Elizabeth Holmes fraud trial: What to expect in the case against the ex-Theranos CEO

 Elizabeth Holmes fraud trial: What to expect in the case against the ex-Theranos CEO

One of Silicon Valley’s most infamous entrepreneurs, Elizabeth Holmes, is scheduled to stand trial on Aug. 31 to defend accusations that she used her biotech startup, Theranos, to commit criminal fraud.

Holmes, 37, once proclaimed the youngest female self-made billionaire — and featured in Yahoo Finance’s new documentary “Valley of Hype,” streaming on Yahoo Finance starting Aug. 30 — faces federal charges of wire fraud and conspiracy to commit wire fraud tied to the collapse of the blood-testing company.

Jury selection is slated to begin Aug. 31, and opening statements are scheduled for Sept. 8.

A central question at trial will be whether Holmes and her former romantic partner and co-defendant, ex-Theranos president and COO, Ramesh “Sunny” Balwani, used Theranos to intentionally defraud private investors into backing the venture, and intentionally defraud patients into purchasing unreliable blood tests. 

Between 2013 and 2015, Theranos raised more than $700 million from private investors, and accepted payments from patients who purchased its blood tests offered in certain Walgreens (WBA) stores in Arizona and California.

How much due diligence was actually conducted?

“But this wasn’t, and shouldn’t have been, such ‘dumb money’— it came from some very brilliant and accomplished people,” Margaret O’Mara, University of Washington history professor and author of “The Code: Silicon Valley and the Remaking of America,” told Yahoo Finance in a July interview.

Among Theranos’ investors were some of the world’s wealthiest investors and some of Silicon Valley’s premier venture capital firms, some of who may testify during Holmes’ trial.

Jack Ma, executive chairman of Alibaba Group, speaks next to Elizabeth Holmes, CEO of Theranos, during the Clinton Global Initiative's annual meeting in New York, September 29, 2015.  REUTERS/Brendan McDermid

Jack Ma, executive chairman of Alibaba Group, speaks next to Elizabeth Holmes, CEO of Theranos, during the Clinton Global Initiative’s annual meeting in New York, September 29, 2015. REUTERS/Brendan McDermid

Legendary investor Tim Draper, head of venture capital firm Draper Fisher Jurvetson, was one of Holmes’ earliest investors. Other investors included ATA Ventures, hedge fund and investment management company Partner Fund Management, the Walton Family, the family of former U.S. education secretary Betsy DeVos, media mogul Rupert Murdoch, and Mexican business tycoon Carlos Slim.

Theranos, and other companies like WeWork, O’Mara said, reflect dark consequences that can emerge from a global financial system flush with cash, even when backing comes from influential financial and political leaders.

“I’m interested in understanding how the people who both served on Theranos’ board and invested in the company were persuaded to put their money and reputations on the line for this operation,” O’Mara said. “How much due diligence was actually conducted? Was the advice of financial analysts overridden? How much was Holmes’ and Balwani’s deception, and how much was advisers’ and investors’ irrational exuberance?” 

The former CEO and her co-defendant, Balwani, were indicted by a federal grand jury in 2018, but the trial was delayed repeatedly by the coronavirus pandemic and again by Holmes’ pregnancy. In 2020, the court granted a motion for the two defendants to be tried separately.

According to prosecutors, Holmes misrepresented to investors and patients that Theranos’s proprietary analyzer known as the TSPU, Edison, or miniLab could accomplish a full range of accurate and reliable diagnostic tests using small blood samples drawn from a finger stick.

Elizabeth Holmes accepts The Entrepreneur award at the 25th Annual Glamour Women of the Year Awards at Carnegie Hall on Monday, Nov. 9, 2015, in New York. (Photo by Brad Barket/Invision/AP)

Elizabeth Holmes accepts The Entrepreneur award at the 25th Annual Glamour Women of the Year Awards at Carnegie Hall on Monday, Nov. 9, 2015, in New York. (Photo by Brad Barket/Invision/AP)

In 2015, then-Wall Street Journal reporter, John Carreyrou first publicly exposed that the device could not reliably perform as many tests as Theranos claimed. Though the company’s funding propelled it to a $9 billion valuation and “unicorn” status, it folded under regulatory and legal pressure in 2018.

Holmes faces maximum penalties of 20 years in prison and has pleaded not guilty to the charges.

Reed Kathrein, a lawyer who settled a civil suit against Holmes on behalf of two late stage minority investors, said while the prosecutors must prove the elements of the crimes alleged beyond a reasonable doubt, the government and Holmes are at odds over how high a bar should be set.

The government, Kathrein said, “contends it only needs to show two simple elements of the conspiracy statute,” whereas Holmes “wants much more specificity.”

In Yahoo Finance’s “Valley of Hype,” Kathrein said that while primary blame lies with Holmes and Balwani, he questions the diligence of the company’s first board member, Stanford University emeritus professor of chemical engineering, Channing Robertson, and the diligence of Walgreens, which entered a $140 million deal to place Theranos’ blood tests inside its drugstores. 

FILE - In this Monday, Nov. 2, 2015 file photo, Elizabeth Holmes, founder and CEO of Theranos, speaks at the Fortune Global Forum in San Francisco. Elizabeth Holmes, who ran Theranos until its 2018 collapse, hasn't paid her Palo Alto, California, attorney John Dwyer and his colleagues for the past year, according to documents filed Monday, Sept. 30, 2019 in Phoenix federal court.  (AP Photo/Jeff Chiu, File)

In this Monday, Nov. 2, 2015 file photo, Elizabeth Holmes, founder and CEO of Theranos, speaks at the Fortune Global Forum in San Francisco. (AP Photo/Jeff Chiu, File)

“I don’t know what the heck was going on with [Robertson] … why he claims to be completely in the dark. And he’s the one that brought her around, got her credibility, and was paid handsomely, annually,” Kathrein said in the film.

“I place huge blame with Walgreens,” he added. “But, it’s more on the negligence side. I don’t believe that Walgreens knew what was going on, but they should have known what was going on.”

‘A very different trial’

Social distancing precautions are expected to slow the pace of the already protracted trial.

“It’s going to be a very different trial of course in the COVID timeframe,” presiding Judge Edward Davila said during a December pretrial hearing, stressing the need to plan for people getting sick and needing to wear proper face coverings in the courtroom.

Holmes’ trial is expected to last as long as four months, according to Holmes’ attorney, Lance Wade. Holmes’ defense team has not yet revealed whether she will to testify in her own defense. 

The ex-CEO’s lawyers have repeatedly expressed concerns over the possibility of a media-tainted jury, asking to learn which potential jurors had consumed coverage of Holmes and Theranos’ demise, including Carreyrou’s reporting.

Balwani is scheduled to be tried in January 2022. According to Kathrein, the split benefits both defendants.

“The separation of the trials is a big help to both,” Kathrein said. “Elizabeth will be able to blame Sunny…And he can also say Elizabeth knew everything since her trial will be over.”

Yahoo Finance reached out to Walgreens and former Theranos directors to request interview and comment for the film. All declined with the exception of former board member, Dan Warmenhoven. 

Alexis Keenan is a legal reporter for Yahoo Finance. Follow Alexis on Twitter @alexiskweed.

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