The Elizabeth Holmes trial: visionary, criminal or both?
Former Theranos employees began testifying this week against Elizabeth Holmes, the once-notorious biotech founder and CEO, in a criminal lawsuit that worries Silicon Valley.
In opening statements last week, federal prosecutors accused Holmes and the company’s COO, Ramesh Balwani, of long knowing that Theranos’ home blood test was not working, but duped investors in error so that they continue to flow. Holmes and Balwani are accused defraud patients, doctors and investors over $ 700 million. At its peak in 2013-14, the private company was valued at over $ 9 billion.
A 2015 Wall Street Journal article, which became the bestseller “Bad Blood,” led to several criminal and civil investigations and sanctions imposed by the Securities and Exchange Commission. Theranos disbanded in 2018. Prosecutors must prove that Holmes, who was 19 when she started the business in 2003 after dropping out of Stanford University, knew the product wasn’t working while she sought new business and investment. Defense attorneys say Holmes “believed” in the revolutionary blood testing device and that “striving and failing is not a crime”.
Eugene Soltes, McLean Family Professor of Business Administration at Harvard Business School, is an expert in corporate integrity and risk management. He interviewed dozens of business leaders convicted of crimes, including Bernie Madoff, for his 2016 book, “Why They Do It: In the Mind of a White Collar Criminal.” Soltes says the case against Holmes is not a slam dunk and explains why even a conviction is unlikely to deter others. The interview has been edited for clarity and length.
Harvard Journal: What do you think of the start of the trial?
Eugene Soltes: I think most people who watch the news think it’s a very simple case. However, when it comes to how white collar crimes are prosecuted, it is quite difficult. Are we not prosecuting people on the basis of our intuitive notions of fraud or not? Or is it to lie or not to lie? Instead, we look at specific evidence and data and how they are interpreted. More importantly, the jury must assess not on a preponderance of evidence, but whether the charges against her are beyond a reasonable doubt.
You read “Bad Blood” and it’s like, why are they even going to be judged? The fraud is so obvious. But that’s the difference between a journalistic account and watching what evidence the jury can see and hear. Beyond a reasonable doubt, the bar is very high. They are looking at these very specific allegations about when and how the alleged fraud was committed.
Second, the defense is likely to focus on the difference between what is often referred to as fraud versus “buffoonery” – broad statements of opinion that people are reasonably expected to interpret as not being true. These are all the marketing ads we read on a daily basis. Silicon Valley is known for praising its innovations. In fact, people really want that kind of excitement, that’s what attracts people and it’s accepted. Starting a business, describing these innovations with enthusiasm, and then seeing it fail because it didn’t go as planned is not a fraud. The defense will almost certainly describe Theranos as another inspired but failed startup. Obviously, many people who contemplate failure see a different story: a founder whose eagerness to become the next “unicorn” ignored the real risks his products pose to people.
Gazette: What would you ask Holmes if you had the chance?
Soltes: This is not just for her, but for any visionary business leader whose efforts fall short of these goals. I would like to ask, what was the roadmap? In her mind, how did she see it come to fruition in the end? A nice tale from Theranos is that she had a visionary idea very, very early on, but it still required a huge amount of R&D. They made a mistake by launching a product too early that had an impact on people’s health. I’d like to know what the plan looked like – what was the plan to make the technology actually work?
Business leaders often pride themselves on being visionary and visionary thinkers. A lot of the really hard work, and ultimately the success and failure, comes from their ability to operationalize those ideas in the end. Elizabeth Holmes offered extraordinary vision. She pitched an idea that was succinct, compelling, inspiring, even beautiful, but couldn’t operationalize that idea.
Gazette: Do executives accused or convicted of large-scale crimes share common traits or motivations, according to your research?
Soltes: Overall there isn’t a strong sense of remorse and I suspect it’s probably no different here. Innovators are passionate about their vision. By all accounts, she and the others at Theranos all wanted Theranos to be successful. Their vision was incredible; that would have been transformative. The question is, when does this wish and enthusiasm turn from optimism to fraud?
Enron executives were serious about transforming and changing the energy markets and made some progress in this direction. But they wanted it so badly, so aggressively, that they weren’t ready to accept failure along the way. This is the hallmark of many white collar frauds. It then often goes a step further and they start to obscure or even hide those trips, which is where it becomes fraudulent.
When many of these former leaders look back on their actions, they don’t think about what they were hiding. Instead, they often think, “If only we had had another year, if only we had had two more years, if only we had had more money, we would have made it and we would have changed the world.” It is more of a disappointment that this vision did not materialize rather than the setback that we see in the press and described by prosecutors, namely that they created a business that has deceived thousands or millions of people. .
Gazette: One of the reasons to prosecute complex cases like the one against Holmes and Balwani is that they warn others. Is fear of execution a factor in the decision-making of the executives you studied?
Soltes: I don’t think anybody thinks he’ll be the one going to jail. Notably, it is even when they engage in the kind of fraudulent behavior for which we send people to jail. They think the people who go to jail are the ones who didn’t go to high school, who weren’t the Stanford dropouts. He’s the guy on the street who sells drugs or assaults. They don’t think the criminal consequences will happen to them; it only happens to this other guy. And that’s one of the challenges of psychology here. Prosecutors say they try to have that deterrent effect, but a deterrent effect only works if people internalize that their conduct warrants criminal penalties.
As much as I would have liked it to be different, I am also skeptical of the deterrent effect of sanctions at the executive level. Businesses often operate in a murky world in which the difference between buffoonery and fraud is often really unclear.
This article was originally published in the Harvard Journal. The interview has been edited for clarity and length.
About the Author
Christina pazzanese is an editor at the Harvard Gazette.
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