California jurors convicted Theranos Inc. founder and CEO, Elizabeth Holmes, 37, on four counts of criminal fraud on January 3, 2022. This decision came after 15 weeks at trial and more than 50 hours of deliberation over a multi-million dollar scheme to defraud investors. The U.S. District Court for the Northern District of California tried the case under United States v. Elizabeth A. Holmes, et al. 18-CR-00258-EJD.

Case updates are available through the court's website here.

Holmes Rises to Silicon Valley Fame

In 2003, Holmes founded Theranos, a blood-testing company, in Woodside, California, with offices in Palo Alto and Newark after leaving Standford University's chemical and electrical engineering programs at age 19. She asserted that Theranos had developed Edison's Theranos Sample Processing Unit (TSPU). Holmes solicited investments through a combination of direct marketing communications, press releases, financial statements, and other information.

Holmes quickly rose to Silicon Valley fame on the promise of revolutionary blood-testing technology. She stated that the analyzer could perform a broad range of clinical tests using only a few drops of blood drawn via a finger stick. Additionally, Holmes represented that the analyzer could produce more accurate and reliable results than those obtained through conventional methods rapidly. She raised millions of investor dollars, and the company reached a $1 billion valuation in 2010. By 2015, that figure had risen to $10 billion.

The Tides Begin Turning on Theranos

It all came crashing down in October 2015, when the Wall Street Journal published a scathing investigative piece alleging that Theranos engaged in questionable business practices. Most notably, the company employed conventional blood-testing equipment rather than Edison-based devices.

After several years of scandal and legal challenges from investors, medical authorities, and the Securities and Exchange Commission, Theranos dissolved in September 2018. Both Holmes and former Theranos President and COO Ramesh “Sunny” Balwani faced multiple wire fraud charges and conspiracy to commit wire fraud.

The original Wall Street Journal Article by John Carreyou is available here.

The Prosecution of Elizabeth Holmes

Holmes testified for six days, expressing regret and asserting that she never intended to deceive anyone. She also accused Balwani, with whom she had a romantic relationship for over a decade, of emotional and physical abuse.

Prosecutors spent most of their time establishing that Holmes defrauded high-profile investors, depriving patients who received inaccurate test results of a prominent role in the trial. During closing arguments, United States Attorney General, Jeffrey Schenk, remained adamant that Holmes chose to engage in fraud over legitimate business practices.

Jurors Struggled to Convict Holmes

Jurors found Holmes guilty of defrauding three major investors out of $144 million, including Lakeshore Capital Management, PFM Healthcare Master Fund, and Mosley Family Holdings. Additionally, they found her guilty of one count of conspiracy to commit mail fraud. However, the jury found Holmes not guilty of fraud charges against patients and deadlocked on three charges of fraud against other Theranos investors.

However, the jurors had a difficult time convicting Holmes. One juror even stated that they respected her belief in her technology and dream.

A Cautionary Tale for Founders and Investors

Many startups often operate on a “fake it until you make it” viewpoint. Holmes' actions appear to have been motivated in part by this mentality versus compliance and consumer protections. In her depositions, she stated that she believed the company's blood-testing technology was on the verge of success. However, until investors demand detailed information, another Theranos is likely to emerge if it hasn't already.

Investors and founders can mitigate risk by following the legal advice of a corporate attorney. Contact the HAN LLP legal team for an initial meeting here.