Does crime pay?
Wall Street Crime and Punishment is a weekly series by Benzinga's Phil Hall chronicling the bankers, brokers and financial ne’er-do-wells whose ambition and greed take them in the wrong direction.
When the media charted Elizabeth Holmes’ ascension to corporate power, the one consistency in the coverage was the obsession with her appearance: her long blonde hair, her penchant for wearing Steve Jobs-style black turtlenecks and her baritone voice that many observers believed was out of sync with her demure femininity.
Even a veteran writer like the New Yorker’s Ken Auletta got caught in the style trap in his December 2014 profile of Holmes, with Holmes flaunting her intellect by declaring how she read “Moby-Dick” at age nine and how she was fluent in Mandarin. Auletta peppered his coverage with comments on how her voice dropped an octave during on-stage presentations and how she “pinned her hair into an unruly bun.”
Perhaps one could excuse the heavy-handed obsession with feminine style to the fact that Holmes did not fit the stereotypical image of the Silicon Valley go-getter as a lumpy dude in a well-worn hoodie. As a young female professional in an industry dominated by middle-aged men, she certainly stood out from the crowd.
And perhaps this made Holmes’ downfall all the more jolting. Many people viewed her as the force of energy who could break barriers in bringing a new generation of women into high-tech leadership, and the acknowledgment of her failings offered a bitter affirmation that middle-aged men were the only ones to face accusations of financial fraud.
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A Prodigy Emerges: Elizabeth Anne Holmes was born Feb. 3, 1984, in Washington, D.C. Her father, Christian Holmes IV, was an Enron executive who found work in federal agencies after his company’s downfall and her mother, Noel Anne Daoust, worked on Capitol Hill as an aide for the foreign policy and defense committees. Holmes’ great-great-grandfather was a Danish immigrant who settled in Cincinnati, became a prominent surgeon and married the heiress of the Fleischmann yeast empire, thus creating a lineage of wealth and privilege.
“I grew up with those stories about greatness,” Holmes would recall in the December 2014 New Yorker profile. “And about people deciding not to spend their lives on something purposeful, and what happens to them when they make that choice — the impact on character and quality of life.”
When she was nine, Holmes’ father relocated the family to Houston, where he took the job of CEO at the energy and manufacturing conglomerate Tenneco Inc (NYSE:TEN). She would later claim that her father felt guilty about relocating the family to Texas, so she wrote him a letter stating, “What I really want out of life is to discover something new, something that mankind didn’t know was possible to do.”
Shortly after arriving in Houston, Holmes’ parents arranged for her to receive tutoring in Mandarin. Her father made numerous business trips to China before Holmes was born and recognized the country’s potential to become a global economic force. By the time she was a high school sophomore, Holmes managed to secure summer class placement in Mandarin studies at Stanford University, and in 2002 she enrolled at Stanford after completing her high school studies.
Holmes originally considered pursuing a career in chemical engineering, and at the end of her freshman year, she landed a summer position at the Genome Institute of Singapore where she conducted tests for the severe acute respiratory syndrome (SARS), which had broken out in China.
Holmes theorized that the traditional testing manner of collecting blood samples with syringes could be improved upon, and by 2003 she filed a patent application for a wearable medical device designed to “analyte monitoring and drug delivery." The patent was approved in 2007 but the device was never manufactured.
Holmes believed that she could go further as a self-starting entrepreneur rather than slog through another three years at Stanford. With her parents’ blessing and financing, she dropped out of school in March 2004 to start her own company. She also convinced Channing Robertson, a Stanford engineering school dean, to serve as an adviser and later as a member of her new company’s board of directors.
There Shall Be Blood: Holmes set up shop in Palo Alto, California, with a company that she originally called Real-Time Cure, though a typographical error in the printing of corporate checks renamed the company “Real-Time Curses.” She switched the name to Theranos, a mash-up of "therapy" and "diagnosis."
Holmes sought to expand on her patented idea of conducting blood tests using only a finger pinprick’s worth of blood, which could be put into an automated testing device for rapid results. The goal was to deliver blood test results with greater speed and efficiency. Holmes would frequently claim that a lifelong fear of syringes inspired her to take this alternative approach.
In Theranos’ initial years, Holmes kept her company off the public radar while Robertson helped introduce her to venture capitalists, and by the end of 2004 she had amassed $6 million from investors.
In the following years, Holmes’ ability to attract investors became nothing short of astonishing, with financial input coming from Oracle Corporation (NYSE:ORCL) co-founder Larry Ellison, Tim Draper’s Silicon Valley venture-capital firm Draper Fisher Jurvetson, News Corp (NASDAQ:NWSA) media mogul Rupert Murdoch, Walmart Inc.'s (NYSE:WMT) Walton family, Cox Enterprises’ Cox family, New England Patriots owner Robert Kraft, Mexican billionaire investor Carlos Slim and the Windquest Group, the holding company owned by Trump administration Education Secretary Betsy DeVos and her husband, former Amway CEO Dick DeVos.
A 2011 meeting between Holmes and former Secretary of State George Schultz resulted in Schultz agreeing to join the Theranos board. Schultz’s presence helped in recruiting other prominent board members including another former Secretary of State (Henry Kissinger), a former Defense Secretary (William Perry), a future Defense Secretary (James Mattis) and former CEOs Richard Kovacevich of Wells Fargo & Co (NYSE:WFC) and Riley Bechtel of Bechtel.
By 2013, Holmes had amassed $400 million from investors and was ready to go into the limelight with her company.
A Few Big Problems: Theranos made a big splash in September 2013 by partnering with Walgreens Boots Alliance Inc (NASDAQ:WBA) to launch 45 in-store blood sample collection centers, mostly in Arizona. Theranos had successfully lobbied that state’s legislature to change the law so people could get blood tests without a doctor’s order. She spoke of bringing the Theranos testing centers across Walgreens’ nationwide chain of pharmacies.
The Theranos approach was a direct challenge to the dominant blood testing companies Quest Diagnostics Inc (NYSE:DGX) and Laboratory Corp. of America Holdings (NYSE:LH), which took the traditional approach of syringe-based blood extractions and the filling of blood-filled vials that were sent out for laboratory analysis. The minimally invasive testing procedure and the rapid turnaround time on results made the competition seem antiquated.
Even more exciting to the business media was Holmes. She found herself on the cover of Forbes, Fortune and Inc., and even the New York Times Style Magazine got in on the act by giving her a glamor-shot cover and equally eye-catching photo spread. A great deal of the initial media coverage focused on Holmes' life, including her veganism, her workaholic regimen and her alleged lack of a romantic after-work life.
In 2014, she ranked 110th on the Forbes 400, which hailed her as the world's youngest self-made female billionaire, running a company valued at $9 billion.
But also in 2014, the first cracks began to appear in Holmes’ foundation. The mostly gauzy New Yorker profile acknowledged — albeit deep in the article — that Theranos’ competition was openly questioning the efficiency of its testing services. Holmes shrouded much of her work in secrecy — even her investors were not given the full details of the Theranos technology — and the absence of data from peer-reviewed medical journals affirming the results being promised was called into question.
More damaging media coverage came in October 2015 when the Wall Street Journal ran a lengthy investigative piece that included harsh input from four former Theranos employees and the widow of a Holmes-employed chemical engineer about the far-from-perfect results being generated by the company’s testing devices. Medical professionals also weighed in on the shortcomings of the Theranos method, particularly in the testing for potassium levels.
The timing of the Journal article was terrible for Theranos, as the company was in the midst of planning to raise an additional $200 million in Series C-3 funding. Holmes went on the attack, first trying to get Rupert Murdoch to kill the negative coverage — he refused — and then by addressing a Wall Street Journal-sponsored conference later in the month where she blithely dismissed the newspaper’s investigation as “false stuff about us.”
From there, everything that could have gone wrong for Holmes happened with a vengeance. The Centers for Medicare and Medicaid Services (CMS) sent a warning letter to Theranos in January 2016 regarding problems relating to staffing, equipment and procedures at its laboratory in Newark, California. The company failed to fix the issues and the CMS issued a two-year ban that prevented Holmes from running a blood-testing service. Another federal agency, the U.S. Food and Drug Administration cited multiple quality control issues in a cease-and-desist order that terminated the use of the Capillary Tube Nanotainer, a Theranos invention used for collecting blood specimens.
Walgreens reacted to Theranos’ abrupt reversal of fortune by canceling its partnership. The company paid $4.65 million to settle a lawsuit brought by the State of Arizona over the efficacy of its blood testing results.
In March 2018, Holmes settled a lawsuit brought by the U.S. Securities and Exchange Commission (SEC) that accused the company of defrauding investors out of more than $700 million while making blatantly false marketing claims about its revenue and partnerships. Holmes paid a $500,000 fine, gave up voting control of Theranos and agreed to a 10-year ban on holding an officer’s position in a public company — the latter was especially interesting because Theranos was never a publicly-traded company. (Plans for an IPO were floated in 2008 but came to naught.)
The SEC also charged Theranos’ President and COO Ramesh Balwani at the same time. What was not disclosed until later was that Holmes and Balwani were in a romantic relationship shortly after he joined Theranos in 2009. This tawdry disclosure was the last nail in the corporate coffin. Theranos shut down in 2018, leaving its wealthy investors with nothing to show for their faith and financing.
A Story In Search Of An Ending: In June 2018, Holmes and Balwani were indicted by a federal grand jury with two counts of conspiracy to commit wire fraud and nine counts of wire fraud related to the decline and fall of Theranos. The pair pleaded not guilty and are being tried separately.
Holmes’ trial was supposed to begin in July 2020, but the COVID-19 pandemic coupled with Holmes’ pregnancy and the birth of her son in July 2021 — she married hotel heir William Evans in mid-2019 — delayed the proceedings until late August 2021, when jury selection finally began. Balwani will go on trial in January 2022.
Holmes’ trial began in early September and, as of this writing, is still underway. She faces up to 20 years in prison if convicted on all counts.
And, at this point, we bring this article — and, by extension, our weekly Wall Street Crime and Punishment series — to a close. This series has tracked a century’s worth of financial chicanery starting 33 weeks ago with Charles Ponzi in 1920 and concluding with today’s Holmes trial.
As this series winds down, we are left with a puzzling consideration: why do people commit financial crimes? The trait shared by all 34 individuals profiled in this series were intelligence and success — these were men and women who rose to the heights of their respective industries, and yet they stumbled so badly when given the opportunity to take the too-easy route to riches.
Why did these people go so terribly wrong?
Mystery novelist Agatha Christie once opined, “Crime is terribly revealing. Try and vary your methods as you will, your tastes, your habits, your attitude of mind, and your soul is revealed by your actions.”
And not only their actions, but reactions — some of the miscreants profiled in the series atoned for their sins, others committed additional crimes, others moved on to the proverbial bigger and better, and a few never suffered a day’s punishment for what they did.
Perhaps the most baffling answer to why anyone who commits a financial crime came from the man who coordinated the greatest swindle of all time, Bernie Madoff.
“I had more than enough money to support any of my lifestyle and my family's lifestyle,” he wondered. “I didn't need to do this for that. I don't know why.”
Photo: Fortune Global Forum 2015 / Flickr Creative Commons