Elizabeth Holmes unfairly punished for the Theranos debacle?

Elizabeth Holmes, the founder of Theranos, has been fined $500,000 by the S.E.C. and likely prevented from making a profit from her work at Theranos (nytimes).

I wonder if this is unfair. Was it a 19-year-old college dropout’s job to know that she didn’t have an edge over a small lake of chemistry Ph.D.s at Siemens? If I tell you “I am smarter than Gauss so give me $700 million,” whose fault is it if $700 million evaporates?

Commenters on the nytimes article are often outraged because, supposedly, peoples’ lives were put at risk by a few inaccurate test results. How can that be right? Where is the evidence that any medical procedure was ever performed as a result of a test number coming back from Theranos? (And, while we’re at it, let’s see if we can find useful medical procedures that have been done in response to test results in general!)

There is one funny comment: “The lesson here: If you’re gonna steal, steal big!” (from NDanger, Napa Valley, CA)

Readers: What do you think? She pissed away a huge amount of money because she and her Silicon Valley pals overestimated their collective intelligence and value to humanity. Is that a crime?

[Note that a standard financing structure for Theranos, in which cash investors get preferred shares with liquidation preferences, would have already done most of what the S.E.C. has tried to do. If the company had sold for less than the total invested, all proceeds would go to the preferred shareholders (the cash investors), not to founders and employees holding common shares.]



13 thoughts on “Elizabeth Holmes unfairly punished for the Theranos debacle?

  1. Compare what Holmes got in punishment vs. Martin Shkreli. Either she should have got a lot more or he should have got a lot less.

  2. She got off extremely lightly. I’ve developed and delivered medical devices, and the core rule with the FDA is never ever lie. It’s far better to truthfully say, “we did this analysis and decided not to do that test” than to claim that you did a test. The first is a matter of judgement and risk assessment, even if they completely disagree with your rationale. There is no crime. The latter is a lie. She should have been charged with a felony. Lying to the FDA about what you did is a felony.

    These were not complex intellectually challenging issues. These were questions like “What machine performed this test?”, “What settings were used?”, “What were the relevant calibrations?” It’s all straightforward questions and answers.

    The FDA is concerned with this for the same reason that the FAA gets concerned about counterfeit parts, forged repair records, etc. They don’t wait for people to start dying. You must keep truthful accurate records for everything.

    As for the SEC concerns (which is what the actual charges involve) they are basic fraud considerations. If you tell investors that you make your parts in a plant in Milwaukee, that had better be the truth. Theranos lied about substantial and material facts related to the sale. It’s like a great many other business frauds. People sell things that they don’t own, or lie about the thing that they are selling, and sometimes those people go to jail.

    I think she was very lightly penalized for the frauds she committed, but I’m not sure what the normal penalties are for that kind of fraud.

  3. Not directly relevant here because this wasn’t a criminal case, but most “white collar” prosecutions are really political prosecutions because it is generally unclear who the victim is — unlike the more traditional crimes of murder, rape robbery, etc. White collar sentences are generally grossly disproportionate to the moral wrong in order to satisfy John Q. Public’s view of the world that the rich game the system — look at Shkreli, who was a jerk, but that is not a criminal offense. So what exactly did Shkreli do wrong that justifies 7 years in prison? Who suffered from his conduct? Who knows? If Holmes had really committed an outrageous fraud she would have been prosecuted criminally. The fact that she wasn’t indicates that the evidence was weak and that the US Attorney wasn’t interested in the case otherwise the SEC never would have ended up with it — the SEC contrary to popular belief is pretty low on the federal food chain. Why didn’t the SEC go after the great and good on her board who at best hadn’t a clue as to what was going on? Kissinger and Schultz got conned by this crafty young woman? I don’t think so.

  4. I’m sure you already know this, but Theranos was heavily promoted by the media due to the narrative of a young women in science/tech/vc breaking the gender barrier. In retrospect, we’ve also learned one reason why: Theranos was a big client of Fusion GPS. Those Washington contacts weren’t useless; they helped Theranos air-drop glass-ceiling shattering stories onto business news desks everywhere.

  5. > peoples’ lives were put at risk by a few inaccurate test results.

    Doubtful anyone was harmed, as her business model was receiving samples in front door then ship them out the back door to old-fashioned labs to do the actual tests (while she perfected her new-fangled “lab on a chip”).

  6. Just to be clear, so far this punishment was the SEC. The US Attorney for the San Francisco District can still bring up criminal charges against Theranos executives. (I don’t think they will, not with a board of directors like that.)

  7. If there are people in prison for robbing a liquor store of $700 or shoplifting a $700 TV from Wal-Mart, she probably gets off very lightly.

  8. Perhaps she had a good cry in front of the judge. That’s punishment enough, isn’t it?

    Shkreli seems to have been sent to prison for being annoying to the powers that be. After all, must there not be a crime behind being called ‘pharma bro’? Certainly greater than crossdressing as Steve Jobs, even if there may not have been any monetary loss in Shkreli’s case.

    Another one was Joe Nacchio, CEO of Qwest: https://en.wikipedia.org/wiki/Joseph_Nacchio

    In his case it seems to have been an unfortunate case of principles. It seems almost quaint in these days of ubiquitous unrestricted surveillance. Crushed. Thank you kindly anyway, Joe.

  9. PhilG: I wasn’t sure if I should say that because I wasn’t sure it was 100% correct, but I do know that a number of the bigger firms didn’t go near Theranos with a 10 foot pole and didn’t say why. Given that there is no press release they would love more than a 19-year old female entrepreneur pursuing a “moonshot”, I thought that was a red flag.

    On Jurveston: Will we ever see some of these people emigrate? The President of France wants American engineers and entrepreneurs and France is more sex friendly.

    Coward: A robbery is fundamentally different than a white collar fraud.

    Everyone: The investors in Holmes lost their money because they didn’t do due diligence on her company. Skreli accepted investor money as a professional investor, I’m not an expert but perhaps there’s a distinction?

  10. Tony: That’s kind of my perspective. I haven’t followed the details of lying to the FDA. That’s not good. But in terms of the investors, any lies were transparent. My friends who know about pharma and FDA were immediately skeptical about Theranos as soon as I shared what I had learned from the New Yorker story (long before the WSJ exposed the darker side). All that an investor would have had to do is tap on the shoulder of an employee of a pharma or testing machine company to get a “no, don’t go there.”

    (I think there is a bit of an analogy. Family court judges don’t hold it against a plaintiff who says “This rich white defendant is having sex with the 2-year-old child over whom I am seeking profitable custody” (see http://www.realworlddivorce.com/DomesticViolence ). It is a venue in which it is acknowledged that the convention is to lie. Silicon Valley is kind of similar. A tiny company with minimal achievements is expected to tell investors “We are so much better than Oracle, HP, Apple, Google, et al.” As an investor you almost want to hear that. If the entrepreneurs don’t believe their own hype they would all quit to work at Oracle, HP, Apple, et al.)

  11. Agree with rjh. Never, ever, ever lie to the Feds. They will absolutely nail you to the wall with the lie you so conveniently provided.

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