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Author: Don Obrien

Silicon Valley on trial in case against Elizabeth Holmes


Lawyers on Tuesday are scheduled to begin selecting a jury for the trial to decide the fate of one of Silicon Valley’s most lambasted entrepreneurs, former Theranos CEO Elizabeth Holmes. But it’s not just Holmes who’s on trial — the case could expose the region’s startup business culture to new criticism.

Holmes, 37, once proclaimed the youngest female self-made billionaire — and featured in Yahoo Finance’s new original documentary “Valley of Hype,” available to stream at 5 p.m. on Monday — faces charges of wire fraud and conspiracy to commit wire fraud tied to more than $700 million in investments she attracted for her now defunct blood-testing company, Theranos.

Plaintiffs lawyer Reed Kathrein, who was interviewed in “Valley of Hype” and represented two of the company’s late stage investors, said Theranos’ sizable capital raise could be used in her defense to send a message to the jury that big investments from wealthy, seasoned backers amounted to business as usual.

“They will get witnesses to admit this is a known way of doing business in Silicon Valley, and therefore claim that it could not possibly be fraud,” Kathrein said. “This will be fun to watch as it would put all of Silicon Valley on trial.”

At its peak, the diagnostics firm was valued at approximately $9 billion and headquartered on the prestigious Page Mill Road in Palo Alto, California. Holmes’ unfulfilled vision for the company was to revolutionize health care using a desktop analyzer that could perform hundreds of medical diagnostic tests using as little as a drop of blood.

REFILE - ADDING COUNTRY Former Theranos CEO Elizabeth Holmes leaves after a hearing at a federal court in San Jose, California, U.S., July 17, 2019.  REUTERS/Stephen Lam

REFILE – ADDING COUNTRY Former Theranos CEO Elizabeth Holmes leaves after a hearing at a federal court in San Jose, California, U.S., July 17, 2019. REUTERS/Stephen Lam

“For me, it was, this is a change in the world that I want to see,” Holmes said in an interview during her time as Theranos’ CEO.

According to prosecutors, Holmes misrepresented to investors and patients that Theranos’ analyzer known as the TSPU, Edison, or miniLab could accomplish a full range of accurate and reliable diagnostic tests using small blood samples drawn from a finger stick. Prosecutors also say Holmes lied about the analyzer being used in military field operations.

Holmes, who pleaded not guilty and faces up to 20 years in prison if convicted on all counts, has argued that she did not intend to mislead investors.

Margaret O’Mara, a University of Washington technology history professor and author of “The Code: Silicon Valley and the Remaking of America,” said Holmes raised money for Theranos at a time when Silicon Valley could rest on its laurels as a technology and investment hub, yet also had a lot to prove. 

“In the early 2010s, the Valley was riding high and the veneration of brilliant young founders like [Apple co-founder] Steve Jobs and [Facebook co-founder] Mark Zuckerberg was riding even higher. The only two places it seemed to fall short in the public conversation was its lack of gender diversity, and the feeling that it wasn’t producing meaningful things,” O’Mara said. “And then here comes Holmes, seemingly solving both of those problems: a tall, pretty blonde, young Stanford dropout, in a black turtleneck, who was building something that was far more than an app, that promised to revolutionize health care.”

SQUAWK BOX -- Elizabeth Holmes, Theranos CEO and the world's youngest self-made female billionaire, in an interview on September 29, 2015 -- (Photo by: David Orrell/CNBC/NBCU Photo Bank/NBCUniversal via Getty Images)

SQUAWK BOX — Elizabeth Holmes, Theranos CEO and the world’s youngest self-made female billionaire, in an interview on September 29, 2015 — (Photo by: David Orrell/CNBC/NBCU Photo Bank/NBCUniversal via Getty Images)

Columbia business school professor Len Sherman — also interviewed in “Valley of Hype,” — said Theranos’ ability to attract venture capital and other private funds is reminiscent of the fundraising prowess of New York-based WeWork, and San Francisco-based Uber. 

“The first turned out to be an epic fail and the second has lost more money than any startup in history — and still refuses to predict when if ever they’ll be profitable,” Sherman said. 

While Silicon Valley’s “fake it ‘til you make it” motto may be a defense tactic to soften Holmes’ alleged embellishment about her blood-testing product, Kathrein said, in his opinion, it makes for a weak defense. Instead, he suspects Holmes’ attorneys to focus on the idea that prosecutors have taken her statements to investors and customers too literally.

“More likely they will point to hedges in Holmes’ statements,” and chalk grandiose claims up to “mere puffery,” Kathrein said.

For his part, Former Theranos board member and Silicon Valley technology executive, Dan Warmenhoven, told Yahoo Finance in an interview for the film that to a certain degree Holmes is a victim of Silicon Valley’s startup culture.

“I think with a different board, maybe with a different COO, with somebody to coach her and help develop her as a CEO and a spokesperson, I think a lot of this could have been avoided,” Warmenhoven said.

Holmes is charged along with her co-defendant Ramesh “Sunny” Balwani, Theranos’ former president and COO. Balwani is scheduled to face trial in January 2022.

Lawyers handling jury selection for Holmes’ case are tasked with agreeing upon 12 jurors and 5 alternates. Opening statements are scheduled to begin Sept. 8.

Alexis Keenan is a legal reporter for Yahoo Finance. Follow Alexis on Twitter @alexiskweed.

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