Due to the state of my internet connection (barely functioning), I’ll have to be terse and limit myself to a few high level comments about the pathetic punishment meted out to Theranos founder Elizabeth Holmes. This case proves that the Trump SEC is setting new lows by giving get out of jail nearly free cards to fraudsters.
Holmes settled with the SEC, paying a puny $500,000 when she raised and torched $700 million of investor funds. She also surrendered 18.9 million shares and give up control of the company by converting her Class B shares, which give her voting control, to Class A shares. She is also barred from serving as the director or officer of a public company for 10 years. That bizarrely means she remains as CEO of Theranos. She did not admit or deny guilt.
The Department of Justice is dutifully reported by the press to be looking at a case against her. If you believe that, I have a bridge to sell you. The SEC refers cases to the Department of Justice when it thinks they merit criminal charges and the two agencies work together. It is possible that the Department of Justice could pursue FDA-related charges against Holmes, but the securities law claims were a slam dunk, and the Department of Justice is highly unlikely to pursue a case on its own, particular since it is plenty busy with things like suing California over passing legislation that defies its crackdown on sanctuary cities.
We’ve embedded the filing at the end of the post for your entertainment.
As bad as the overall picture is, some of the items in the SEC filing are eyepopping. Holmes told investors she expected to have over $100 million in revenues in 2014 when she had only $100,000. She told investors that her largely vaporware blood tests didn’t need FDA approval when they did (and why did no reporter bother to check that claim out?). She presented prospective investors with a binder of endorsements with pharma company logos. But only one was real. The rest were made up by Theranos and the put the logos on the page. Holmes also claimed that Theranos was making its own equipment. That should have elicited a lot more study from investors and the press, since that would require engineering expertise that was notably absent on the Theranos team, seeing the facilities where the equipment was being made should have been part of the usual investor dog and pony show and apparently wasn’t.
It was disturbing to see so much of the press reports lead with the SEC’s line that the SEC had charged Holmes with “massive fraud” yet for the most part treat the punishment with “just the facts, ma’am” deference, as opposed to seeking expert comment on its suitability. In the Twitterverse, many pointed out that pharma bro Martin Skrelli was just sentenced to seven years in prison, and that even though he had engaged in brazen fraud, he had arguably not lost investors any money in the end. But he was so smug and full of himself that that alone guaranteed he’d get a harsh sentence.
The more relevant comparable is Rajat Gupta, the former managing director of McKinsey who after his retirement was the blue-chippiest of board members, sitting on the Goldman Sachs and Gates Foundation boards, among others. Using Gupta as a benchmark acknowledges the sorry fact that the connected, particularly the very well connected, get better treatment than small fry.
Recall that Gupta had the misfortune to engage in the one abuse the SEC regards itself as well suited to pursue, insider trading, and where it likes to take big scalps to make up for its failure to do much else on the enforcement front. Prosecutors alleged that the recipient of Gupta’s tips, Raj Rajaratnam of Galleon Group, made profits of or avoided losses of $11.2 million. Gupta’s lawyers argued that he received no economic benefit from Rajaratnam.
Gupta was indicted and found guilty of three counts of securities fraud and one of conspiracy. He was fined $5 million and sentenced to 2 years in prison. He served 1 1/2 years in a penitentiary and six months of house arrest.
While there has been some discussion of the failure of both investors and reporters, it’s light compared to what would seem to be in order. Holmes managed to execute the most rarified form of affinity fraud: she managed to network among the very top stratum of the elites. CNN gives a sketch of how Holmes drew on family connections to get Tim Draper of Draper Fisher Jurvetson as an early investor. Other suckers included Larry Ellison, Betsy DeVos and Rupert Murdoch. Her board members included Henry Kissinger and George Schultz, former Secretary of Defense William Perry, as well as Bill Frist, Sam Nunn, and Jim Mattis. Note that the closest parallel was Bernie Madoff, which was to a significant degree a Jewish affinity scam, with victims ranging from charities and not-for-profits like Technion-Israel Institute of Technology and Congregation Kehilath Jeshurun to people who should have known better like former Salomon Brothers chief economist Henry Kaufman, Bed Bath & Beyond co-founder Leonard Feinstein, and the Wilpon family (major NYC real estate developers and owners of the Mets).
Having very famous and powerful backers outside the world of venture capital meant Holmes meant obvious red flags were ignored. Holmes was a college dropout. Unlike computers, breakthroughs in life sciences come from scientists who have not just the educational chops but serious experience under their belts. And there was no one on her team with that sort of experience.
Not a single major life sciences VC invested in Holmes. She refused to share her science with them. Only wannabes backed her.
And when the Wall Street Journal embarked on its remarkable reporting documenting the extend of the fraud, she was given the benefit of the doubt for far too long. I wish the state of my Internet connection would let me do the sorry performance of the media justice. You’ll have to make do with this CNBC clip:
I wish this would be the last we hear of Elizabeth Holmes as a business person, but you can be sure with her astonishing capacity for denial that she’ll be back. An image-burnishing charity is just about certain to be a big part of her rebranding effort.comp-pr2018-41-theranos-holmes