The verdict on Elizabeth Holmes, the CEO of Theranos, who was tried for fraud in a US court, is guilty. Theranos was a company set up by Holmes and her former partner Ramesh “Sunny” Balwani, which had promised to revolutionise testing. Their advanced biotech equipment—they claimed—would provide results for a whole battery of tests with just a few drops of blood. Theranos was worth $9 billion in its heyday, and Holmes was looked upon as the Steve Jobs of the coming Silicon Valley’s biotech revolution. Hers was the face that launched billion-dollar stock sales to private equity and venture funds. She figured in the Times list as one of 100 most influential persons of 2015 and was feted by Wall Street as the world’s youngest billionaire.
The trial evidence showed that Theranos technology did not work, and she knowingly falsified the results and forged documents. These documents show that major pharmaceutical companies endorsed her products, and even the US military was using Theranos equipment in the field.
Holmes got major names in the industry to invest almost a billion dollars into Theranos. The investors included the Walton family who owns Walmart, Rupert Murdoch, the media mogul and Trump’s Secretary of Education, Betsy DeVos and her family, Larry Ellison, the Oracle founder, and many other moneybags. Theranos’s board of directors had dazzling names, including former US secretaries of state Henry Kissinger and George Shultz, former US secretaries of defence James Mattis and William Perry.
This is the characteristic of today’s stock market: it is dominated by trillions of dollars of private wealth, estimated by The Economist in 2018 in the range of $9 trillion.
The twist in this tale of fraud and greed is that the court did not convict Holmes of defrauding thousands of patients who used Theranos’ faulty tests. On those counts, she walked free. In the heartland of capital, the real sin is to defraud investors, not your customers! This is good, old fashioned American justice: customers are suckers, it is alright to treat them as such, but not the investors who are big money. In the Theranos case, investors had put $945 million into a technology hyped by Holmes in the best tradition of Silicon Valley: fake it till you make it!
What was Theranos faking? It claimed that it is unlike conventional blood testing methods, which need to take about 3 cubic centimetres (or millilitres) of blood, normally from our veins (venipuncture) in the crock of our arms. The amount could increase to 30 ccs depending on the number and type of tests. But Theranos claimed that they used a small container called a “nanotainer” and a special machine called Edison to take only a few drops of blood—1/100th to 1/1000th of conventional tests—to run a battery of tests. Later on, the Edison was replaced by a miniLab, which was supposed to deliver even better results and a larger number of tests.
It was not that Edison or miniLab did not deliver results; they did. But the results had very large errors. Theranos’s faking did not stop at merely the accuracy of its tests. It claimed it could do more than 1,000 tests using its miniLab; it could do only 12. It claimed it did not use any equipment but its own in the Theranos chain of diagnostic labs. It did: contrary to claims, the bulk of its tests was performed on commercially available machines from other companies. They used the small nanotainer samples by diluting them to increase the volumes required by commercial machines.
Not surprisingly, the tests carried out in either Edison or, after dilution of the samples on other machines, had very significant errors. The patients were the victims of these results. For example, evidence during the trial showed that a Theranos test indicated a patient had suffered a miscarriage when she had not.
In June 2014, reporter Roger Parloff wrote in a cover story for Fortune, the US financial magazine, how Theranos was revolutionising the testing industry using the fingerstick method and the large number of tests it could perform. He wrote, “To me, it felt more like a tap than a puncture… and the sheer number of tests the company could do at a lower cost than competitors.” A fingerstick is a routinely used device, for example, to check our blood sugar at home. It does not draw blood from our veins but the capillaries close to the skin, and only a drop or two.
Parloff wrote, “Theranos’s tests can be performed on just a few drops of blood, or about 1/100th to 1/1,000th of the amount that would ordinarily be required, an extraordinary potential boon to frequently tested hospital patients or cancer victims, the elderly, infants, children, the obese, those on anticoagulants, or simply anyone with an aversion to blood draws.” He corrected his story in December 2015, after John Carreyrou started a series of exposes in The Wall Street Journal in October 2015. The Journal series started the unravelling of the media image of Theranos and ultimately its downfall.
It was articles like Fortune’s, supported by high-profile people in Silicon Valley, that put Holmes on the road to stardom and made her company into a biotech heavyweight. She was highly photogenic, was selling an idea that was easy to grasp and, with technology hurtling at a breakneck speed, believable to billionaires out to make a killing through early investments in successful ideas. The Theranos problem was that Holmes faked it too far and left too long a paper trail to her verifiably wrong claims.
Holmes was a 19-year old dropout from Stanford who used the money her family had set aside for her education. She teamed up with Sunny Balwani, a tech-entrepreneur, who had successfully sold out from one of the start-ups, netting reportedly $40 million during the 90s dot-com bubble. He joined as the Chief Operating Officer (COO) of Theranos, and Holmes became CEO. Balwani is also being sued separately for fraud.
The media, including those disturbed by the trial focussing on investor fraud, not the patients who got erroneous results, do not understand bourgeois law. Protecting private property is central to bourgeois law, not people. It is the task of regulations to see that the public is protected from harm by companies acting to maximise their profits. These regulations have been systematically weakened to help capital against consumer interests during the hyper-capitalist regime that started in the 90s, which we call neoliberalism.
The case against Holmes was about supplying doctored evidence or making false statements to investors. Lying to the users of Theranos tests is apparently not fraud; or as Elizabeth Lopatto put it in The Verge, “For the charges to stick, jurors had to believe Holmes had intended to defraud patients, not merely give them bad results.” Giving bad results knowingly to patients is not a crime; but giving wrong information to your investors is!
Why did not regulators look at Theranos’ Edison and miniLab instruments? At its height, Theranos was generating nearly 9,00,000 tests a year without its lab or instruments needing to conform to any US regulation or law. Here is the big loophole in US regulations: any laboratory-developed diagnostic tests designed, manufactured and used within a single laboratory is not regulated. It is not only true for Theranos tests but also a number of other tests, notably those for cancer, that use the same loophole. Will this case and verdict change the laboratory test industry and plug the Theranos loophole? Nothing we currently see shows any inclination of the US authorities to regulate the biotech industry on this count; unless more Theranos happen.
Theranos ceased operations in 2018, and Holmes is now awaiting her sentencing. The companies stock and its technology are now worthless. The house of cards that Holmes and Balwani built has collapsed. But has ‘fake it till you make it’ collapsed in Silicon Valley? Lopatto takes a more cynical view that it will only make the Valley more cautious not to get caught red-handed lying to your investors. Lying to the people is OK—as the Theranos verdict shows—but not to the moneybags