Technology

After 11 weeks of testimony and many delays, prosecution rests case against Elizabeth Holmes

San Jose, California (CNN Business)After testimony from 29 witnesses, federal prosecutors are resting their case against Elizabeth Holmes, the former CEO and founder of failed blood testing startup Theranos.

Over the course of 31 court days spread out over nearly three months, jurors heard from a broad assortment of witnesses in the San Jose federal courtroom where the highly-anticipated trial of Holmes kicked off with opening statements on September 8. The start of the trial faced numerous delays due to the ongoing pandemic and the birth of Holmes’ first child this summer.

To make its case, the prosecution turned to scientists, doctors, retail executives, former employees and even a former Defense Secretary. Through them, the government attempted to unravel the many layers of the alleged deception that led investors and patients to believe Theranos’ false promises that it could accurately, reliably and efficiently conduct a range of tests using just a few drops of blood.

    Holmes, a Stanford University dropout who founded Theranos in 2003 at age 19 with the lofty mission of revolutionizing blood testing, is facing nine counts of wire fraud and two counts of conspiracy to commit wire fraud. The government alleges she knowingly misled doctors, patients, and investors about her company’s blood testing capabilities in order to take their money. Now 37, Holmes faces up to 20 years in prison, as well as a fine of $250,000, plus restitution for each count of wire fraud and each conspiracy count. She has pleaded not guilty.

      Jurors heard from investors who lost millions of dollars after having been provided information by Holmes about Theranos’ supposed blood testing capabilities. That information included, jurors learned, falsified documents purporting to be endorsements of its technology from two major pharmaceutical companies. Jurors heard from three patients; one was falsely told she was miscarrying after taking a Theranos test when, in fact, her pregnancy was viable; another was told she had HIV antibodies when previous and subsequent tests by other labs indicated she did not.

          The trial now turns to the defense, which has given some indications of what its case could entail during opening arguments and cross examinations of government witnesses. Holmes’ team has sought to convince jurors that Holmes — who it frequently characterizes as a young, ambitious but inexperienced entrepreneur — acted in good faith, and lacked the intent to deceive. Instead, it has pointed at others for Theranos’ downfall.

          Holmes’ attorneys have blamed the lab’s failings on lab directors and Theranos’ COO and president Ramesh “Sunny” Balwani, with whom Holmes was romantically involved and who was roughly two decades her senior. (Balwani is set to face federal prosecutors over the same charges next year; he has pleaded not guilty.)

          “There were lots of misleading statements made during the lifespan of Theranos. The jury has now heard that evidence. But the government still has to establish intent — and that provides a real opportunity for the defense,” Mark MacDougall, a white-collar defense lawyer and former federal prosecutor, told CNN Business.

          Many layers to the government’s case

          Prosecutors sought to contrast the issues inside Theranos with how it was pitching itself to investors and business partners. The prosecutors also attempted to show that Holmes was at the center of it all, in an effort to address the trial’s three main questions: what Holmes knew, when she knew it, and whether she intended to deceive investors, patients and doctors.

          Multiple high-profile witnesses testified about Holmes’ charisma and, according to the former CEO of Safeway, her unusually hands-on role “negotiating completely on her own.” Investors and retail executives testified that they were kept in the dark about the company’s true capabilities. And former employees testified that they alerted Holmes directly to the lab’s issues, to little effect.

          Surekha Gangakhedkar, a scientist who worked at Theranos for eight years, testified that she quit in 2013 over her concerns with launching blood tests to consumers through its Walgreens partnership. When she expressed this to Holmes, she testified the CEO responded by conveying “that when she has a promise to deliver to the customer, she doesn’t have much of a choice but to go ahead with the launch.”

          Similarly, Adam Rosendorff, the former lab director who was questioned for six days of the trial, testified that while he technically reported to Balwani, Holmes sat above Balwani. Rosendorff said he made his own concerns known to Holmes and ultimately determined “the company believed more about PR and fundraising than about patient care.” After Rosendorff departed, Theranos had two co-lab directors who overlapped yet were unaware of each others’ existence. One rarely ever set foot in the lab and only met Holmes once; the other never visited the lab.

          Investors and business partners had little visibility into these issues at the time. Former executives for Walgreens and Safeway, testified that they were kept in the dark that the company relied on third-party devices, rather than its own, to analyze patient blood. Witnesses like former Walgreens executive Wade Miquelon testified being shown pharmaceutical company endorsements which had been faked.

          Miquelon and some investors also said they were impressed by another misleading claim: that Theranos’ technology was being tested in Afghanistan on military helicopters. “What better application for a technology like this than in a military setting under harsh conditions like one would expect in a place like Afghanistan or Iraq,” investor Brian Grossman, whose firm Partner Fund Management poured $96 million into Theranos, testified this week.

          Theranos’ association with retired four-star general and former Defense Secretary James Mattis, who once served on Theranos’ board, made it plausible that the startup could have had its technology deployed to help solders in war zones and on military aircrafts. But Mattis, arguably the biggest name to take the stand, testified it was not, as did a former Theranos employee who was involved with its conversations with the military.

          These misrepresentations were fed directly from Holmes to journalist Roger Parloff, who was the government’s final witness before it rested its case. Parloff wrote the 2014 Fortune Magazine cover story, which was one of the glowing articles that circulted Theranos’ claims and factored into why investors were wowed.

          Six investors, whose investments are each part of the wire fraud charges Holmes is facing, took the stand, including some who spoke about investments made by some of the world’s wealthiest families.

          Among them were a money manager for the billionaire family of former US Education Secretary Betsy DeVos and a former lawyer who first heard about Theranos from a longtime client — former US Secretary of State Henry Kissinger — and then solicited other rich families to invest, including the DeVos family, the Waltons of the Walmart fortune, and the heir to an Italian auto empire.

          From the outset of the trial, legal experts have suggested jurors may be less sympathetic to investors than patients, who are the other category of alleged victims in the government’s case.

          The government introduced two patients, and a doctor in the final week of its case. Earlier this month, the prosecution botched an attempt to bring in another patient because it failed to list the specific test the patient took on a document previously provided to the defense. That error resulted in the government removing one count of wire fraud.

          The prosecution had listed roughly 180 possible witnesses it may call. Among those it didn’t call: Kissinger, who once sat on the board; media mogul Rupert Murdoch who reportedly invested $125 million; high-powered attorney David Boies who was an investor, board member and legal defense for Holmes and Theranos, and employee-turned-whistleblower Tyler Shultz, the grandson of the late George Shultz, another former Secretary of State and board member.

          Jurors heard her voice, read her texts and saw clips of her TV interviews

          In the company’s heyday, Holmes was the subject of much media attention as it soared to its once-$9 billion valuation. In its downfall, that spotlight hasn’t dimmed — there have been documentaries, a forthcoming limited series, a planned feature film and at least two podcasts devoted to covering the trial. That attention was a big challenge to selecting a pool of jurors largely unfamiliar with her.

          But since the beginning of the trial, jurors — who knew little, if anything about the baritone-voiced entrepreneur with a penchant for black turtlenecks — have only gotten glimpses into how she spoke, and presented herself.

          They heard audio from a 2013 investor call where Holmes made claims about Theranos’ testing capabilities and its work with the military. They also saw television clips from interviews she gave after the 2015 Wall Street Journal investigation that first poked holes in its technology and testing methods.

          “I’m the founder and CEO of the company — anything that happens in this company is my responsibility,” she said, in a April 2016 Today Show clip.

          Perhaps the most intimate look jurors have gotten into Holmes’ state of mind at the time of the alleged fraud has come through text messages between her and Balwani.

          The texts, some of which have been introduced through various witnesses, ranged from personal to professional and reveal the two were in constant communication. Among them, they discussed the state of Theranos’ clinical lab in November, 2014 as the company was securing investments (“Normandy lab is a f***ing disaster zone,” Balwani wrote) and how they felt when regulators were doing a laboratory audit in September, 2015 (“Praying literally non stop,” Holmes wrote. “Going bad so far. Pray,” Balwani wrote). There were also more intimate “love you” texts to some confusing ones that mentioned “the death and sex thing,” which went unexplained to jurors.

          “There’s an aspect of many criminal cases where the jury is asked to get inside the heads of the defendant and other important individuals in the case and that can be uncomfortable for a variety of reasons,” said Jessica Roth, a former federal prosecutor and Cardozo Law School professor. Roth noted that, given the particulars of the Holmes case, “it is warranted, at least to a certain extent, to get inside that relationship and to understand the nature of the power dynamics.”

          Will Holmes take the stand?

          Whether jurors will get to hear from Holmes, who is listed as a possible witness, remains an open question. Legal experts such as Stanford Law School professor Robert Weisberg say that determining whether to take the stand is “a very complicated calculation.”

          Doing so would mean subjecting Holmes to a cross-examination that would undoubtedly be “really, really rigorous.” He noted that anything she testifies about could potentially be impeached by things she has said and written over the years.

          Another looming question: whether Holmes will claim she was the victim of intimate partner abuse at the hands of Balwani. The allegation, which Balwani’s attorneys have denied, was introduced in pre-trial filings. So far, her attorneys have only vaguely hinted at the idea in opening arguments. Still, among the possible witnesses for Holmes is clinical psychologist, Dr. Mindy Mechanic, whose work focuses on the psychosocial consequences of violence, trauma and victimization.

          The defense is likely to continue playing up Holmes’ youthful age and lack of experience at the time of the alleged fraud. Through cross examinations, the defense has drilled into the expertise of witnesses and their teams in contrast to Holmes. Holmes, her attorneys have argued, wasn’t qualified to run a laboratory. The defense also sought to sow doubt in the due diligence process of investors and underscore that startups are known to be risky investments.

          “Elizabeth was only in her twenties, had no prior business experience and was surrounded by much older mentors and advisers,” said MacDougall, the white-collar defense lawyer. “The defense now has the chance to put the evidence in context.”

          George Demos, a former Securities and Exchange Commission prosecutor and an adjunct law professor at the UC Davis School of Law, said the defense “may call witnesses to testify about Theranos’ successes to show that Holmes was in fact on the road to achieving her goals.”

            Holmes, who has been present each day inside the courtroom, is dutifully accompanied by her mother, Noel, who oftentimes walks hand-in-hand with her daughter to the door through which she enters the courtroom and gives her a hug. (Holmes’ father is listed as a possible defense witness.)

            Anne Kopf-Sill, Phd., a retired biotechnology executive who has been attending the trial most days and has been following the story of Theranos for years, said she’s been struck by the persona Holmes gives off in the courtroom: “She’s just sitting there looking sweeter than an angel.”

            Leave a Comment