, and it pledged that Safeway would undertake the renovations to install clinics in their stores, where customers would have their blood analyzed on Theranos devices. 

A third major success occurred with the U.S. Army.  In August 2011, Elizabeth had met General James Mattis in San Francisco, where she pitched her idea of installing Theranos blood analyzers in Afghanistan, so that wounded soldiers could have their blood analyzed in the field.  Mattis thought this was a great idea, and he set up a meeting between his staff and Elizabeth.  Elizabeth Holmes explained her vision to the military officers.  She was miffed when one of the visiting staff, Lt. Colonel David Shoemaker, told her that this project would not work unless the Theranos machines were certified by the Food and Drug Administration (FDA).  And Shoemaker knew what he was talking about: he had a Ph.D. in microbiology, had done research on communicable diseases, and had also completed a fellowship at the FDA. 

Figure 14: Gen. James Mattis.  He was interested in a collaborative agreement where Theranos would deploy their blood-analysis machines in Afghanistan.  Mattis later joined the Theranos Board of Directors.

This led to a serious argument between Holmes and Shoemaker.  Elizabeth took the view that the Theranos machine was simply a “remote sample-processing unit.”  It would relay information to the Theranos labs, where the actual analysis would take place.  Therefore, argued Holmes, the Theranos machines in the field needed no FDA clearance – those machines were analogous to something like a fax machine.  Once the analyzers in the Theranos labs had been cleared by the FDA, the machines in the field needed no FDA clearance.  Shoemaker, on the other hand, maintained that the Theranos machines were blood analyzers, and would therefore need FDA clearance.  This process would likely take a year or two, even if they eventually obtained FDA approval. 

Elizabeth Holmes was not pleased with this argument, and she pressed her case with Gen. Mattis.  Mattis was furious at anything that would seriously delay getting the Theranos machines into the field.  Eventually, the Army came to an agreement with Theranos.  Their blood analyzers could be taken to Afghanistan; however, they agreed on a pilot project as a first step in potential deployment of Theranos machines.  The machines could be sent to Afghanistan; however, the only testing they would do was on blood samples from soldiers that had already been analyzed by conventional methods.  Then the Theranos results could be compared with pre-existing blood analysis data.  In the meantime, Theranos could negotiate over the question of FDA approval of their machines. 

Together with the contracts with Safeway and Walgreens, the possibility of use by the Army on the battlefield represented a potential coup for Theranos.  Had this materialized, it could have been a major source of income.  However, deployment of the machines kept being delayed.  Theranos offered many reasons why the machines were not being delivered on schedule.  In fact, in March 2013 when Mattis retired from the military, the Theranos machine deliveries still had not begun.  However, that did not stop Elizabeth Holmes from claiming that the Army was using Theranos blood analyzers in the field. 

A major boost for Theranos occurred in the summer of 2011.  Elizabeth Holmes had met with George Shultz, who had been Secretary of State under Ronald Reagan.  Shultz was a senior Fellow at the Hoover Institution on the Stanford University campus.  He was universally admired there, and played a major leadership role in the Hoover Institution, despite his advancing age (he was 92 at the time).  Like so many others, Shultz was captivated with Holmes’ vision of this revolutionary blood-analyzing device.  In July 2011, George Shultz joined the Theranos board of directors.  Most of Shultz’s compensation for serving on the board came in the form of Theranos stock. 

Figure 15: George Shultz.  He was Secretary of State under Ronald Reagan’s presidency, and he joined the Theranos board of directors in 2011. 

George Shultz himself then became an enthusiastic booster of Theranos.  He persuaded a number of the Fellows at the Hoover Institution to join the Theranos board; like Shultz, they would be given Theranos stock in lieu of a salary.  This included:

  • Henry Kissinger, former secretary of state under Nixon, and a winner of the 1973 Nobel Peace Prize;
  • William Perry, who had been secretary of defense under Clinton;
  • Sam Nunn, a former senator from Georgia;
  • Bill Frist, a heart surgeon and former senator from Tennessee;
  • Gary Roughead, a former admiral in the U.S. Navy.

In early 2013, General James Mattis also joined the Theranos board of directors.  The fabulous group of distinguished men on their board gave Theranos much-needed publicity.   People began to take notice of this up-and-coming company, with their dynamic young blonde leader.  It was only later that people would realize that this same board contained no one with any serious knowledge of blood analysis or microfluidics. 

But the prospects for Theranos seemed stunning.  Sunny Balwani produced revenue projections for the company.  In 2014, he predicted that Theranos would earn $165 Million in profit on total revenues of $261 Million; in 2015, the projections were for profits of $1.08 Billion on revenues of $1.68 Billion.   In fact, as we will see later, in 2014 Theranos’ revenues were closer to $100,000 than $261 million! The potential financial windfall appealed greatly to venture capitalists, who were also enthusiastic about the company’s prospects.  Elizabeth Holmes claimed that in less than 6 months, Theranos machines would be able to do 300 blood tests from a few drops of blood; those tests included 99.9% of all commercial blood tests.  In addition, Theranos promised to submit all of their technology for FDA approval. 

Figure 16:  An advertisement for Theranos. Note that the ad implies they can analyze blood from a sample of just “one tiny drop.”

Buoyed by these prospects, in February 2014 the venture capital firm Partner Fund purchased $96 million in Theranos shares.  The total private capital raised by Theranos was by now $400 million; this meant that the company was valued at $9 Billion.  Since she owned nearly half of Theranos’ stock, Elizabeth Holmes’ net worth became nearly $5 Billion.  Her sudden appearance in the pantheon of billionaires, together with her youth, her gender and her affectations (she wore black turtlenecks, just like Steve Jobs had, she stared directly at the camera without blinking, and she spoke in a deep baritone voice) made her irresistible to the media. 

Some major journals published long articles about Elizabeth Holmes and Theranos.  In June 2014 Roger Parloff, the legal correspondent for Fortune magazine, heard about a legal battle involving David Boies, who was working as legal counsel for Theranos and had joined their board of directors (more about Boies later).  When Parloff contacted a public-relations officer for Boies, she suggested that Parloff consider an article about Elizabeth Holmes and Theranos.  “Roger, this is the greatest company you’ve never heard of,” she said. Parloff then interviewed Holmes, who pitched him her vision of the company, and her amazing tales of the capability of the Theranos machines and their ability to revolutionize the health-care industry.   Parloff was impressed, but he was even more impressed when he interviewed members of the Theranos board of directors. 

Figure 17: The Fortune cover story by Roger Parloff, about Elizabeth Holmes and Theranos.  Parloff’s story, This CEO is Out for Blood, played a significant role in introducing the country to Theranos.

The Theranos board clearly viewed Elizabeth as a bona fide genius.  And their descriptions of Ms. Holmes seemed more appropriate to a figure such as Mahatma Gandhi than to a young entrepreneur.  George Shultz told Parloff: “Everywhere you look with this young lady, there’s a purity of motivation.  I mean she really is trying to make the world better, and this is her way of doing it.”  Henry Kissinger told Ken Auletta, “She has a sort of ethereal quality – that is to say, she looks like nineteen.  And you say to yourself, “How is she ever going to run this?  She does so by intellectual dominance: she knows the subject.”  William Perry was quoted as saying, “She has sometimes been called another Steve Jobs, but I think that’s an inadequate comparison.  She has a social consciousness that Steve never had.  He was a genius, she’s one with a big heart.”  Not to be outdone, James Mattis stated “She has probably one of the most mature and well-honed sense of ethics – personal ethics, managerial ethics, business ethics, medical ethics — that I’ve ever heard articulated.” 

Well, these are quite amazing testimonials to Ms. Holmes; however, coming from members of her board of directors signals that they saw their function as basking in the glow of her brilliance, rather than insuring that the company’s technical claims were in fact valid, or that the projected revenues for Theranos had some basis in reality.  George Shultz told a reporter, “We never took any votes at Theranos.  It was pointless.  Elizabeth was going to decide whatever she decided.”  Although Shultz meant this as a compliment, in fact it is a devastating critique of the operations of Theranos’ board of directors.  As we will see, even when they were notified of irregularities in Theranos’ operations, these men tended to side with Ms. Holmes rather than her accusers.

Roger Parloff’s article in Fortune “vaulted Elizabeth’s Holmes to instant stardom.”  It ran as the cover story in Fortune, with a large closeup of Elizabeth Holmes’ face and the headline “This CEO Is Out for Blood!” His article was followed by a December 2014 profile of Elizabeth Holmes by Ken Auletta in the New Yorker.  The comparisons of Ms. Holmes to Steve Jobs and Bill Gates intensified.  In 2014 she was named Fortune magazine’s Businessperson of the Year.  The following year she became the youngest person ever to win the Horatio Alger Award, and Time magazine named her one of the 100 most influential individuals in the world (she was nominated by Henry Kissinger).    

Figure 18: Elizabeth Holmes on the cover of Forbes magazine in 2014.  The story touted Holmes as being one of the richest people in America.

At this point Theranos and Elizabeth Holmes had rocketed to fame.  Theranos had become a “unicorn:” that is, the company’s prospects were deemed so dazzling that they were able to tap into massive amounts of private equity capital.  They were riding a wave of favorable publicity, fueled by untested faith in the assertions of Elizabeth Holmes about the capabilities of their devices, and by the revenue projections issued by their company.  Holmes was also well-connected to politicians.  In Jan. 2015 she appeared as a feature speaker at the Clinton Foundation’s Health Matters Summit; and in Sept. of that year, she spoke with Bill Clinton at a Clinton Global Initiative event. 

Figure 19: Elizabeth Holmes speaking with Bill Clinton at a Clinton Global Initiative event in Sept. 2015.

Warning Bells About Theranos:

Despite the accolades for Theranos and Elizabeth Holmes, various people raised pointed questions about Theranos’ research and its claims.  Over the years, several people voiced doubts about the company, and about Elizabeth Holmes.  We have already mentioned the incident with Henry Mosley.  He was Theranos’ CFO when he was told that in a visit by Holmes and other staff to the company Novartis, the Theranos staff were unable to get their Edison machines to function properly.  So, in a demonstration of the blood-analysis abilities of their machine, Theranos instead wired a photo of a successful test from their Palo Alto headquarters and presented that as their “successful” outcome.  When Mosley confronted Elizabeth with this incident and warned that this conduct was unethical, Holmes fired him on the spot. Here are three other issues that were raised about the company. 

Avie Tevanian:

Avie Tevanian had been head of software engineering at Apple in the late 1990s.  After he retired from that company he was named to the Theranos advisory board.  In 2006, Tevanian had invested $1.5 million in Theranos.  At the board meetings, Elizabeth Holmes would regularly announce that Theranos had signed extremely lucrative contracts with pharmaceutical companies; however, Avie observed that the contracts were not followed by revenue streams.  So, he asked why the revenues had not appeared, and he was told that the contracts were delayed because of legal reviews; but when he asked to see copies of the contracts, Elizabeth said that no copies were available at the moment. 

Figure 20: Avie Tevanian, who served on the Theranos board of directors in 2006, and who raised questions regarding the company’s revenues and contracts with pharmaceutical firms.

In addition, Avie was perplexed by repeated delays in the rollout of Theranos’ blood-analysis machines.  Although the board had been told that the rollout would occur any day, at each board meeting it seemed that a new technical glitch had delayed putting the machines on the market.  Tevanian thought that this was inconsistent with a product that was ready for commercialization, so he kept pressing on with questions about the contracts, lack of revenue from the contracts, and delays in product rollout. 

A few weeks later, Avie was invited to a meeting with Donald Lucas, the chairman of the Theranos board.  At that meeting, Lucas informed Avie that Elizabeth had complained to him that Tevanian was hostile to her; Lucas suggested that Tevanian resign from the board.  Tevanian responded that he was merely doing his duty as a member of the board of directors to validate the company’s claims.  After his meeting with Lucas, Avie went back and reviewed the Theranos documents he had originally received, before he joined the board.  After finding what he felt were irreconcilable differences between those documents and what he had seen at Theranos, he brought them to a subsequent meeting with Lucas. 

However, Lucas was more interested in getting Tevanian off the advisory board than listening to his well-founded concerns about Elizabeth Holmes’ claims regarding the company’s finances and the status of its blood-analysis machine.  Furthermore, once Tevanian announced his intention to resign from the board, Theranos imposed some conditions that Tevanian thought were punitive and unnecessary.  So, in retiring he sent the following message to Lucas.  “I do hope you will fully inform the rest of the Board as to what happened here.  They deserve to know that by not going along 100% “with the program” they risk retribution from the Company/Elizabeth.” 

Kevin Hunter:

A second episode that should have raised red flags occurred in the negotiations between Theranos and Walgreens.  Theranos had pitched to Walgreens the idea that Theranos machines could be installed in Walgreens, where customers could have their blood tested.  Walgreens executive Jay “Dr. J” Rosan and CFO Wade Miquelon were ecstatic about Theranos’ claims that it could revolutionize health care, empower individuals to monitor their own health, and drastically lower the costs of health care.  Dr. J boasted to colleagues thathe had found a company he was convinced would change the face of the pharmacy industry.”  They brought along Kevin Hunter, the head of the lab consulting firm Colaborate, to a visit to Theranos.  Hunter was there to evaluate the situation and, if things went well, to help initiate a formal partnership between Walgreens and Theranos. 

While at the Theranos headquarters, Hunter asked if he could see the laboratory: Theranos had stated that they had a lab ready for commercialization.  Their machines were claimed to be able to run 192 different blood tests – these constituted over 99% of current blood tests.  This claim alone should probably have raised suspicions, since half the tests listed by Theranos could not be done using the Theranos technique of chemiluminescent bioassays.  When Hunter inquired if he could see the lab, Elizabeth Holmes told them it would be OK “if we have time.”  In fact, the “lab downstairs” did not contain any blood-analysis machines: it was an R&D area where a group of biochemists were carrying out basic research.  When Hunter inquired again, he was told that they would not be able to visit the lab, because he had not given Elizabeth “sufficient time” to arrange the test.  But Hunter had initially made the request to see the lab two weeks ago.   

This was deeply unsatisfying to Hunter.  He had planned to have the Theranos machine conduct tests on his own blood; afterwards, he had arranged to repeat the same tests at Stanford Hospital to check the Theranos results.  The inability to see the Theranos machines in action raised Hunter’s suspicions.  Next, Hunter proposed a 50-patient study, where patients would get their blood tested by both Theranos and Stanford Hospital, and the results compared.  Again, Theranos declined the offer.   The final straw took place at a party to launch the collaboration between Theranos and Walgreens.  At that party, Theranos had shown up with a machine and had tested the blood of several Walgreens executives.  Hunter asked to see the results of the tests, but they had not received them over a month later. 

Hunter urged the Walgreens executives to delay the rollout of the Theranos machines at Walgreens.  But the executives refused: they argued that if they didn’t hurry to implement the collaboration, Theranos might turn around and license their machines to Walgreens’ chief competitor CVS.  The fear of being scooped by CVS was a powerful incentive for Walgreens.  As a final request, Hunter looked into Theranos’ claim that their blood-analysis system had been “comprehensively validated over the last seven years by ten of the largest fifteen pharmaceutical companies.”   But Hunter was not able to verify that claim when he checked with the Big Pharma companies.  Walgreens also claimed that Johns Hopkins University’s medical school had thoroughly reviewed the Theranos technology and could vouch for it.  But when Hunter received the two-page JHU report, he found that their team had been shownproprietary data on test performance,” and that the Hopkins team believed the technology behind it to be “novel and sound.”  But the end of the report stated “The materials provided in no way signify an endorsement by John Hopkins Medicine to any product or service.” 

Hunter told his Walgreens counterparts that the JHU “review” was meaningless.  As it happened, the head of the Johns Hopkins Lab had offered to test Theranos devices in their lab; however, Theranos never provided an Edison machine to be studied.  Hunter did persist in asking pointed questions of Elizabeth and Sunny in conference calls between Theranos and Walgreens.  However, eventually Elizabeth and Sunny complained that Hunter’s queries were “interfering” with the Theranos-Walgreens project.  After that, Hunter was excluded from the conference calls. 

Tyler Shultz:

Perhaps the most poignant example of warnings that went unheeded was that of Tyler Shultz.  Tyler was the grandson of George Shultz, and he became a member of the Theranos staff in 2013, following his graduation from Stanford.  Tyler had met Elizabeth about 18 months earlier at his grandfather’s house, and had been so inspired by her vision of revolutionizing the health-care field that he changed his major from mechanical engineering to biology.  He then joined Theranos after he graduated. 

Figure 21: Tyler Shultz. The grandson of George Shultz, Tyler worked at Theranos in 2013, and was dismayed at what appeared to be unethical and possibly illegal conduct at that company.

Tyler was assigned to a team studying the reliability of the assays run on Theranos’ Edison blood-analysis devices.  They would input blood samples into the Edisons and note how the results varied when duplicated on the same machine, and also compare the output from different Edison devices for the same samples.  Tyler soon became seriously dismayed at the practices adopted by Theranos.  For example, one of the variables studied by Tyler (and also by his friend and co-worker, Erika Cheung) was the coefficient of variation (CV) for each Edison blood test.  A test is defined as “precise” when the CV is below 10%.  But at Theranos, test results that had high CVs were often discarded, and the tests repeated until a low CV was obtained; that was then listed as the CV for that device and test.  Tyler and Erika were concerned at the “cherry-picking” of results, when all results should have entered into the calculation of the CV.  In other cases, Edison results that deviated from expectations were defined as “outliers” and discarded.  However, Tyler was unable to get a satisfactory definition of what constituted an “outlier,” except that it differed substantially from the norm. 

Another example of Theranos testing procedures was a test for syphilis.  To calibrate the Edison machines, Tyler and his co-workers ran tests of 247 blood samples.  Of these, 66 were known to be positive for syphilis.  The first test run of the Edison machines successfully identified only 65% of the positive samples; the second run detected 80% of the samples.  So Tyler was shocked to see that the Theranos Website claimed that their Edison machines correctly identified 95% of positive syphilis samples.  This was part of Theranos’ claim that their blood analysis machines consistently outperformed other commercial devices.   The Theranos machines also experienced difficulties analyzing blood samples for levels of vitamin D.  Tyler and Erika found that commercial blood analyzers might find a level of 20 nanograms per milliliter, in the normal range.  But when the same sample was tested on a Theranos Edison device, they would obtain a value of 10 to 12 nanograms/ml, which would indicate a significant vitamin D deficiency.  They were surprised to learn that Theranos devices had been cleared for commercial analysis of vitamin D levels from live patients. 

Figure 22: Erika Cheung.  She was a colleague of Tyler Shultz, working with a Theranos team testing their Edison devices.  Like Tyler, she was dismayed at the lab practices at the company, and eventually resigned. 

In Nov. 2013, Erika Cheung was assigned to the group running blood samples given by patients at Walgreens stores.  Before running the blood sample, Erika ran a “quality-control” check on the Edison machine.  This involved using a sample with a known quantity of a substance, and seeing if the machine repeated the known result.  The machine is deemed to have failed if the result is more than two standard deviations away from the known result.  Erika’s first trial failed, as did the second trial.  At this point, the machine should have been taken off-line to be re-calibrated.  Erika attempted to use Theranos’ help line for guidance on how to deal with this issue.  After none of the suggestions worked, eventually an employee from the R&D group arrived. 

The R&D staff member proceeded to take multiple readings of the sample on three different Edison machines.  She obtained a total of 12 results.  Of these, she removed two that she deemed “outliers,” then took the mean value of the remaining 10 samples and returned this “result” to Walgreens.  Erika was stunned: she knew that this was a completely unorthodox (and probably unethical) method for analyzing blood samples; furthermore, the R&D employee was not even licensed to perform these tests. 

Eventually, Tyler Shultz became sufficiently disturbed by the procedures used by Theranos to test their machines and determine their reliability that he approached Elizabeth Holmes to express his concerns.  He brought up the fact that the CVs he measured were far larger than those claimed by Theranos.  He also mentioned his concern that Theranos claimed its machines were considerably more accurate than other commercial machines, when in fact the opposite seemed to be true.  Elizabeth disputed some of Tyler’s statements but in other areas replied that Tyler’s statements “didn’t sound right,” and directed him to Daniel Young, one of the senior scientific staff members at Theranos.  The answers that Tyler received to his questions ranged from dubious to downright false. 

Finally, Tyler asked Young about one other troubling area.  Every four months Theranos had to undergo “proficiency testing” of its devices, in order to satisfy the CLIA (Clinical Laboratory Improvement Amendment) requirements.  The lab was sent blood plasma samples containing amounts of certain analytes.  The labs ran tests on their equipment and returned their results, which were then compared with the known values of those analytes. At present, Theranos was using commercial analyzers for some tests and their Edison machines for others.  However, for the CLIA tests they only sent results from commercial machines the company had purchased from other manufacturers.   For the most recent CLIA tests, some of the Theranos staff ran the test samples on both commercial machines and their Edisons.  The Edison results differed dramatically from the commercial machines. 

When Sunny Balwani was informed what the Theranos staff were doing, he was infuriated.  He insisted that they stop all testing of the CLIA samples on the Edisons, and he demanded that only results from the commercial machines be returned to the authorities.  Tyler asked Young whether they should have sent Edison results for certain processes, since they were using the Edison machines for those processes (the CLIA regulationsstated that the samples must be analyzed ’in the same manner’ as patient specimens ’using the laboratory’s routine methods’”).  Young responded that the lab’s proficiency testing scores were obtained by comparing a given lab with its peers.  Since Theranos had devised new techniques, they had no peers, so it made sense to return only values from their commercial analyzers. 

Tyler was discouraged and suspicious.  The CLIA regulations seemed quite clear, and it appeared that Theranos was violating them.  So he sent a query to the director of the Clinical Laboratory Evaluation Program at the New York State Department of Health.  Using an alias, he described Theranos’ practices regarding the CLIA specifications, and he asked whether these were legitimate practices.  Stephanie Shulman, the director of the program, responded that what Theranos was doing amounted to “a form of PT cheating … in violation of the state and federal requirements.”  Tyler was told that he could either tell Dr. Shulman the name of the offending company, or “he could file an anonymous complaint with New York State’s Laboratory Investigative Unit.”  Tyler filed an anonymous complaint.

Tyler then reached out to his grandfather George Shultz.  At that time, George was a member of the Theranos board; in addition, he had persuaded several of his colleagues at the Hoover Institution to serve on the board.  Tyler knew that George regarded Elizabeth Holmes as the Golden Girl; nevertheless, he felt it necessary to pass along to his grandfather the many troubles with the Edison machines.  He added that many of the blood tests performed by Theranos were run on commercial analyzers, in direct contradiction to the company’s claims about the number of tests that could be run by the Edisons.  He also stressed that Theranos was not submitting CLIA tests on its Edisons, in violation of state and federal law. 

Tyler ended by announcing his intention to resign from Theranos.  He was chagrined to find that his grandfather appeared to agree with Elizabeth Holmes.  He urged Tyler to talk with Elizabeth before resigning, as George was convinced that Elizabeth would be able to explain that Tyler was mistaken.  Tyler dutifully tried to arrange a meeting with Elizabeth.  When a meeting could not be arranged, he sent a long e-mail to her.  In it, he described the failure of the Edison machines to achieve credible and reproducible results; the use of questionable procedures to obtain CVs for the machines; and the dubious and probably illegal methods that Theranos used for their CLIA reporting.  Tyler ended by expressing his concerns and intentions.  “I just feel a responsibility to tell you what I see so we can work towards solutions.  I am invested in this company’s long-term vision, and am worried that some of our current practices will prevent us from reaching our bigger goals.” 

When Tyler did receive a response, it was a long email from Sunny Balwani.  Sunny claimed that the issues raised were simply a result of Tyler’s youth and his inability to understand laboratory practices.  Balwani was incensed at Tyler’s suggestion that the lab’s CLIA practices were unethical.  Balwani wrote “That reckless comment and accusation about the integrity of our company, its leadership and its core team members based on absolute ignorance is so insulting to me that had any other person made these statements, we would have held them accountable in the strongest way.  The only reason I have taken so much time away from work to address this personally is because you are Mr. Shultz’s grandson.  I have now spent an extraordinary amount of time postponing critical business matters to investigate your assertions – the only email on this topic I want to see from you going forward is an apology that I’ll pass on to other people including Daniel [Young] here.” 

Upon receiving the message from Sunny, Tyler Shultz knew that he would have to resign.  He immediately sent Sunny an email giving two weeks’ notice.  However, later in the day the head of HR told Tyler that Theranos had decided Tyler should leave immediately.  He was made to sign a new set of nondisclosure forms, packed up his belongings, and left.  However, before he even reached his car in the company’s parking lot, he received a phone call from his mother, who said “Stop whatever you’re about to do! … I just got off the phone with your grandfather.  He said Elizabeth called him and told him that if you insist on carrying out your vendetta against her, you will lose.”   

After taking his belongings home, Tyler visited George Shultz in his office in the Herbert Hoover Memorial Building.  Tyler explained to George what had happened, and gave George copies of both his own memo, and the response from Sunny Balwani.  Tyler tried to convince George that he knew what he was talking about, pointing out the immense discrepancy between Theranos’ claims about their blood-analysis work and the poorly-performing Edison machines, and the CLIA performance testing activities that were quite likely illegal.  However, when Tyler left his grandfather, George Shultz told him “They’re trying to convince me that you’re stupid.  They can’t convince me that you’re stupid.  They can, however, convince me that you’re wrong and in this case I do believe that you’re wrong.” 

We have presented only three examples of incidents where people raised doubts about the claims made by Theranos and the reality of their blood-analysis methods.  In every case, the parties involved chose to believe Elizabeth Holmes.  And they failed to insure that warnings were followed up on, or to check on questions raised about Theranos.  In the first instance, Avie Tevanian was a member of the Theranos board.  He provided Don Lucas, the chairman of the board, with a list of dubious or unsubstantiated claims made by the company.  Rather than following up on Avie’s claim, Lucas suggested that Tevanian resign from the board.  

Kevin Hunter had been hired by Walgreens as a consultant when they were negotiating an agreement where Theranos blood-analyzing machines would be stationed in Walgreens stores.  Hunter became suspicious when his repeated efforts to see the Edison machines in action were denied.  In addition, Theranos declined Hunter’s perfectly reasonable request to run a 50-patient trial where volunteers would have their blood tested both by Theranos and by the Stanford Hospital, and the results compared.  In this case, Hunter strongly urged that Walgreens delay the collaboration with Theranos until they could verify the reliability of the Edison machines.  Walgreens refused because they were concerned that Theranos might initiate a collaboration with their arch-rival CVS. 

The third case was that of Tyler Shultz.  As an employee at Theranos, Tyler observed first-hand how unreliable the Edison machines were.  He also noted serious discrepancies between the claims made by Theranos about the accuracy of their results, and how many blood tests could be run using a single drop of blood.  Finally, Tyler had good reason to believe that Theranos was violating the law by not using Edison machines on some of the proficiency tests they ran to satisfy CLIA regulations. 

Note that in every instance, Elizabeth Holmes was made aware of the issues.  In the case of Avie Tevanian, Avie’s concerns were voiced to chair of the board Don Lucas.  Lucas conveyed these to Elizabeth, whose reaction was to ask Avie to resign from the Theranos board.  Kevin Hunter made requests directly to Elizabeth when visiting Theranos along with Walgreens board members; he also made numerous requests in subsequent Walgreens-Theranos conference calls.  Eventually Elizabeth complained to the Walgreens brass that Hunter’s skepticism was “interfering with” the negotiations between the two companies; after that time, Hunter was dropped from the calls. 

Theranos employee Tyler Shultz took his concerns directly to Elizabeth Holmes.  She disputed some of his complaints, and for others she sent him to talk with senior Theranos staff scientist Daniel Young.  Tyler felt that some of Young’s claims sounded dubious, so he followed up by anonymously contacting a New York State laboratory evaluation center.  He then passed along his observations and qualms in an email sent to Elizabeth.  When he received a threatening response from Sunny Balwani, Tyler resigned from Theranos.  At that point, Elizabeth told Tyler’s grandfather George Shultz that his grandson had a “vendetta” against her, and she threatened that if he did not stop this “he would lose.”  Alas, Tyler found that George Shultz preferred to believe Elizabeth Holmes over his own grandson.  Later in this post, we will provide a further update on Tyler Shultz and Theranos. 

Cracks in the Facade:

Theranos appeared to be one of the most successful start-ups of its time.  Elizabeth Holmes was a brilliant fund-raiser, and her vision of Theranos and its potential for a revolutionary effect on American health care brought in a massive amount of venture capital.  In addition, Theranos had signed contracts with two industry giants, the pharmacy chain Walgreens and the Safeway supermarkets; finally, they claimed to have Theranos blood-analysis machines analyzing blood samples from soldiers in Afghanistan.  However, in the glare of the public spotlight, problems with the Theranos business model and its machines began to surface. 

First, two articles written by scientists raised issues about Theranos’ business model and its claims.  The first was an article by John Ioannidis in the Journal of the American Medical Association in Feb. 2015.  Ioannidis pointed out that, despite the fact that Theranos claimed to be “revolutionizing the blood test,” Theranos employees had published nothing in the peer-reviewed literature.  He asked “How can the validity of claims made be assessed, if the evidence is not within reach of other scientists to evaluate?” Ioannidis suggested that perhaps the biomedical innovation community might bypass the rigors of peer review by developing something like the preprint process arXiv that is used in physics (here, people circulate preprints of their work before they are published, without having to wait for peer review).  Ioannidis understood that for-profit companies might feel justified in shielding their innovations from public scrutiny.  However, he maintained that “Once a product or service reaches the point at which it generates substantial revenue, the science behind it should then be communicated in detail to ensure adequate review.”  Ioannidis further noted that “Unless stealth research adopts more scientific transparency, investors, physicians, patients and healthy people will not be able to judge whether some proposed innovation is worth $9 billion, $900 billion, or just $9.”  In the case of Theranos, Ioannidis’ warning would prove prophetic. 

In May 2015, Dr. Eleftherios Diamandis of Mount Sinai Hospital, Toronto published an article in Clinical Chemical Lab Medicine.  He examined claims made by Theranos regarding its business model, and concluded that their claim of drastically reducing the costs of blood analysis were highly unlikely.  In addition, Diamandis emphasized the downside of patients carrying out their own blood analysis; these included self-testing and self-interpretation of results, over-testing, over-diagnosis and over-treatment.  He raised a number of reasons why a health care model such as Theranos proposed could have significant negative consequences. 

Adam Clapper, a pathologist from Columbia, Missouri, read Ken Auletta’s New Yorker profile of Elizabeth Holmes and was instantly skeptical – indeed, in his profile, Ken Auletta had called Elizabeth’s description of Theranos’ machines “comically vague.”  Clapper decided to look further into Elizabeth Holmes’ claims.  As proof that the Theranos machines worked, Holmes had referred to a Theranos article in Hematology Today.  When Clapper looked up that publication, he saw that the article referred to just a single blood test on a total of six patients.    Clapper authored an industry blog called Pathology Blawg, and he wrote a post expressing his skepticism about the claims from Theranos, saying that he would remain a skeptic “Until I see evidence that Theranos can deliver what it says it can deliver in terms of diagnostic accuracy.”    

After reading Clapper’s post, some people who were also skeptical of Theranos contacted him in an attempt to expose Theranos’ dubious claims.  They managed to get in touch with Alan Beam, a former lab director for Theranos who had resigned when he realized that Theranos had been cheating on its blood testing, by running blood samples on commercial analyzers while claiming that they were using their own technology.  Adam Clapper knew that he alone could not unmask Theranos; they needed a detailed investigation to do this.  Clapper contacted the Wall Street Journal and was put in touch with reporter John Carreyrou.  Carreyrou then talked with Alan Beam.  He provided Carreyrou with some devastating statements about what Theranos practices.  However, Beam insisted on not being identified, and only providing information on deep background. 

Winner of FT/McKinsey Business Book of Year 2018 John Carreyrou and the cover of his book Bad Blood

Figure 23: John Carreyrou.  A journalist for the Wall Street Journal, Carreyrou began investigating Theranos after he was contacted by pathologist Adam Clapper.

Beam had been sufficiently concerned about the unethical and illegal actions of Theranos that he began copying his Theranos e-mails to his Gmail account.  He was worried that he might have to defend himself when the truth about Theranos was revealed.  However, when he resigned from the company, they made him sign a new non-disclosure agreement that would prevent him from ever discussing Theranos’ methods.  Furthermore, Sunny Balwani told him that the company knew about his copying e-mails to his Gmail account, and they insisted that he delete them.  Beam tried to fight against this, but he was up against lawyers from Theranos’ legal firm Boies Schiller Flexner.  Eventually Beam was told he had to delete those files.  Later, however, he was told that Gmail could find and restore those files, so Beam retrieved this information.

In the meantime, Theranos was failing to fulfill its promises to both Safeway and Walgreens.  In the case of Safeway, their CEO Steven Burd had sunk $350 Million of Safeway money to re-fit half of Safeway’s stores to accommodate upscale wellness centers that would use Theranos machines.  The company had pledged that their machines could be installed by the middle of 2012.   However, Burd had already allowed Theranos to miss several deadlines, and he was now in a position where he had to rely on that company to come through for Safeway.  Eventually, Theranos set up a test facility on Safeway’s corporate campus in Pleasanton, California.  Safeway hired Kent Bradley, a former U.S. Army physician, as their chief medical officer. 

Bradley was surprised to see that there were no Theranos machines at Pleasanton.  They merely had two phlebotomists taking blood draws from Safeway employees.  The blood was then couriered to Theranos’ main laboratory where it was analyzed.  Bradley was mystified that the phlebotomists took two samples from each employee, one with a finger-stick and a second venous draw.  He became suspicious when he learned that Theranos was farming some of its blood tests to a commercial lab in Salt Lake City.  But he was even more concerned when some Safeway employees began to divulge test results that seemed highly abnormal.  When their blood was re-tested at a commercial facility, their blood levels were normal. 

It turned out that Theranos was carrying out all the Safeway blood tests using commercial analyzers as they were not able to get their new miniLab, an updated version of the Edison machine, to work reliably.  However, the technicians and phlebotomists hired by Theranos were sloppy and poorly trained.  Although Theranos had promised that their machines were ready for commercial use and would be installed in Safeways by the middle of 2012, they missed that deadline. 

Steven Burd was under pressure from Safeway’s board.  The company had been missing its financial targets, in large part because it had predicted a massive boost in revenue once it opened its Theranos wellness centers.  Safeway analysts had projected $250 million in additional revenue in the first year after the full Theranos rollout.  In reality, the company was down the $350 million it had already spent in re-fitting their supermarkets for the wellness centers.  When another two quarters came with no Theranos installation, the board lost its patience.  In January 2013, they announced that Burd would be retiring in May.  Even after Burd left Safeway, the new directors continued to negotiate with Elizabeth Holmes, who kept reassuring them that the Theranos machines would be rolled out in the near future. 

At the same time, Walgreens experienced many of the same problems as Safeway.  Because their minilab blood-analyzing machines were not reliable, Theranos opened wellness centers in a few Walgreens stores in northern California.  Once again, blood was taken at the Walgreens and then couriered to the Theranos labs for analysis. 

Theranos researchers had only developed one successful method for analyzing blood: diluting the plasma, then sending it into pipettes where robot arms would perform the blood analysis.  Since they wanted their “miniLab” to perform four different types of analysis, they produced four separate arm-and-pipette systems, each one performing a separate analysis.  They then stacked the four devices one atop the next.  However, both the precision and the reliability of those machines was poor.  Although they were years away from a reliable machine, Elizabeth Holmes continued to claim that Theranos machines were capable of performing hundreds of tests, returning the results in less than an hour, and having the best precision in the industry. 

In June 2012, Holmes had obligated Theranos to have wellness centers installed at Walgreens stores by Feb. 2013.  They missed that deadline, which angered Walgreens management as the original contracts had been signed in 2011.  Elizabeth then promised Walgreens that their operation would be installed by September 2013.  Unfortunately, sufficient progress had not been made on their minilab.  At this point, Theranos fell back on using commercial analyzers. 

Theranos purchased ADVIA commercial analyzers from Siemens, and modified them so they would accept the vials from finger-sticks.  Before the samples were inserted into the ADVIA machines, the samples were diluted with another commercial machine, a Tecan.  Both of those machines were much larger than the Theranos Edisons or miniLabs.  But even then, the Theranos researchers ran into problems.  They needed larger samples than the plasma from the finger-sticks in order to use the ADVIA machines; however, when they diluted the samples in the Tecan, they decreased the fraction of blood below the values that would produce reliable results.  Lab director Alan Beam was nervous when he realized that Theranos was planning to begin commercial analysis under these conditions. They were using commercial analyzers and not their own product, and the analyzers were producing unreliable results.  When Elizabeth Holmes insisted on meeting the Sept. 2013 launch date, a few of the Theranos researchers resigned in protest. 

Figure 24: The launch of the Theranos – Walgreens collaboration in Sept. 2013.  Elizabeth Holmes, with Walgreens CEO Gregory Wasson (2nd from right) and CFO Wade Miquelon (at right).

However, on Sept. 7, 2013, Theranos opened up a few blood-analysis centers in Walgreens stores in northern California and Arizona.  As with the Safeway collaboration, no Theranos machines were installed in the Walgreens; finger-sticks and venous draws were made by phlebotomists in the Walgreens stores, and then shipped to Theranos labs where they were analyzed. 

The Bombshell:

After being contacted by Adam Clapper, who urged him to consider an investigative piece about Theranos, John Carreyrou of the Wall Street Journal contacted former Theranos lab director Alan Beam.  Beam’s remarks convinced Carreyrou that this might constitute a sensational story.  Specifically, Beam told Carreyrou that:

  • Theranos had lied about their achievements and cheated on “tests” of their machines
  • The roll-out of the Walgreens commercial effort had been a disaster
  • Contrary to Theranos’ claims, many of their blood tests had to be made using venous draws instead of finger-sticks
  • Blood samples were being transported from Arizona to California where they were analyzed
  • In most cases, Theranos was using commercial equipment from other companies, rather than their own machines, to analyze blood samples

This information was particularly inflammatory since Theranos claimed to have invented devices that would completely revolutionize the blood-analysis industry.  Beam’s information made it clear that Theranos was being completely dishonest about their methods.  However, there were several problems in proceeding.  First, Carreyrou was having trouble persuading employees to talk with him.  Not only had Theranos employees been required to sign non-disclosure agreements (NDAs) when they joined the firm, they were also made to sign a different NDA when they left the firm.  The later NDA specifically forbade them from revealing anything about their employment at Theranos and told them no information about Theranos could be retained; Theranos also confiscated their company phones when they resigned. 

Most current or former Theranos employees refused to talk with Carreyrou at all.  It appeared they were afraid they would be in deep trouble if they violated their NDA.  Carreyrou did get Alan Beam and two former employees to talk with him on deep background (he could publish what they told him, but he could not reveal their identities).  And he got a third former employee, Adam Rosendorff, to talk with him off the record (that meant Carreyrou could not print any of the information from Rosendcrff).  However, Adam’s information did corroborate what he was hearing from the other employees.  Rosendorff described the reckless behavior of Theranos in analyzing patients’ blood with unreliable machines: “The way Theranos is operating is like trying to build a bus while driving the bus.  Someone is going to get killed.” 

Carreyrou contacted nurses and doctors who worked with patients who had been notified of abnormal results on their blood tests; but when their blood was re-tested at commercial labs they were fine.  Carreyrou himself had his blood drawn at a Walgreens in Arizona, and in four cases he was informed of abnormal results; when re-tested at a commercial lab, his blood results were normal. 

One of the most outspoken former employees was Tyler Shultz, the grandson of Theranos board member George Shultz.  Tyler was eager to tell his story; at the same time, he was greatly concerned that Theranos would come after him.  Tyler provided Carreyrou with significant detail about his experiences at Theranos.  In addition, Tyler had managed to leave Theranos with a copy of the message he sent to Elizabeth Holmes and Sunny Balwani’s response. Tyler also had his correspondence with the New York State Health Department about the rules for proficiency testing.  Carreyrou was gathering powerful information showing that Theranos had lied about its accomplishments, failed to follow the legal requirements for obtaining FDA approval for its tests, and was operating blood testing sites in a manner that put patients at risk.  However, Carreyrou’s story also posed considerable hurdles.  First, since all of the former Theranos employees had signed NDAs, they would be subject to harassment and lawsuits from Theranos lawyers, if it became known who Carreyrou had contacted.  Second, since Theranos was certain to deny any allegations made by Carreyrou, his piece would have to undergo rigorous scrutiny from the Wall Street Journal lawyers.

Carreyrou had good reason to be concerned about lawyers attacking him and his sources: the lawyer David Boies and members of his firm Boies Schiller Flexner were representing Theranos.  David Boies was one of the best-known lawyers in the country.  He had first become famous for his handling of the Justice Department’s antitrust suit against Microsoft.  He had represented Al Gore in the Supreme Court case in the 2000 presidential election.  And he had also successfully led the presentation to the Supreme Court that overturned California’s ban on gay marriage, Prop 8.  Furthermore, Boies was known as an extremely aggressive and persistent lawyer. 

Figure 25: Lawyer David Boies (L), with his wife Mary and Harvey Weinstein.  Boies represented Weinstein in an effort to silence women who claimed to have been sexually harassed by Weinstein.  Boies and his firm also represented Theranos.

Boies had become interested in Theranos when he represented them in a lawsuit between the company and Richard Fuisz, a friend of the Holmes family who had filed for a patent related to the Theranos blood machines.  Elizabeth complained that Fuisz had stolen her idea after talking with her and her family, and then patented it.  When Boies learned more about Theranos, he agreed to represent the company in return for Theranos stock as part of his reimbursement.  As Boies began to do more work for Theranos, he agreed to join the Theranos board of directors in 2016.  This put Boies in a potential conflict of interest between his membership on the Theranos board, his legal representation of the company, and his ownership of a block of Theranos stock. 

Carreyrou was soon informed that Boies was threatening Tyler Shultz.  Apparently their firm knew that Tyler had talked with Carreyrou.  Since neither Tyler nor Carreyrou had revealed their meetings to anyone else, they assumed that Boies had one or both of them surveilled.  Boies and lawyers from his firm badgered Tyler Shultz with threats and harassing letters.  This exacerbated an otherwise delicate situation.  Ethical employees such as Tyler Shultz felt a moral obligation to be whistle-blowers, as they had observed illegal and unethical practices at Theranos.  On the other hand, the non-disclosure agreements they had signed forbade them to reveal this to anyone.  In retrospect, the heavy-handed tactics employed by David Boies and his associates had the effect of allowing Theranos more time to put patients at risk, and allowing Elizabeth Holmes and Sunny Balwani to carry on their fraudulent scheme for a longer period of time. 

This would not be the first time that Boies’ tactics of harassment, intimidation and weaponizing of non-disclosure agreements had been used to allow criminals to carry on their nefarious deeds.  Boies was a lawyer for Harvey Weinstein during the period when he was accused of having sexually harassed several women.  Boies’ firm hired the Israeli intelligence company Black Cube to spy on women who had charged Weinstein with sexual harassment, and reporters who were trying to gather evidence about Weinstein’s activities.  Black Cube is said to have produced dossiers that could be used to smear Weinstein’s accusers, and to prevent reporters from filing stories about Weinstein’s activities. 

What is astonishing is that, during the time when he hired Black Cube to dig up dirt on reporters in an effort to kill stories about Harvey Weinstein, a partner in Boies’ law firm was also representing the New York Times in a lawsuit!  When the Times discovered that Boies had hired Black Cube, they promptly fired Boies, and they issued a statement.  “We never contemplated that the law firm would contract with an intelligence firm to conduct a secret spying operation aimed at our reporting and our reporters.  Such an operation is reprehensible.”  Subsequently, the New York Times published a profile on Boies that covers both his illustrious early career, and his representation of Harvey Weinstein and Theranos.  Boies attempts to justify his ethically challenged work for both of these clients. 

Theranos had become aware that John Carreyrou was preparing to write a Wall Street Journal article about the company.  And they must have realized that the story was likely to reveal unethical and/or illegal activities undertaken by Theranos.  Carreyrou and his sources believe that all of them were likely under surveillance by David Boies and his lawyers (a fact that was eventually confirmed by Elizabeth Holmes).  Carreyrou then set up a meeting with Theranos representatives at the Wall Street Journal.  The meeting took place on June 23, 2015.  A group of lawyers representing Theranos appeared at the meeting, including David Boies and Heather King; King had been a partner at Boies Schiller Flexner and had recently become general counsel for Theranos.  Daniel Young was the only Theranos scientist present at the meeting.  Carreyrou brought along his editor and Jay Conti, the general counsel for the parent company of the WSJ. 

Carreyrou had sent the participants a list of 80 questions about Theranos and its operations.  A few of these questions were answered in part, but for the most part Boies and his associates claimed that Carreyrou had interviewed former disgruntled Theranos employees who had given him false information about the company.  Following the meeting, the WSJ received a letter from David Boies, who insisted that the Wall Street Journal “destroy or return” all confidential information about Theranos that it possessed.  Boies and Heather King were also harassing the former Theranos employees whom they knew had talked with Carreyrou.  They stated that unless these people stopped making “false and defamatory” statements about the company that Theranos would “consider all appropriate remedies, including filing suit against you.”  Boies also threatened Carreyrou that if he published his story that contained defamatory information about Theranos, they might sue the Wall Street Journal

Elizabeth Holmes began a separate initiative to kill John Carreyrou’s story.  In the last round of Theranos fund-raising, Rupert Murdoch had invested $125 million in Theranos.  So Holmes sought out Murdoch, who owned the Wall Street Journal.  She warned him that Carreyrou’s intended story was false and defamatory, but that it had the potential to do great harm to Theranos.  To Murdoch’s credit, he stated that he did not intervene in WSJ business and that he trusted their editors and lawyers to get their stories right. 

Figure 26: Billionaire Rupert Murdoch.  Murdoch invested $125 million in Theranos. When Elizabeth Holmes learned that a Wall Street Journal reporter was investigating her company, she met with Murdoch, urging him to kill the story (Murdoch owned WSJ). Murdoch declined Holmes’ request.

John Carreyrou’s article, “Hot Startup Theranos Has Struggled With Its Blood-Test Technology” was published in the Wall Street Journal on Oct. 14, 2015.  As everyone had expected, the story was a bombshell.  It revealed that Theranos was carrying out the vast majority of its blood tests on commercial machines, it pointed out that the extreme dilution of the samples led to inaccurate results, and it mentioned some of the incorrect results that had put patients’ health in jeopardy. 

Carreyrou’s article marked the beginning of the end for Theranos.  It was clear to company management that their only hope was to attempt to discredit his article.  The day after publication of the article, Elizabeth appeared on Jim Cramer’s TV program Mad Money.  Cramer mixed a series of ‘softball’ questions with some probing queries.  Here is the video of Holmes’ interview with Cramer. 

Holmes dealt with Cramer’s questions in impressive fashion.  She denied virtually all of Carreyrou’s claims, passing them off as factually incorrect and due to a few disgruntled former employees who had left Theranos years earlier.  One of the revelations in Carreyrou’s article was that the FDA had ruled that Theranos could not utilize their technology without FDA approval.  Holmes tried to argue that Theranos had voluntarily taken the step of requesting FDA approval.  Although Elizabeth produced forceful responses to Cramer’s questions, her answers ranged from evasive to downright false. 

However, despite Elizabeth Holmes’ performance on Mad Money, Carreyrou’s article exposed Theranos to probing questions from many sources.  Venture capitalists began to ask themselves about the company.  For example, why had Elizabeth Holmes been so secretive about Theranos’ machines?  Why did Theranos’ board of directors have no members with “even basic knowledge” of the science of blood work?  And out of the many investors in Theranos, why had no venture capital firms with expertise in health care invested in that company?  Furthermore, venture capital firms that had invested in Theranos were now scrutinizing what they had been told about the company, and contrasting the incredibly rosy revenue projections they were given with the reality of Theranos’ bottom line.  In retrospect, it is shocking that Theranos never had an independent financial audit.  This is particularly disturbing since, after CFO Henry Mosley was fired, Theranos continued for some time without a qualified Chief Financial Officer. 

There was one immediate change in Theranos’ management structure.  George Shultz and his Hoover Institution buddies were removed from the Theranos board of directors; Theranos created a “board of counselors” that had no powers, and moved Shultz & Co to that group.  At this time, Theranos added David Boies to their board of directors.  Over the past few months, Boies had been extremely aggressive in threatening anyone who had talked with John Carreyrou.  Furthermore, they had sent threatening letters to Carreyrou and the Wall Street Journal management.  However, WSJ management and lawyers decided that Carreyrou’s story was accurate, and they ignored Boies’ insistence that they return or destroy any materials about Theranos. 

Carreyrou continued to investigate Theranos.  In particular, he contacted the FDA after receiving a tip that they had conducted inspections of Theranos lab facilities.  Carreyrou soon obtained corroboration from an FDA official who spoke on deep background.  The FDA had conducted surprise inspections of Theranos lab facilities in Palo Alto and Newark, California.  They determined that the Theranos nanotainers that held the blood samples were “uncleared medical devices.”  They forbade Theranos to continue to use these devices until they had been approved by the FDA.  Carreyrou was told that the Theranos machines turned out to be unreliable and produced poor results.  By classifying the nanotainer as an unapproved medical device, the FDA was able to prohibit the use of Theranos blood analyzers until they could fix these problems. 

Over the next several weeks, John Carreyrou published four more articles about Theranos.  Each one provided yet more evidence that Theranos devices were unreliable and potentially dangerous.  These new articles covered the following ground:

  • Theranos had attempted a new round of funding for shares in the company, just days before Carreyrou’s first WSJ article. 
  • Safeway had walked away from their partnership with Theranos
  • Walgreens had cancelled a planned nationwide rollout of Theranos blood-analysis centers.
  • For several years, Theranos had operated without a legitimate lab director. 

Theranos relied on its allies in an attempt to counter the pounding they were receiving from Carreyrou.  Channing Robertson, the supervisor of Elizabeth Holmes’ undergraduate research at Stanford, leapt to her defense.  Theranos, he said, could not possibly have been using unreliable equipment for taking blood samples of patients.  Theranos management would have to be “certifiable” to do such a thing.  Robertson continued to praise Ms. Holmes “as a once-in-a-generation genius, comparing her to Newton, Einstein, Mozart, and Leonardo da Vinci.” 

Channing Robertson had taken early retirement at Stanford, and had been retained by Theranos as an advisor.  He was being paid $500,000 per year for his ‘work’ at Theranos.  Robertson’s statement immediately raises the question: What the hell was he doing at Theranos?  Robertson was a renowned chemical engineer, who had become famous for his research showing the dangers of products such as the Dalkon Shield IUD, and the actions of tobacco companies making it easier for the body to absorb nicotine from cigarettes.  One would have thought that he would be intimately familiar with the Theranos blood-analysis machines, and how Theranos was analyzing the blood from patients at Walgreens.  Robertson’s remarks suggest that he was completely in the dark regarding the functioning of their Edison and miniLab machines.  Once again: If he had no idea how Theranos was analyzing (or failing to analyze) patients’ blood, just what was he doing at the company? 

Figure 27: Elizabeth Holmes on the cover of Bloomberg Businessweek.  The article, published after John Carreyrou’s expose at the Wall Street Journal, portrays her trying to fight back from the revelations in Carreyrou’s article.

Yet another disastrous blow to Theranos came from the Centers for Medicare and Medicaid Services (CMS).  In September 2015, CMS staff member Gary Yamamoto had received a complaint from Erika Cheung, who had been a colleague of Tyler Shultz at Theranos.  Cheung claimed that “Theranos’s proprietary devices were unreliable, that the company cheated on proficiency testing, and that it had misled the state inspector who surveyed its lab in late 2013.”  Yamamoto was sufficiently concerned that he and CMS inspector Sarah Bennett showed up unannounced at Theranos three days later.  The initial inspection found so many problems, and so much missing documentation, that CMS scheduled a second visit in November. The November visit lasted for four days, and the CMS staff insisted on inspecting the Theranos labs. 

John Carreyrou was alerted to the CMS visits, but found it very difficult to obtain the actual CMS report; Theranos lawyers were fighting to keep it secret, alleging it would reveal trade secrets.  However, CMS did post a letter saying that Theranos’ operations posed “immediate jeopardy to patient health and safety.”  The letter stated that Theranos had been given ten days to submit a plan to address these issues, or they would be in danger of losing their federal certification.  Theranos issued statements attempting to minimize the seriousness of the CMS findings.  Eventually, Carreyrou was able to get a leaked copy of the CMS report from its visit.  It showed that Theranos had been running blood tests using its Edison analyzers (which Elizabeth had denied in the Jim Cramer interview), but it was able to run only 12 tests on the Edison (out of a list of 250 tests on its menu).  The remaining 238 tests were run on commercial analyzers (again contradicting Holmes). 

Furthermore, as Theranos employees were aware, the Edison machines were exceptionally unreliable.  One of those blood tests had failed quality controls 87% of the time!  In comparison tests, Edison’s results differed from those of commercial analyzers by as much as 146%.  An Edison test to measure vitamin B12 levels had a coefficient of variation between 34 – 48%, compared with 2 – 3 % for commercial labs.  This was accompanied by other lapses at Theranos including sloppy work and analysis by unqualified workers.  Carreyrou published quotes from this report, despite efforts by Heather King to prevent the WSJ from publishing. 

Shortly after Carreyrou’s article, CMS sent a new letter saying that Theranos had failed to correct 43 out of the 45 deficiencies in their previous letter.   At this point, the walls were closing in on Elizabeth Holmes and her company.  Elizabeth broke up with Sunny Balwani and fired him; the official Theranos press release said that Sunny had voluntarily retired.  However, this was insufficient to ward off the wolves at the door.  In an effort to prevent CMS from banning them from carrying out blood tests, Theranos voided over 10,000 of their blood test results. 

However, they failed to mention this to Walgreens, who found out about this action from a Wall Street Journal article.  In June 2016, Walgreens quickly terminated their contract with Theranos and closed down their wellness centers.  Next, CMS banned Elizabeth Holmes for two years from working in the business of blood testing.  Theranos went to some lengths in an attempt to keep these developments secret; however, by now the cat was out of the bag.  These actions were leaked to John Carreyrou, who published them in subsequent WSJ articles. 

Forbes revised its estimate of Elizabeth Holmes’ net worth from $4.5 billion to zero; at the same time, it revised its valuation of Theranos from $9 billion to $800 million (although Elizabeth owned by far the most stock in Theranos, she owned common stock, while many of the major investors owned preferred stock.  As their prior claims would have exhausted all the remaining value of Theranos, Holmes’ net worth was now revised to zero).  And Roger Parloff of Fortune published a revision of his earlier cover story; he recounted how he had been deceived by Elizabeth Holmes.    

The next nail in the coffin came from Theranos’ investors.  For example, the Partner Fund that had invested nearly $100 million in Theranos sued them in Delaware court (Theranos was incorporated in Delaware), alleging that the prospectus submitted by Theranos to their firm was composed of “a series of lies, material misstatements, and omissions.”  Partner Fund was not the only venture-capital group to sue Theranos.  Walgreens also sued Theranos, claiming that they had “failed to meet the most basic quality standards and legal requirements” of their contractual agreement.  Heather King resigned as general counsel for Theranos and returned to the law firm of Boies Schiller Flexner.  David Boies ceased to work as a legal consultant for the company, and he also resigned from the Theranos board of directors. 

By this point, it was clear that Theranos was probably going out of business.  They closed their laboratories in Arizona and California, and Theranos agreed to pay $4.65 million in restitution to patients in Arizona who had blood tests from the company.  By late 2017, Theranos had burned through nearly all of the $900 million it had raised in venture capital.  The company had only 130 employees left, after reaching a high of 800 employees.  Theranos settled the lawsuit from the Partner Fund venture capital firm for $43 million; they settled just before Sunny Balwani was scheduled to give a deposition in the case.  They also settled the suit filed by Walgreens for over $25 million. 

Any hopes that Theranos might right their ship and remain solvent were dealt a severe blow in March 2018 when the Securities and Exchange Commission (SEC) filed a lawsuit against Theranos, Elizabeth Holmes and Sunny Balwani charging them with “conducting an elaborate, years-long fraud.”  Elizabeth settled the SEC civil suit by relinquishing her voting control of Theranos, returning a major block of her stock, paying a $500,000 penalty, and accepting a ten-year ban on being an officer or director in a public company.  Sunny Balwani refused to settle the SEC civil suit.  As of January 2022, that case is still ongoing. 

In June 2018, the U.S. Department of Justice filed criminal charges against Elizabeth Holmes and Sunny Balwani.  The charges and the subsequent trial of Elizabeth Holmes are reviewed in a later section; the information can be found here.  The two trials were separated.  We will shortly review Elizabeth Holmes’ trial. Sunny Balwani’s trial is expected to begin in March 2022. 

In Dec. 2017, Theranos borrowed $100 million from Fortress Investment Group.  As part of the deal, Fortress gained a lien on all of Theranos’ assets, in particular on all of its patents.  Another requirement was that Theranos obtain an independent financial audit no later than June 2018.  It was required that Theranos would have sufficient funds to support itself for 12 months after the completion of the audit.  Philippe Poux had been hired in mid-2017 as the CFO at Theranos.  He stated that when he was hired, Theranos still had no budgeting process, no accurate case-flow forecasting, and no auditable financial statements.  Holmes attempted to raise more money, or to sell the company, but found no takers.  Poux said that it became “painfully obvious” that Theranos’ rate of spending would outstrip the available funds, particularly with the large legal expenses facing the company. 

On Sept 12, 2018, Theranos turned over ownership of its patents to Fortress.  That company took all the Theranos assets, except for $5 million for unsecured creditors, and closed down Theranos.  This marked the end of the startup that was supposed to revolutionize not only the field of blood testing, but also empower citizens to control their own health through frequent monitoring of their own blood tests.  Elizabeth Holmes and Theranos had experienced a meteoric rise followed by a spectacular fall.  It will surely spawn hundreds of articles and several books attempting to analyze what happened.  There is already a documentary, The Inventor, from HBO, directed by Adam Gibney, who also directed the documentary Enron: The Smartest Guys in the Room

And not surprisingly, there is also a movie in the works.  Adam McKay, director of The Big Short and Don’t Look Up, has purchased the rights to John Carreyrou’s book Bad Blood.  McKay has apparently signed actress Jennifer Lawrence to play Holmes. 

Figure 28: Adam McKay has purchased the rights to John Carreyrou’s book Bad Blood.  The director will make a movie about Theranos, and has hired Jennifer Lawrence (at L) to play Elizabeth Holmes (at R). 

A number of wealthy billionaires lost a considerable amount of money on Theranos.  There is considerable evidence that many of these investors overlooked what should have been major red flags.  For example, however, lawyer and investor Daniel Mosley asked Elizabeth Holmes for audited financial statements of Theranos; the company never provided them, but Mosley invested $6 million in the company anyway.  Mosley, a counselor for the rich and famous, was persuaded to invest in Theranos by Henry Kissinger, who served on the Theranos board of directors and who invested $3 million into the company.  Mosley also contacted the Walton family and the DeVos family, and recommended that they invest in Theranos. 

Like so many others, Daniel Mosley was dazzled by Elizabeth Holmes and her vision for revolutionizing health care.  In Sept. 2014, he sent an e-mail to Holmes saying “I can’t tell you how enamored I am in what you’re doing.  I could not be more impressed with what you have accomplished and what lies ahead for Theranos.”  Apparently Mr. Mosley was sufficiently impressed that he failed to exercise due diligence about the company.  Groups that were solicited by Mosley eventually invested over $400 million in the company; this turned out to be nearly half the total private capital invested in the firm.  Mosley told Henry Kissinger that “The most extensive evidence supplied regarding the reliability of the Theranos technology is a study report prepared by Pfizer based on a clinical cancer treatment trial.”  Unfortunately for Mosley, that report had been prepared by Theranos. Elizabeth Holmes had added Pfizer’s company logo to the report, and it contained claims that were not supported by Pfizer scientists. 

A major loser on Theranos was Rupert Murdoch, who lost $121 million on his investment.  In addition, the Walton family lost $150 million, Betsy DeVos and her family trust lost $100 million, and the Cox family (owners of Cox Media Group) lost $100 million.  All of those three families were urged to invest in Theranos by lawyer Daniel Mosley. In most cases, after John Carreyrou’s first Wall Street Journal article indicated that Theranos might be in big trouble, the investors accepted a Theranos offer to provide them with additional stock in the company in return for an agreement not to sue.  The major exception was Rupert Murdoch.  He sold his investment back to Theranos for $1, and he took a $121 million loss which had favorable tax implications for him. 

It is difficult to raise much sympathy for billionaires whose investments went sour, although we don’t want to justify the falsehoods perpetrated by Theranos. Like Daniel Mosley, several other investors failed to do adequate vetting before investing.  For example, Lisa Petersen, who is in charge of investments for the DeVos family, admitted that “she did not visit any of Theranos’ testing centers in Walgreens stores, call any Walgreens executives or hire any outside experts in science, regulations or legal matters to verify the start-up’s claims.” 

But in addition to the billionaire investors and major venture-capital firms, there were also smaller venture-capital firms and individuals whose lost investments in Theranos caused them serious financial hardship.  Now that Theranos has gone out of business, it seems unlikely that they will recoup anything from their investment. 

Two Whistleblowers

A few former employees of Theranos were willing to talk with John Carreyrou while he was writing his first WSJ article about that company.  After his first article was published, more people were willing to share their experiences with Theranos.  In particular, two young courageous former Theranos employees not only spoke with Carreyrou, but they also reported their experiences to federal agencies.  Furthermore, they were willing to proceed even in the face of significant harassment and threats from lawyers at Theranos, and from David Boies, who represented that company.  Here we review the experiences of these people. 

Tyler Shultz

We have discussed the case of Tyler Shultz in some detail.  At this point, we include the video of an interview with Tyler Shultz at the Markkula Center for Applied Ethics, which took place in fall 2018.  The video gives a fascinating, detailed, and intimate glimpse of the experience of a whistleblower.  Tyler Shultz was a brave soul and a person who did not back down despite considerable pressure.  As a Theranos employee, he notified Elizabeth Holmes and Sunny Balwani of the problems with their testing regime and the questionable and probably illegal activities that Theranos had undertaken.  For his efforts, he received a withering response from Balwani.  After he resigned from Theranos, he brought his misgivings to his grandfather George Shultz, who was on the company’s board of directors at that time. 

Unfortunately, George Shultz continued to side with Elizabeth Holmes rather than believe the evidence provided by his own grandson.  George attempted to persuade Tyler to sign non-disclosure statements and to recant his claims about the company.  When Tyler refused, the Theranos lawyer David Boies subjected Tyler to a series of harassing letters and threats; Elizabeth Holmes has now admitted that Boies also had Tyler and his family placed under surveillance.  When Tyler refused to sign the papers demanded by Boies, Theranos took legal action against him.  Eventually, it cost Tyler’s family $400,000 in legal fees attempting to clear his name.  Here is the video of his interview. 

Although Tyler Shultz was subjected to tremendous pressure from David Boies and Theranos, the outcome of his case was not the norm for a whistleblower.  Many whistleblowers find that after they sound the alarm, their career is ended.  They can no longer find employment in their field, and they are treated as pariahs.  In Tyler’s case, he returned to grad school and is finding success working in the field of nanotechnology.  So, despite the intense legal pressure on him and the significant financial stress endured by his family, Tyler Shultz has emerged from this experience relatively happy and fulfilled.  He has produced an audiobook called Thicker Than Water that provides a deeper picture of his experience at Theranos and thereafter. 

Erika Cheung:

Erika Cheung was a student at Berkeley who joined Theranos immediately after graduation.  We have documented her work with Tyler Shultz on immunoassay studies; they tested the reliability and precision of the Theranos machines in the lab before they were used on patients.  Like Tyler, Erika became disillusioned when the Edison machines turned out to be seriously unreliable.  She was concerned that the company cherry-picked the data they used to determine the precision of the Theranos machines.  She subsequently resigned from Theranos and in Sept. 2015, Erika filed a complaint about the company’s practices with the Centers for Medicare and Medicaid Services (CMS). 

Her complaint led to a surprise visit from CMS to Theranos.  The CMS staff found so many deficiencies that CMS determined the company’s practices posed “immediate jeopardy to patient health and safety.”  The inability of Theranos to correct their deficiencies was a significant factor in shutting down their analyses of patient blood samples. 

Like Tyler Shultz, Erika Cheung was harassed, threatened and surveilled by Theranos and David Boies.  Erika showed considerable bravery in continuing to speak out in the face of threats against her.  Ms. Cheung was one of the first witnesses called by the prosecution in the trial of Elizabeth Holmes.  Here is a TEDX talk by Erika Cheung, where she reviews her experience in working for Theranos and afterwards. 

Following her Theranos experience, Ms. Cheung was a founding team member of a startup accelerator called Betatron, that assisted young entrepreneurs in Hong Kong and Asia.  She has now launched a non-profit organization called Ethics in Entrepreneurship.  It is aimed at developing an ethical culture in startup systems. 

While Elizabeth Holmes exemplifies the very worst in terms of honesty and integrity in young entrepreneurs, by contrast Tyler Shultz and Erika Cheung are refreshing examples of idealistic and honest young scientists.  They are fortunate that they are able to continue their work in the field of public-health technology; and we are lucky that their voices were not silenced in this affair.   

The Trial of Elizabeth Holmes

On June 14, 2018, the US Dept of Justice (DOJ) filed criminal lawsuits against Elizabeth Holmes and Sunny Balwani.  Details of the indictment can be found here. The lawsuit alleged that each defendant had committed conspiracy to commit wire fraud against investors, and a second count alleging conspiracy to commit wire fraud against doctors and patients.  The lawsuit also charged each defendant on six counts of wire fraud against investors, and three counts of wire fraud against doctors and patients.   Elizabeth Holmes stepped down as CEO of Theranos minutes before the DOJ indictment was released. 

The conspiracy to commit wire fraud was based on the claim that Holmes and Balwani had developed a scheme to defraud investors, and a related scheme to defraud doctors and patients.  These are issues that we have reviewed in this post.  The wire fraud was based on the fact that funds were provided to Theranos using interstate wire transfers.  In addition to these two conspiracy charges, there were six counts of wire fraud against investors.  This involved five different investors who wired money to Theranos (one investor wired money from two different banks).  The three charges of wire fraud against doctors and patients included two patients who had obtained blood tests from Walgreens centers, and a case where Walgreens had wired funds to Theranos as part of the collaborative agreement between the two companies. 

In Feb. 2020, a judge ruled that since the blood tests for patients were paid for by medical insurance, the plaintiffs could not claim that the patients were deprived of any money or property, and hence they could not sustain charges of fraud against doctors and patients.  This weakened the government’s case on those charges.  However, the judge allowed the wire fraud claims to proceed to trial. 

In Sept. 2020, it appeared that Ms. Holmes was planning to mount a “mental disease” defense.  The judge ruled that federal prosecutors could examine Ms. Holmes if she intended to claim mental disease.  Ms. Holmes’ trial, which was originally scheduled to begin in June 2020, was delayed until June 2021 due to the coronavirus pandemic.  In March 2021, Holmes’ trial was further delayed when it was disclosed that she was pregnant.  She delivered a baby in July 2021 and her trial began in August 2021.

Figure 29: Elizabeth Holmes arriving at U.S. district court for her trial in August 2021.  Note that she has traded in her trademark “Steve Jobs” look of black turtleneck and pants for an ensemble that more resembles a “young nursing mother.”

At the beginning of the trial, Judge Edward Davila refused to grant a defense request that results of Theranos blood tests, including tests conducted by the Centers for Medicare and Medicaid Services, be suppressed.  The defense argued that the data could not prove that the Theranos Edison and miniLab devices were less reliable than those from conventional blood-analysis machines.  The reason they cited was that results from Theranos devices were initially in the Laboratory Information System (LIS), but are currently missing.  The defense request was possibly an example of extreme chutzpah, as the Dept. of Justice has accused Theranos of destroying that data.  Theranos, on the other hand, blames the U.S. government for the loss of that data.  In any case, Judge Davila ruled that the LIS data was not required to prove the quality (or lack thereof) of the Theranos results.  

The trial lasted for three months and heard testimony from 32 witnesses.  A number of key witnesses for the prosecution testified that Theranos had lied about the reliability of their blood tests.  The company also concealed the fact that they were not using their own machines for blood analysis work, but instead were conducting tests on commercial blood-analysis machines that they had purchased. 

For example, Adam Rosendorff testified that he joined Theranos in April 2013, when he believed that Theranos “was going to be the next Apple.”  He was lab director in the period immediately preceding the Theranos launch with Walgreens.  However, he became disillusioned and resigned in Nov. 2014.  “I felt pressure to vouch for tests that I did not have confidence in,” he testified at the trial.  “I came to believe that the company believed more about PR and fundraising than patient care.”  After he left Theranos he consulted a lawyer about his concerns regarding the company’s unethical and dishonest practices.  “Even months after I left the company, I felt obligated from a moral and ethical perspective to alert the public.”  When Rosendorff was contacted by reporter John Carreyrou, he became the journalist’s first deep background source. 

Defense lawyers for Ms. Holmes suggested that Elizabeth Holmes was not qualified for technical positions such as a lab director, and they advanced the theory that her job was not to direct the actions of the lab technicians but simply to oversee general operations of Theranos.  But Rosendorff said that some e-mails that discussed problems with the reliability of the Theranos blood-analysis machines had been sent to Balwani and Holmes, but not him.  He testified that he was disturbed at the Theranos practice of deleting certain test results in an attempt to make their machines look more reliable, and he was very concerned at the high failure rates of the Theranos machines. 

At the trial, prosecutors focused on the Theranos practice of misleading potential investors.  In demos to investor groups, the Theranos machines were programmed to make noises when they were not actually taking data.  When the machines failed, an app was installed that made it appear that the machine was still processing a sample, but very slowly.  In some cases, investors were led to believe that the Theranos machine had analyzed their blood sample, when in fact the sample had been processed on a commercial machine.  Testimony revealed that Holmes and scientist Daniel Young had the final say regarding the demos to investors; and Ms. Holmes did the final review of investor presentations.  Defense lawyers focused on a few instances where Ms. Holmes had insisted on changes that removed false or misleading statements on the company’s Website. 

An unusual feature of this trial was the defense’s decision to put Ms. Holmes on the stand.  She gave very emotional testimony.  She claimed that as an undergraduate at Stanford, she was raped.  In her testimony, this became a defining moment in her determination to create a company to revolutionize the health care industry.  She also claimed that she met Sunny Balwani when she was 18 years old, and on a Stanford intensive Mandarin study course in Beijing.  Balwani was very helpful in consoling her during this period and apparently this led to a several-year affair with Sunny, who was 19 years older than Elizabeth. 

Apparently, her affair with Balwani began in 2003.  In 2005, Holmes moved in with Balwani and in 2009, Balwani joined Theranos as president and chief operating officer of that company.  Holmes alleged that Balwani controlled many aspects of her life, including the way she dressed and acted, and that he was also abusive to her.  In a statement, Balwani categorically denied Holmes’ allegations.  The only corroborating evidence offered by Holmes was some e-mails she sent to herself regarding some aspects of their relationship.  Under questioning by prosecutors, Holmes testified that Balwani had not forced her to make false statements to investors, business partners and company directors

Figure 30: Screen shot of news about the trial of Elizabeth Holmes.  Ms. Holmes admitted that she personally added pharmaceutical company logos to Theranos lab reports that were sent to investors. The presence of the logos led investors to believe that Theranos devices were endorsed by these companies, which was not the case. Ms. Holmes ciaimed that adding the logos “was not meant to deceive.”

Holmes also admitted that she had added pharmaceutical company logos to the company’s lab reports.  This was a crucial admission, since investors in Theranos had testified that the presence of the logos led them to believe that the Theranos devices were endorsed by those major companies.  This apparently played a significant role in the decision by venture capital companies and individuals to invest in Theranos. Holmes argued that the logos were added to the Theranos lab reports because the company was in discussion with those companies over potential collaborations.  She insisted that adding the logos “was not meant to deceive.” 

Here is ABC News review of Elizabeth Holmes’ personal testimony in her trial (since TV cameras were not allowed in the courtroom, there is no direct video of Holmes’ testimony). 

In Dec. 2021, after 3 months of testimony from 32 witnesses, the jury began deliberating.  They deliberated for 50 hours before returning their verdicts.  Elizabeth Holmes was convicted on conspiracy to commit wire fraud to investors, and on three of the charges of wire fraud against investors.  She was found innocent of conspiracy against doctors and patients, and innocent on two charges of fraud against patients and doctors.  One count of wire fraud against a patient was dismissed.  The jury remained deadlocked on three cases against wire fraud against investors. 

Elizabeth Holmes is set to be sentenced on Sept. 26.  She faces jail time of up to 20 years and $500,000 fine for each of the four felony counts on which she was convicted.  The significant delay between the verdict and the sentencing was to allow the trial of Sunny Balwani to proceed before Ms. Holmes is sentenced.  The DOJ has announced that they are dropping the three charges on which the jury deadlocked.  Ms. Holmes is expected to appeal the verdict.  Update Nov. 22, 2022: On Nov. 18, Elizabeth Holmes was sentenced by Judge Edward Davila of the U.S. District Court for the Northern District of California. She was sentenced to a term of 135 months in federal prison, followed by three years of supervised release. In addition, the parties were scheduled to meet to determine the amount of financial restitution that Holmes would owe.

Prosecutors had argued for a 15-year sentence for Ms. Holmes. They claimed that a significant sentence was necessary to “deter future start-up schemes” and “rebuild the trust investors must have when funding innovators.” A probation officer assigned to the case had recommended a nine year sentence, so Judge Davila exceeded the recommendation of that officer. The judge claimed that in this case, the fraud perpetrated by Holmes and Sunny Balwani was different from that of a “normal” start-up where investors knowingly take on significant financial risk. Judge Davila reflected on what had led Ms. Holmes to commit fraud. He asked, “Was there a loss of moral compass here? Was it hubris? Was it intoxication with the fame that comes with being a young entrepreneur?” We will probably never know the answer to those questions. We hope that the sentencing of Elizabeth Holmes will mark a sea change in the way our government deals with white-collar crime. We are convinced that even short prison sentences for fraud or other corporate criminal behavior could change the way that corporations operate. For now, we are left with the uncomfortable fact that a female entrepreneur has received a stiff prison sentence, while the Sackler family that controlled Purdue Pharma is walking away from the opioid epidemic without serving a day in jail, and with much of their ill-gotten riches.

Finally, here is a succinct summary of Elizabeth Holmes and the Theranos saga.  It is called Theranos: Silicon Valley’s Greatest Disaster.  Produced by ColdFusion, it gives a clear and accurate review of the history of Elizabeth Holmes and Theranos. 

Summary and Conclusions:

The spectacular rise and stunning fall of Theranos is an object lesson on the opportunities and pitfalls of entrepreneurial activity in Silicon Valley.  At present there are hundreds of articles being written about Elizabeth Holmes and her blood-analysis company.  In this summary, we will try to identify some of the issues that were highlighted by the history of this company.  And we will discuss some possible changes that might help to prevent future disasters such as Theranos. 

The Next Steve Jobs:

Elizabeth Holmes has a lot in common with the Intelligent Design pseudoscientists addressed by Judge William Overton in his ruling against the teaching of “creation science” as science in Arkansas public schools. Overton said: “While anybody is free to approach a scientific inquiry in any fashion they choose, they cannot properly describe the methodology as scientific, if they start with the conclusion and refuse to change it regardless of the evidence developed during the course of the investigation.” Holmes had decided from the start on her conclusion of what Theranos’ blood analysis device would look and perform like, and she refused to alter her “vision” despite much evidence opposing it. She rejected both the evidence and the employees or board members questioning her about it.

Stanford University has a well-deserved reputation for incubating Silicon Valley entrepreneurs. But in this case, Channing Robertson failed to properly mentor Elizabeth Holmes. When Stanford experts in the life sciences told Holmes her vision was not realizable, she would have been well advised to take some time to produce a research paper before being encouraged to go off and launch her own business. Her homework assignment in that research paper should have been to study the literature on the various types of blood assays, their efficiencies in detecting the levels they were designed to measure, and the minimum amount of blood each would require to attain industry-competitive accuracy. As it is, she had charisma and a vision, but little technical knowledge and a flawed moral compass.  To make matters worse, Channing Robertson signed on as an advisor at Theranos, a position where his expertise in chemical engineering and his familiarity with high-tech business should have made him a valuable asset.  It is shocking that Robertson appeared to have no first-hand knowledge of the details of the Theranos blood-analysis machines. 

Elizabeth Holmes’ insecurities about her lack of technical expertise are reflected in her choice to assemble a Board of Directors lacking even a single person with expertise and experience in blood analysis or more general aspects of biotechnology. She compounded this problem by invoking security concerns to prohibit Theranos employees in different divisions from interacting with each other. By this approach, she not only hindered technical progress, but furthermore, only she and Balwani retained oversight of all technical aspects, and neither of them seem to have really understood the technology. They both dug themselves deeper and deeper holes by grossly overpromising what the technology could deliver, and then faking the evidence to hide their incompetence.

The success Theranos had in attracting venture capital and senior advisors to the Board of Directors seems to have been based on a cult of personality. Holmes talked a good game and apparently mesmerized a fair number of worldly men who had spent decades understanding and exploiting the weaknesses and lies of geopolitical or courtroom adversaries. But their cult-like worship of Elizabeth Holmes is reflected not only in the awed language they used to describe her, but in George Shultz’ case, in unconditionally believing her rather than his own grandson with insider knowledge of the company’s shoddy and illegal practices. Fortunately, a few whistle-blowers with technical knowledge and/or a well-developed sense of ethics did not succumb to the cult of Elizabeth Holmes’ personality.

Theranos and Venture Capital

Venture capitalists attempt to identify the most promising ideas for new companies; they then invest heavily in them, and monitor their progress.  It is the expectation of venture capital that most of the projects that they bankroll will fail.  In the case of Theranos, the company was unable to surmount the technical challenges in miniaturizing the process of blood testing.  Despite their failures in this regard, Theranos continued to attract venture capital, even when it was running tests on commercial blood-analysis systems, rather than on the Edison and miniLab machines that it developed.  Eventually, Theranos attracted nearly $900 million in venture capital, before the reporting by Wall Street Journal writer John Carreyrou highlighted the difficulties Theranos was experiencing, and also their unethical practices. 

How can investors avoid falling into the same difficulty with unethical startups?  One shocking fact about Theranos is that, despite being valued at $9 billion before it collapsed, the company never had an independent financial audit.  Such an audit, if carried out by a responsible firm, would have immediately brought attention to the company’s shoddy record-keeping.  An audit would also have revealed that the company’s revenue stream was orders of magnitude smaller than its rosy projections. 

Private companies are not always required to undergo independent audits.  However, in the case of Theranos, it would have been prudent to insist on an audit before venture capital companies invested in the firm.  We have noted that an early member of the Theranos board of directors, Avie Tevanian, became suspicious when Elizabeth Holmes repeatedly announced collaborations with major pharmaceutical companies, but these announcements were never followed by revenue from those ventures.  Furthermore, Elizabeth never supplied him with copies of the contracts for those collaborations, despite several requests from Tevanian.  But when he brought these discrepancies to Donald L. Lucas, the chairman of the Theranos board of directors, Tevanian was asked to resign from the board. 

When lawyer Daniel Mosley was advising his client, Henry Kissinger, on investing in Theranos, he asked to see the results of an independent audit of the company.  Despite the fact that he was never provided with results of an audit, nevertheless he convinced Kissinger to invest $3 million in the company; and Mosley himself invested $6 million.  Then, Mosley recommended to several billionaires that they invest in Theranos.  His efforts brought the company nearly $400 million in new investments from families such as the Waltons of Walmart, the DeVos family of Amway, and the Cox family (Cox communications).  In retrospect, the heads of these family foundations also failed to carry out due diligence before each of them invested at least $100 million in Theranos; they relied on Daniel Mosley’s assurances, and Mosley relied on Elizabeth Holmes.  

Corporate Governance:

One of the features that vaulted Theranos into media fame was the makeup of its board of directors.  People were dazzled by the star-studded group that Elizabeth Holmes had recruited to sit on the Theranos board, of which she was the director.  As we have mentioned, that list included: former US secretary of state George Shultz and Henry Kissinger; former secretary of defense William Perry and James Mattis, who would later become secretary of defense; former US senators Sam Nunn and William Frist; Richard Kovacevich, former CEO of Wells Fargo; William Foege, former director of the Centers for Disease Control; and Henry Bechtel, chairman of the board of Bechtel Group.  This was indeed a board of directors with great, perhaps unrivalled star power.  It gave Theranos the illusion that it was being run by people with great experience and reliability. 

It turns out, however, that the board members did not see themselves as dispassionately overseeing the company.  Ken Auletta, who wrote a profile of Elizabeth Holmes in the New Yorker, stated that the board members he interviewed “Were talking about her as if she were Beethoven, as if she was this rare creature that maybe one in a century or two in a century come along who can really change the world.”   It is impressive that the board members bought into Holmes’ vision of her company; however, it also meant that they saw their role on the board as simply interacting with this brilliant visionary.  Roger Parloff, whose laudatory cover story for Fortune about Elizabeth Holmes and Theranos made the company famous, was most impressed when he interviewed Henry Kissinger.  Parloff believed that Kissinger’s presence on the board gave legitimacy to Elizabeth Holmes’ claims.  “Kissinger, he’s met a lot of world leaders, I thought he might be a judge,” said Parloff.  Both Parloff and Kissinger were sadly mistaken (after John Carreyrou’s expose in WSJ, Parloff wrote a second article that explained how he had been misled). 

These board members did not treat Elizabeth Holmes’ visions of revolutionizing the health-care industry with a skeptical eye; similarly, they seem to have accepted without scrutiny Sunny Balwani’s revenue projections, which went beyond optimistic to completely fraudulent.  In short, this “all-star” board of directors apparently did nothing to actually oversee the company.  In retrospect, a company’s board of directors should be prepared to rigorously vet the company’s claims and to insist on verifying its finances.  We have mentioned Avie Tevanian, who joined the board at an earlier time.  He soon realized that Elizabeth Holmes was claiming collaborations with Big Pharma companies that never materialized; and he also found that the company’s revenues did not seem to match their phenomenal forecasts. 

The Theranos board members failed miserably in their duties.  A company should have a board whose expertise matches the company’s focus.  On this Theranos board, only William Foege had expertise that would match the Theranos blood-analysis work.  Furthermore, whenever Elizabeth Holmes was asked direct questions about the Theranos technology, she would insist that it was top secret and that people would simply have to trust her assertions about the company’s blood analyzers. 

In the future, a company’s board of directors should take seriously their responsibility to ensure that the company is being honest with its claims and its finances.  One would hope that the Theranos disaster would make investors more aware of the importance of sound oversight from a competent board. 

Government Agencies:

When Theranos began to analyze blood samples from patients, their blood-analysis devices should have been tested and cleared by a government agency.  The Food and Drug Administration regulated diagnostic equipment that companies purchased and used in their laboratories.  The Centers for Medicare and Medicaid Services (CMS) had oversight for clinical laboratories, under the Clinical Laboratory Improvement Amendments (CLIA) of 1988.  Knowing that their blood-analysis machines were unreliable and not reproducible, top administrators at Theranos went to considerable lengths to avoid oversight by the federal agencies. 

One of the first big ventures for Theranos was a proposal that the U.S. Army would use Theranos blood-analysis machines for soldiers in the field.  Elizabeth Holmes pitched her vision to General James Mattis, who thought it was a terrific idea and wanted it implemented ASAP.  The Army delegated Lt. Colonel David Shoemaker to work on implementing this venture.  Elizabeth Holmes told Dr. Shoemaker that the Theranos machines did not need FDA approval.  Her argument was that the machines were only going to take data and wire it to Theranos headquarters, where the blood would be analyzed.  Thus, the Theranos devices were acting much like a fax machine, and therefore FDA approval was unnecessary.  Shoemaker, who had a Ph.D. in microbiology and had worked at the FDA, knew better.  He informed Holmes that the project could not proceed without FDA approval.  Eventually, Theranos never sent their machines to Afghanistan, so the issue became moot.  However, Holmes continued to claim that Theranos machines were in the field in Afghanistan. 

Later, when engaged in a collaboration to install Theranos machines in Walgreens pharmacies, Elizabeth Holmes initially claimed that their blood tests would be “waived” under the CLIA rules.  This was the case for simple measuring devices that people could use in their homes.  But later on, Theranos decided that Walgreens patients could have their blood drawn in the pharmacy, but the samples would then be couriered to the Theranos labs where it would be analyzed.  At this point, Theranos claimed that their tests were “laboratory-developed” tests.  This was a clever change in strategy.  As it happened, neither the FDA nor CMS regulated tests that companies had developed in their own labs.  This meant that, at least initially, neither of these agencies would require Theranos to obtain approval before they began testing. 

Once Theranos was analyzing blood taken from patients, the company had to comply with government “proficiency tests” to insure that their machines were accurate and reliable.  An accrediting agency would send samples to the company, which would run them through their machines and report the results.  The results were checked with the known analytes in the samples. However, Theranos cheated on the proficiency tests.  The CLIA rules specified that the samples had to be analyzed “in the same manner” as patient specimens “using the laboratory’s routine methods.”  Theranos was using commercial analyzers for some tests, and their own Edison machines for others.  However, they never sent the results from their Edisons to the agencies, only the results from commercial analyzers. 

When Tyler Shultz observed that Theranos was not sending proficiency-testing data from their own Edisons, he suspected that this represented unethical and possibly illegal activity from the company – and he was correct.  Eventually, his anonymous complaint to New York State’s Laboratory Investigative Unit, and Erika Cheung’s complaint to CMS, triggered on-site inspections that hastened the process of Theranos’ demise. 

Absent a tip from an insider, it is uncertain how long Theranos would have been able to get away with cheating on the proficiency tests.  Eventually, it would have become clear that Theranos patients were getting incorrect results on their blood samples.  But it seems that the government must close the “loophole” with regard to “laboratory-developed tests.”  Either the FDA or the CMS must scrutinize and approve such tests before they can be used on patients. 

Corporate Lawyers:

Theranos was represented by super-lawyer David Boies; and a former partner at his law firm Boies Schiller Flexner, Heather King, became the legal counsel for Theranos.  In our article, we have discussed some of David Boies’ practices.  We can identify three issues that should be of concern to the legal profession. 

First, David Boies was representing Theranos as a lawyer; and from 2016 he was also a member of the Theranos board of directors.  This placed Boies in a potential conflict of interest, between his work representing the company and his duties as a board member.  In addition, a substantial part of Boies’ compensation from Theranos was in the form of company stock.  Again, this practice could place Boies in a conflict of interest. The legal profession should have clear rules that prohibit such conflict of interest situations. 

A second issue with Boies arose not with Theranos, but with his work as a lawyer defending Harvey Weinstein from accusations of sexual harassment.  Lawyers representing male clients accused of sexual harassment end up in an ethical gray area.  Their efforts are devoted to inducing the women accusing these men to accept payments to drop lawsuits against their client, and to sign non-disclosure agreements that will prohibit them from speaking about the abuse they received.  If that is not successful, then the lawyers attempt to gather compromising material to hold against the accusers.  David Boies hired an Israeli security firm, Black Cube, to dig up material against Weinstein’s accusers. 

But Black Cube did more than that: they also looked for compromising material against reporters who might be writing stories about Harvey Weinstein’s history of sexual harassment.  This latter activity seems to be completely reprehensible: it is a direct attack on our tradition of a free press.  David Boies defends his actions by saying that he does what is necessary to defend his clients. He further claims that when he eventually read stories about Harvey Weinstein by Ronan Farrow and others, he was shocked to discover how many women were harassed by Weinstein.  Surely, as Weinstein’s lawyer, David Boies should know how many women would have accused him of sexual harassment? 

With respect to Theranos, Boies was actively pursuing and threatening former employees who were talking to journalists about the company.  Since Theranos required all their employees to sign strict non-disclosure agreements, people talking with journalists were violating those agreements.  However, in the case of Theranos, the former employees were not “revealing company secrets,” instead they were acting as whistleblowers.  They had first-hand knowledge of unethical and probably illegal practices at the company, and they felt a moral obligation to alert the public and federal regulators of these practices. 

David Boies justifies his threats and legal action against people like Tyler Shultz by claiming that he was simply representing his client.  However, it turns out that Theranos was indeed lying about its methods and placing the public at risk by using unreliable methods for analysis of blood from patients.  Tyler Shultz’s family had to pay $400,000 in legal fees to contest the actions instigated by Boies and Heather King.  Another Theranos employee, biochemist Ian Gibbons, was so conflicted by his work with the company and its questionable practices that he committed suicide on the day he was scheduled to give a deposition in a suit filed against the company.  One would hope that whistleblowers like these Theranos employees would receive more protection from harassment by their former employer. 

In conclusion, Silicon Valley was too eager to discover “the next Steve Jobs.”  Before someone is declared a genius, they should actually have to produce something of lasting value.  Elizabeth Holmes and Theranos produced only a sketchy idea, surrounded by a massive fraud. 

Follow-up: the Conviction of Sunny Balwani

On Thursday July 7, 2022, Ramesh “Sunny” Balwani was convicted of twelve counts of fraud, for his actions as President and Chief Operating Officer for the failed blood-testing startup Theranos.  As we have detailed earlier in this post, the company claimed to have a revolutionary method for performing more than 200 blood tests using just a few drops of blood.  Theranos raised hundreds of millions of dollars from venture capitalists based on their claims of success in this field. 

Theranos made what seemed to be great strides in licensing their blood-analysis techniques.  They signed a lucrative deal with Walgreens, who planned to install Theranos blood-analysis machines in Walgreens pharmacies across the country.  In addition, they reached an agreement with Safeway supermarkets to perform their blood analyses in Safeway stores.  Theranos had set up test programs in a few Walgreens in Arizona and California, and also promised to set up blood-work stations in Safeway stores. 

However, Theranos was hiding a dirty secret from their investors, their advisory board, the Food and Drug Administration, the administrators at Walgreens and Safeway, and the public – their revolutionary “one drop of blood” technology didn’t work.  First, as many as half of the 200 different tests that Theranos claimed to perform did not use a finger-stick of blood for analysis.  Second, in order to perform scores of different tests on a few drops of blood required that the blood sample be diluted with water, in order to provide sufficiently large samples of liquid to be assayed.  But very large dilutions of the sample increased the uncertainty in the result. 

At Walgreens stores, Theranos dealt with these problems by taking two samples of blood – one using their patented “Edison” machines that took a few drops of blood, but an additional sample was taken from the patient’s veins in a traditional manner.  Also, when their own machines proved unable to perform some precision blood tests, Theranos instead analyzed the samples using blood-analysis machines from different companies.  They did not reveal to outsiders, including their own advisory board and FDA officials, that they were using other machines to perform blood analyses. 

Furthermore, Theranos grossly overestimated their finances, something that Sunny Balwani would have overseen in his role as Chief Operating Officer and President of Theranos.  For example, in 2014 Balwani predicted that Theranos would accrue profit of $165 million on revenues of $261 million.  In fact, Theranos’ 2014 gross revenues were closer to $100,000 than $261 million!  So Balwani was clearly culpable for shockingly false claims about Theranos’ financial state. 

However, as Balwani declined to testify in his own trial, his lawyers tried to portray him as a true believer in the Theranos hype, to assert that he had essentially no knowledge of the technical details of the Theranos technology, and claimed that Elizabeth Holmes was in charge of all matters related to the Theranos science.  As evidence that Balwani believed in Theranos, his lawyers pointed out that Balwani had held onto his stock in the company, and had not “dumped” his holdings when Theranos’ claims and operating methods were questioned. 

As we have detailed in this post, the Theranos schemes unraveled when Wall Street Journal reporter John Carreyrou published a series of exposes about Theranos, beginning in 2015.  The company initially fought back against Carreyrou’s accusations; however, Carreyrou had amassed damaging evidence from current and former employees at Theranos.  This led to an FDA investigation confirming that Theranos had falsely claimed to have performed all blood analyses using their own machines.  The FDA further established that Theranos machines were unable to perform precise blood analyses.  As a result, both Walgreens and Safeway cancelled their contracts with the company. 

In 2018, Theranos declared bankruptcy.  The government then indicted Theranos chief executive Elizabeth Holmes and COO Ramesh “Sunny” Balwani on several counts of fraud.  Yet another dirty secret of Theranos was that Balwani and Holmes were in a romantic relationship, a fact that was evident to Theranos employees but was kept secret from investors, their advisory board and the general public. 

The trials of Holmes and Balwani were separated when it became clear that Holmes might use the defense that she had been under Balwani’s control, and therefore was not responsible for her actions.  Holmes was tried first, and in January 2022 she was convicted of four counts of fraud and acquitted of four counts of fraud.  Three other charges against Holmes were dismissed when the jury was unable to reach a verdict.  The sentencing of Ms. Holmes was paused until the end of Mr. Balwani’s trial. 

Sunny Balwani’s defense was that he was merely in charge of finances at Theranos.  His lawyers claimed that Sunny had little or no first-hand knowledge that the company was engaged in fraudulent behavior.  They asserted that all decisions regarding the technical aspects of Theranos’ blood analysis work had been made by Elizabeth Holmes.  However, the government produced 24 witnesses who testified that Sunny Balwani was making decisions regarding all aspects of the company, and they produced e-mails showing Balwani’s involvement in dishonest claims made about Theranos ability to perform revolutionary blood analyses.   Adam Rosendorff, a former lab director at Theranos, testified that Balwani “controlled which employees had access to the lab, managed the laboratory resources, and hired and fired lab employees.  He was much more involved in the operations of the lab than Ms. Holmes, Dr. Rosendorff said.”

After the trial, the jurors deliberated for 32 hours before returning their verdict.  Balwani was guilty of 10 counts of fraud, and in addition of two counts of conspiracy to commit fraud.  This verdict seemed a bit harsh.  Elizabeth Holmes was convicted of three counts of defrauding Theranos investors and one charge of conspiracy to commit fraud.  However, she was acquitted of charges that she had defrauded patients of Theranos; and the jury was unable to reach a verdict on the charges of conspiracy to commit fraud against patients.  Surely, it would have made more sense for Holmes to be found guilty of defrauding Theranos patients, rather than Balwani.   

We can think of a few reasons why Balwani might be treated more harshly than Holmes.  First, Ms. Holmes was 19 years younger than Balwani, and she was a charismatic leader at Theranos.  In fact, many articles about her called her the “next Steve Jobs.”  It may be that Ms. Holmes’ testimony in her own defense allowed her to be viewed as a brilliant but naïve entrepreneur.  Furthermore, she may have gained some sympathy by playing up her role as a new mother during her trial.  Another reason for the Balwani verdict is that the prior trial of Elizabeth Holmes allowed the prosecutors to hone their tactics and use of witnesses to prove that Balwani was deeply involved in all aspects of Theranos, and that he played a leading role in the deception by his company towards investors and patients.  Finally, while Elizabeth Holmes cultivated a reputation as a brilliant, mesmerizing leader, Sunny Balwani appeared to be bullying and arrogant.  Many Theranos employees were put off by his boorish behavior; this may be a reason why he did not testify in his own trial. 

Elizabeth Holmes will be sentenced in September of 2022, while Sunny Balwani is scheduled to be sentenced in November.  Both of them face up to 20 years in prison.  This is one of the first cases where the leaders of a major disruptive company have faced criminal charges for their actions.  What are we to make of this?  On the one hand, when Theranos rolled out their blood analysis efforts at Walgreens stores, they were clearly putting patients at risk.  Some of the analyses released by Theranos were completely wrong – they were obtaining results that were clearly contradicted by re-testing from conventional blood-analysis machines.  In addition, Theranos was committing fraud when it claimed that the analyses were being carried out on their own machines, when they were secretly running the blood samples through commercial products.  So, the accusations of fraud seem to be well founded. 

The financial claims made by Theranos were clearly outrageous (the difference between a projection of $165 million in 2014 profits, as compared with the reality of about $100,000, appears to be an open and shut case of investor fraud).  However, people who defended Theranos with respect to investor fraud argued that outrageously high projections were an integral part of Silicon Valley culture.  They point to the mantra “Fake it until you make it,” with the implication that if Theranos had eventually made good on its hype, the earlier totally false projections would simply be par for the course.  It is also the case that many apparently “golden” startups have involved completely dishonest claims about their success, e.g., WeWork.  It is also possible that Holmes, Balwani or both may succeed in having their convictions overturned on appeal. 

In the Theranos case, it appears that two of the chief executives of this corporation will go to jail for their role in perpetrating a fraud.  Jail sentences for white-collar criminals may send an effective message to financiers and lawyers.  Other executives who contemplate fraud may think twice about breaking the law, if they see their peers serving jail time.  As an example, consider the 2015 case where Volkswagen installed software that would detect when the car’s emissions were being tested.  The so-called “defeat device” would lower the car’s emissions so that VW could (falsely) claim that their diesel engines had low emissions.  Such an operation was not carried out by a single person, acting recklessly. The deception was carefully planned and involved engineers, executives and lawyers for the company.  If these people knew that by taking part in this immoral campaign, they might spend some time in jail, this might prove a powerful incentive for them to refuse to take part in such an operation. 

While Theranos was indeed putting their patients at risk, the damage they did pales when compared to the Sackler family’s actions with respect to Purdue Pharma and OxyContin.  One can make a good case that Purdue Pharma jump-started a national opiate crisis that to date has taken half a million lives. 

One difference between Elizabeth Holmes and the Sackler family is that Elizabeth Holmes was lauded as the “golden child” who sparked a revolution in the blood analysis industry.  By contrast, the Sackler family worked hard to keep their names, and the fact that they ran Purdue Pharma, out of the press.  Over a period of about 15 years, the Sacklers withdrew enormous sums from Purdue Pharma, and moved much of that money offshore.  When Purdue Pharma filed for bankruptcy, the family had withdrawn over $30 billion from the firm, leaving it with assets of only $1 billion.  Furthermore, a bankruptcy judge allowed the family to be immunized against financial liability, even though the family members themselves had not declared bankruptcy (see our blog post on OxyContin and the Sackler family). 

One is left with mixed feelings about the prosecution of Elizabeth Holmes and Sunny Balwani.  On the one hand, it is refreshing to see some white-collar criminals being held responsible for their fraudulent activities.  On the other hand, it is frustrating to see even more egregious behavior with respect to the Sackler family go unpunished.  Although settlements regarding the dishonest distribution of opiates will result in billions of dollars being returned to state and federal coffers, it is nevertheless galling to see the Sackler family walk away with billions of dollars, their reward for contributing to the opiate addiction of hundreds of thousands of Americans.   

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