Theranos founder Elizabeth Holmes’s trial: Prosecutors must show intent

Silicon Valley startups are often perceived to be walking a line between exaggeration and deception in promoting their products. Federal prosecutors trying Theranos Inc. founder Elizabeth Homes in California must convince a jury that she didn’t believe her own hype.

Ms. Holmes’s trial is slated to begin Wednesday, when her lawyers and prosecutors for the U.S. attorney’s office for the Northern District of California make their opening statements, kicking off what is expected to be several weeks of witness testimony. Ms. Holmes is the rare chief executive to personally go on trial, facing charges of defrauding patients and investors about the nature of her startup’s blood-testing technology.

Theranos and Ms. Holmes regularly claimed that the company’s machines could test for a range of blood conditions using just a few drops of blood taken from a finger prick. Their promises to revolutionize the healthcare industry put Ms. Holmes on magazine covers and vaulted its valuation to over $9 billion.

Prosecutors allege the technology was unreliable, inaccurate and known to be so, despite Ms. Holmes’s public claims to the contrary. The Wall Street Journal first reported on problems at Theranos in 2015, and the company shut down three years later amid scrutiny from regulators and prosecutors. Some patients and doctors reported receiving inaccurate results from Theranos tests, underpinning prosecutors’ accusations.

The challenge for prosecutors is showing that Ms. Holmes’s salesmanship of her blood-testing technology was intended to deliberately mislead investors and patients, said white-collar crime defense attorneys and former prosecutors.

Amy Deen Westbrook, a professor at Washburn University School of Law whose research focuses on anticorruption initiatives, said such a showing would be difficult.

"They have to prove she knew it was false and she said it anyway. It’s much, much harder to prove," Ms. Westbrook said. "You’ve got a group of people there in the room and in the whole world of Silicon Valley that understand that most startups fail," regardless of whether founders believe their products will succeed.

Ms. Holmes has pleaded not guilty to 10 counts of wire fraud and two counts of conspiracy to commit wire fraud. Neither her lawyers nor a spokesperson for the U.S. attorney’s office for the Northern District of California responded to questions for this article.

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Prosecutors for the district, which includes Silicon Valley, have struggled with high-profile cases that could shape the culture of the technology industry, said white-collar crime lawyers in the area and former prosecutors. Convicting Ms. Holmes could make founders more cautious about promises they might not be able to fulfill, white-collar attorneys said. But they cautioned that other startup founders might view Ms. Holmes as an outlier.

"There are two arguments: One is that every CEO in Silicon Valley will be watching this case. The other is every CEO will be watching this case and seeing it as completely different from what they’re doing," said Frank Partnoy, a professor of business law at the University of California’s Berkeley School of Law.

In court documents, prosecutors have outlined some of the evidence they plan to present against Ms. Holmes, detailing dozens of incidents in which they allege that she and former Theranos President Ramesh "Sunny" Balwani misled investors, patients, doctors, the press and others about their product’s capabilities. Mr. Balwani, who at one point was in a romantic relationship with Ms. Holmes, faces a separate trial on identical charges. He has pleaded not guilty and denies any wrongdoing.

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In one instance, Theranos representatives told an Arizona obstetrician-gynecologist that Theranos’s device had been approved by the U.S. Food and Drug Administration even though Ms. Holmes and Mr. Balwani knew they hadn’t received FDA approval, prosecutors allege in court documents. Board members weren’t initially aware that Theranos was using third-party devices for some of its blood tests, according to prosecution evidence that includes statements from two former U.S. secretaries of state, Henry Kissinger and the late George Schultz, both of whom served on the board.

In court filings, Ms. Holmes’s lawyers have said she believed that "Theranos was a legitimate business generating value for investors" and that she never misled investors and patients.

In addition to arguing that she believed in Theranos’s technology, attorneys for Ms. Holmes have said they might try to convince the jury that she was in an abusive relationship with Mr. Balwani that affected her decision-making. In a preview of a possible mental-health defense, her lawyers have said she lacked an intent to deceive because "as a result of her deference to Mr. Balwani, she believed that various representations were true." In court filings, attorneys for Mr. Balwani said he unequivocally denied any allegations of abuse.

The Northern District has had a couple of high-profile defeats in recent years. Prosecutors early last year lost a case against a former employee of the consumer-electronics startup Jawbone who was accused of stealing trade secrets and taking them to rival Fitbit. Prosecutors subsequently dropped similar charges against five other former Jawbone employees.

But the office has also been tenacious in its efforts to hold technology executives to account. The Northern District has for years pursued a case against Mike Lynch, the former chief executive of Autonomy Corp., on charges that he used false and misleading documents to make the business-software maker more attractive to a potential purchaser. Hewlett Packard in 2011 bought Autonomy for $11.1 billion and a year later took an $8.8 billion write-down related to the deal, saying it was duped into overpaying because of what it said appeared to be willfully inflated financial statements.

A U.K. judge ruled in July that Mr. Lynch could be extradited back to the U.S. for trial, sending the matter to the country’s home secretary. The company’s chief financial officer was convicted of conspiracy and wire fraud in 2019 and sentenced to five years in prison.

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"Mike Lynch never should have been charged in this matter, and should we go to trial in San Francisco, we are confident he will be completely exonerated," his attorney, Reid Weingarten, said.

The prosecutors leading the Theranos case are Robert Leach, John Bostic, Jeffrey Schenk and Kelly Volkar. Mr. Leach was one of the prosecutors in the HP cases and Mr. Schenk helped win a conviction of PG&E for violating the Natural Gas Pipeline Safety Act of 1968 following the fatal San Bruno natural-gas pipeline explosion in 2010, a major victory for the office.

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If the office loses its case against Ms. Holmes, it could dent its reputation for handling big complex technology cases, white-collar crime experts said. But if it wins, it could bolster its credibility to police Silicon Valley.

"It’s not often that an office prosecutes a case where books have been written and documentaries made. It would be a high-profile case in any office," said Melinda Haag, a former U.S. attorney for the Northern District of California as well as a former member of Mr. Balwani’s defense team. She declined to discuss details of the Theranos case.

This report originally appeared in The Wall Street Journal.