The Big Hustle
Theranos was a privately held health corporation that was touted as a breakthrough technology company. It claimed to having devised blood tests that required only exceedingly small amounts of blood and could be performed very rapidly using small automated devices the company had developed. However, the claims later proved to be false. Here is their story and what happened to it over time.
The case of Theranos, an once high-flyer in Silicon Valley, portrays a company run by an ambitious CEO, Elizabeth Holmes, who thought she could get away with just about anything. Perhaps she would have if an employee had not blown the whistle to a Wall Street Journal reporter in 2015.
The Wall Street Journal investigative reporter, John Carreyrou, who broke the story, wrote a book, Bad Blood: Secrets and Lies in a Silicon Valley Startup, that characterized what went on at Theranos as the biggest corporate fraud since Enron and a tale of ambition and hubris set amid the bold promises of Silicon Valley.
The idea was to make blood tests cheaper, more convenient, and accessible to consumers. Simply by using a pin prick, blood could be analyzed quickly for diseases. Holmes believed the testing procedures were a revolution in the way diagnostics were done and preventative medicine. Using a machine called the Edison, pharmacies were able to use this portable blood test from a drop of blood. However, most tests were not a needle prick but actually a venipuncture.
Physicians could not get information on how the tests were done. The whole process was sort of a black box, which had mysterious or unknown internal functions or mechanisms. Theranos was very secretive about the workings of the machinery and knew it did not working as intended.
Holmes duped just about everyone about the efficacy of Edison. She was able to raise hundreds of millions of dollars until Tyler Schultz blew the whistle. For twelve years, Holmes essentially ran a Ponzi scheme by attracting investment funds from primarily venture capitalists that saw it as a unique opportunity to cash in on the boom in Silicon Valley.
According to a federal indictment, Holmes and Balwani defrauded doctors and patients (1) by making false claims concerning Theranos’s ability to provide fast, reliable, and cheap blood tests and test results, and (2) by omitting information concerning the limits of and problems with Theranos’s technologies. Allegedly, the defendants knew Theranos was not capable of consistently producing accurate and reliable results for certain blood tests. Other allegations include:
- The defendants made numerous misrepresentations to potential investors about Theranos’s financial condition and its future prospects, including that its patients’ blood was being tested using Thermos-manufactured analyzers; when, in truth, they knew that the company had purchased and used third party, commercially available-analyzers.
- The defendants’ represented to investors that Theranos would generate over $100 million in revenues and break even in 2014 and that the company was expected to generate approximately $1 billion in revenues in 2015; when, in truth, Theranos would generate only negligible or modest revenues in 2014 and 2015.
- The defendants fraudulently stated that the Edison could perform a full range of clinical tests using small blood samples drawn from a finger stick at a faster speed than previously possible and with more accurate and reliable results. Allegedly, the defendants knew that the claims about the analyzer were false. It was slower than competing devices and, in some respects, could not compete with existing, more conventional machines.
Tyler Schultz claimed to know something unethical was going on and could have major repercussions on the company. He complained to Holmes that the research results were tampered with and multiple quality control tests were failing. Shultz said the prototype of Edison only had an accuracy of 65 percent while the required accuracy results were 95 percent, adding that Theranos was knowingly misrepresenting information to its users. He told HBO in a documentary that if a hundred people who had syphilis came and got tested on the Theranos devices, the company would only tell 65 of them that they had syphilis and told the other 35 that they were healthy: no need for medical intervention.
Schultz had signed non-disclosure and confidentiality agreements. Theranos accused him of leaking trade secrets and violating the agreement. He and his family fought it spending between $400,000 and $500,000 in legal fees.
In an interview with ABC News for its 20-20 television show in May 2019, another former Theranos employee, Erika Cheung, pointed out the flawed quality controls at the company that had ignored problems with the process of analyzing blood. Cheung said she raised these issues directly with Balwani who reacted by saying, “What makes you think that we have problems? What was your training in statistics?...I’m tired of people coming in here and starting fires where there are no fires and sort of thinking that there are problems when there are no problems.”
Cheung realized her concerns were falling on deaf ears. She told the reporter that “This was not an environment, that is not a culture, where they really care about what consequences this might have on patients.”
On June 15, 2018, Holmes and Balwani were indicted on multiple counts of wire fraud and conspiracy to commit wire fraud. According to the indictment, investors and doctors, and patients were defrauded. It alleged the defendants were aware of the unreliability and inaccuracy of their products but concealed that information. If convicted they each face a maximum fine of $250,000 and 20 years in prison.
In September 2018, it was announced that, with the approval of the company’s board of directors and shareholders, Theranos would begin the process of corporate dissolution. The company owed at least $60 million to unsecured creditors. The move to dissolve rather than file for bankruptcy left the company with $5 million to distribute to creditors.
The trial of Holmes and Balwani was set to begin in October 2020, although Holmes asked for a delay to April 2021 because of Covid-19.
The story of Theranos is a cautionary tale where one lie leads to another and before you know it the story snowballs out of control and coverups ensue. The culture of the company was such that it hid important information from the public, pharmacies, medical professionals, and the government. It is a classic case of the ethical slippery slope.
Posted by Steven Mintz, aka Ethics Sage, on September 3, 2020. You can sign up for our newsletter and learn more about Dr. Mintz’s activities at: https://www.stevenmintzethics.com/. Follow him on Facebook and on Twitter .