Elizabeth Holmes trial: Ex-employee says she was rebuffed in attempt to raise alarms

A former Theranos Inc. lab worker testified Wednesday that she raised alarms about the blood-testing startup’s practices with colleagues, managers and even a top executive and a board member but was rebuffed at every turn.

The testimony of the former employee, Erika Cheung, bolstered federal prosecutors’ case against Theranos founder Elizabeth Holmes, who is battling accusations that she defrauded patients and investors with promises that her technology could test for a range of health conditions using just a few drops of blood from a finger prick.

Over two days of testimony, Ms. Cheung testified that Theranos’s highly publicized proprietary technology often didn’t work, and that the company cut corners to give the impression that its product was ready for wide-scale use by patients.

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She said she tried to tell as many people as she could about problems, including having a discussion with the company’s No. 2 executive, Ramesh "Sunny" Balwani. Rather than being receptive, she said, he questioned why she was qualified to raise concerns and whether she wanted to work at the company.

Ms. Cheung said she was "really stressed and uncomfortable with what was going on" in her final months at the company and didn’t feel confident enough in the technology to run patient samples. She resigned in April 2014.

Ms. Holmes has pleaded not guilty to 10 counts of wire fraud and two counts of conspiracy to commit wire fraud. Her lawyer has described her as guilty of little more than naiveté and running a failed business.

During cross-examination, an attorney for Ms. Holmes tried to establish Ms. Cheung’s role as a low-level employee at Theranos, asking her to detail the hierarchy of company lab teams and whether she was aware that under lab protocols, the laboratory director is responsible for ensuring tests are accurate and reliable.

Ms. Holmes’s lawyers tried to block jurors from seeing some of Ms. Cheung’s emails from her time at Theranos, saying they were hearsay that couldn’t be tied back to Ms. Holmes. But U.S. District Judge Edward Davila allowed several more emails to be used Wednesday.

Ms. Cheung’s testimony marked her most comprehensive, under-oath telling of her time at Theranos, an experience she has spoken about to regulators, in an HBO movie and on the public stage in a TED talk. Ms. Cheung walked jurors through how she joined the company as a wide-eyed recent college graduate enamored with Ms. Holmes’s vision, and left about six months later.

Ms. Cheung is the second witness in what is expected to be a more than three-month-long trial.

Ms. Cheung joined Theranos after graduating from the University of California Berkeley in 2013—a time when. she recalled, the startup was creating buzz on campus. At a Berkeley job fair, the Theranos booth had "a line out the door of people waiting to talk to the recruiter," she said. After giving her résumé, she had interviews with executives including Ms. Holmes, whom she said she admired and felt "star struck" around.

She was excited about the technology, and was quickly told that secrecy at the company was paramount, Ms. Cheung recalled from the witness stand. By the time she became a Theranos lab associate, the company was already offering tests to the public at Walgreens Boots Alliance Inc. WBA 3.94% pharmacies.

Theranos told investors that its proprietary machines could run over 200 tests with tiny amounts of blood. But Ms. Cheung explained to jurors that Theranos could never handle more than 12 types of blood tests on its proprietary Edison machine, and instead ran most tests on third-party machines, including some that it modified to work with smaller blood samples.

"The machine wasn’t built to be able to do the processing on that small of a volume," she said of the commercial analyzers.

Ms. Cheung’s work involved validating tests that Theranos ran on the Edison device, she said. Such tests required lots of sample blood, which she said they sometimes got by paying employees, including herself, to donate.

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Through the process, she said she noticed that every time she ran a vitamin D test on her own blood, it showed she had a deficiency, which wasn’t reflected on traditional machines. "I started to notice that there was a slight discrepancy," she said.

In November 2013, a month after she joined the company, Ms. Cheung said she tried to alert colleagues to failures on vitamin D quality-control tests she was running on an Edison device, which under lab protocols prevented her from running patient samples.

In an email chain shown to jurors that was sent in response to Ms. Cheung’s concerns, Mr. Balwani said, "This is beyond unacceptable performance," with Ms. Holmes weighing in to inquire whether the sample could be run on a traditional device and asking, "How fast can we resolve this issue."

Ms. Cheung said a patient sample was ultimately run on the Theranos device despite the problems, after an employee omitted some data to make it look like it passed quality control. "I disagreed with it," Ms. Cheung said of the decision.

During her Wednesday testimony, Ms. Cheung said the practice of scrapping so-called outlier data to overcome quality-control failures happened frequently during her time at the company. Eliminating an "outlandish data point" isn’t unheard of at a lab, she said, but at Theranos there was no definition of an outlier and "no point person, really, to determine what an outlier was."

The routine failures during quality-control tests were troubling, Ms. Cheung said, because if you can’t get an accurate result when you know what the answer is supposed to be, "it doesn’t give you the confidence that it’s very reliable" when an actual patient’s blood is being tested.

As the months passed, she worried that patient samples were being tested while "behind closed doors we are having all these problems."

She testified that she never tried to speak to Ms. Holmes about the issues because a friend and colleague, Tyler Shultz, was already in touch with her. Ms. Cheung said she and Mr. Shultz also spoke to his grandfather, then-board member George Shultz, the former secretary of state, but he also brushed off concerns. The elder Mr. Shultz died earlier this year.

In 2015, months after she had left Theranos, Ms. Cheung spoke to a Wall Street Journal reporter about her experience at the company, she testified, which prompted a threatening letter from Theranos’s lawyers delivered by a man who she said appeared to be following her.

Around the same time, she said, she began talking to federal lab regulators about her concerns.

After inspections and sanctions from the regulator, the Centers for Medicare and Medicaid Services, Theranos voided all of the results from tests done on its machines, and reached a settlement under which Theranos voluntarily closed its labs.

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In 2019, Ms. Cheung co-founded Ethics in Entrepreneurship, an organization aimed at improving the ethics and culture of emerging companies.