Elizabeth Holmes’ dream started as a young child who “wanted to discover something new, something that mankind didn’t know was possible.” This attitude, coupled with her fear of needles, drove Holmes to drop out of Stanford University at the age of nineteen in order to pursue her vision of creating a remarkable innovation that was going to save millions of lives and change the world. This vision was Theranos, more specifically the creation of the proprietary Edison device. Theranos was a secretive company that specialized in medical technology. Edison was their primary device that could take a pinprick’s worth of blood extracted from the tip of a finger and test for hundreds of diseases.
While at Stanford, Holmes began pitching her idea to her chemical-engineering professors. Her professors were less than impressed because they claimed a finger prick would lead to unreliable results. As a finger is pricked, it allows for outside contaminants to enter the blood and skew the results of blood tests. Holmes took these criticisms as a challenge and decided to drop out of Stanford as a nineteen-year-old sophomore. With this remarkable idea, Holmes began pitching her idea to investors, where she initially raised six million dollars to create Theranos. She would then fundraise nearly seven-hundred million dollars.
Holmes was fascinated with the late Steve Jobs. She only wore black turtlenecks, boasted about never taking a vacation, practiced veganism, and regularly drank only green juices on a strict schedule. While all of these traits might be seen as a form of flattery, Holmes’s obsession did not stop there. She desired a secretive work environment that could not be penetrated from the outside world. While at Theranos, scientists and engineers were never allowed to discuss their work with anyone, even people within the company. Holmes would not allow scientists to write peer-review papers on Theranos’s technology. She even accepted the money she raised on a contingency that she would not divulge any of her company’s technology to a single investor.
Theranos’s proprietary Edison machine was the invention Holmes had always dreamt of. Allegedly, Edison only required a single drop of blood to test for hundreds of possible diseases. Theranos advertised this device with slogans such as “One tiny drop changes everything,” and “All the same tests. One tiny sample.” Edison was a revolutionary device that could drastically improve the health of hundreds of thousands of people across the globe. Unfortunately, this was only a pitch by Holmes to draw in more investors. The technology she actually was in control of could not have been further from life-changing.
Holmes molded her company in a way that was better at keeping secrets than focusing on the healthcare industry. Her President, Sunny Balwani, was commonly referred to as the enforcer. He would shut down any type of questions about the technology and silence any critics as quickly and efficiently as possible. Theranos’s Board of Directors was filled with excellent military and government minds, while lacking any medical experts. Balwani chastised employees who had “no legal background” and were taking “legal positions and interpretations” on the matters within Theranos. He ordered employees to only report to the accrediting organization results from proficiency tests performed on conventional devices, and not the results of those tests obtained from any Edison machines.
Issues with Edison’s results have been looming in the background of Theranos for a very long time. Chief Scientist, the late Ian Gibbons, encountered numerous problems with the results of the Edison devices. The erratic results Gibbons found was not the only time Theranos’s technology was at issue. In 2012, Holmes attempted to pitch Theranos’s technology to the Department of Defense, but was quickly denied because of the unpredictable results. It was not until she placed a call to a highly ranked friend that she was able to create a pilot program for Edison, irrespective of the unpredictable results. This type of uncertainty lead to a deep investigation of Theranos by one of the Wall Street Journal’s top investigative journalists, John Carreyrou.
Carreyrou’s suspicions were sparked after reading a statement from Holmes regarding Edison’s technology. Holmes responded to a question about the technology by saying, “a chemistry is performed so that a chemical reaction occurs and generates a signal from the chemical interaction with the sample, which is translated into a result, which is then reviewed by certified laboratory personnel.” Carreyrou’s investigation of Theranos lead to a dark secret about their technology and Elizabeth Holmes’ claims about how she was going to change the world.
Carreyrou published over two dozen articles about the fraudulent practices taking place at Theranos. These reports caused Walgreens to sever its relationship with Holmes and Theranos, eradicating a nearly fifty-million-dollar investment from Walgreens. Walgreens entered into contract with Theranos in 2013 in an attempt to implement Theranos’s technology into forty Walgreen’s Wellness Centers in Arizona and one in Northern California. Following these reports, Walgreens sued their former laboratory-testing partner, Theranos, in Federal Court in Delaware, alleging a breach of contract. Walgreens claimed it was misled by Theranos about the state of its technology following their initial agreement. Theranos vigorously responded to this suit by claiming Walgreen’s allegations are unfounded and they will seek to hold Walgreens responsible for the damage it has caused Theranos and its investors. Theranos had no choice but to fight back against Walgreen’s suit, even though their hopes for success seem bleak with the ongoing investigations from multiple federal agencies.
Elizabeth Holmes and Theranos are currently under investigation from five different federal agencies: the U.S. Attorney’s Office for the Northern District of California, the U.S. Securities and Exchange Commission, the Federal Bureau of Investigation, the U.S. Postal Inspection Service, and the Centers of Medicaid and Medicare Services. Each of these organizations are investigating different aspects of Theranos and Holmes’s practices. Federal prosecutors are investigating whether Theranos misled investors about the state of its technology and operations.
Following the federal prosecutor’s informal requests, they received grand-jury subpoenas from a Federal Court in San Francisco. They have sent subpoenas to Walgreens and the New York State Department of Health in an attempt to retrieve documents and testimony about Theranos’s representations made to them. The subpoenas are an attempt to gather broad information about how Theranos described its technologies and the progress it was making in developing those technologies, such as Edison. The federal prosecutors are also examining whether Theranos misled government officials, which could be a federal offense. The FBI and US Postal Inspection Service are assisting the prosecutors with this investigation.
Federal health regulators proposed a ban on Holmes from the blood-testing industry for at least two years after concluding the company failed to resolve the major problems found during their internal inspections. Following this proposal, regulators decided to revoke Theranos’s license to operate a lab in California because of unsafe practices. One of the sanctions against the company is a monetary fine of ten thousand dollars per day until all deficiencies have been corrected. They also banned Elizabeth Holmes from the blood-testing business for at least two years. The Securities and Exchange Commission has begun paying closer attention to ensuring that large private technology firms properly inform investors about their finances and valuations. From this stance, the SEC is examining whether Theranos made deceptive statements to investors when it solicited funding. Theranos had previously been valued at nine billion dollars in 2014.
Theranos and Holmes have a few options to consider following these sanctions and bans from federal regulators. They can appeal the sanctions to an administrative judge, which would temporarily put the sanctions on hold. The company could withdraw from the lab-testing business altogether, and turn it’s focus to developing other medical devices. Individually, Holmes could walk away from the enterprise she built largely on her personality and vision of revolutionizing medicine with a way to cheaply perform dozens of test with a single drop of blood. Her chances of success on appeal are unlikely, and the ban may be a likely outcome for Elizabeth Holmes because, under these sanctions, she is not allowed to own equity in or operate any lab for at least two years. However, Theranos and Elizabeth Holmes have elected to appeal the sanctions implemented by the Centers of Medicaid and Medicare Services. This appeal process can take a very long time, and this type of appeal is very unlikely to succeed, as the agency’s website compiled a list of decisions that shows it did not lose an appeal from 2001 to 2010.
This contributor to JHTL has chosen to remain anonymous.
Disclaimer: The views expressed in this blog are the views of the author alone and do not represent the views of JHTL or Suffolk University Law School.
