Theranos, CEO Holmes, and Former President Balwani Charged with Fraud | Hacker News Reader

Theranos, CEO Holmes, and Former President Balwani Charged with Fraud

sec.gov

1,211 pointskgwgk516 comments

Ok, this is the money line in that press release for me:

“The charges against Theranos, Holmes, and Balwani make clear that there is no exemption from the anti-fraud provisions of the federal securities laws simply because a company is non-public, development-stage, or the subject of exuberant media attention.”

For all those entrepreneurs are trying to "fake it until you make it" be aware that the SEC considers your strategy both fraudulent and they feel they have the jurisdiction to prosecute you. And while I doubt the SEC is going to go after every CEO that raised a Series A on a pitch deck that was pure fantasy, the people who participated in the round might bring them in if it served their purposes.

I interpreted it somewhat differently. The money paragraph seems to be

> claimed that Theranos’ products were deployed by the U.S. Department of Defense on the battlefield in Afghanistan and on medevac helicopters and that the company would generate more than $100 million in revenue in 2014. In truth, Theranos’ technology was never deployed by the U.S. Department of Defense and generated a little more than $100,000 in revenue from operations in 2014.

This was not even a forward-looking statement, it was an outright lie in the legal document.

One can do pretty much whatever they wish with accredited investors' money, but it has to be disclosed in the PPM.

Even if you have a line item where all the money will be spend on CEO's dog's private jet travel, accredited investors who have reviewed and signed the PPM have no legal recourse.

In Theranos case it looks like a straightforward misrepresentation of facts, which is a red flag for SEC.

I had to go through a bunch of SEC cases for an accounting project a while back. One thing stood out to me more than anything: the SEC goes after cases that are easy more than anything else. Multiple crimes committed with lots of evidence and easy-to-spot damages. It actually gave me the impression that avoiding the ire of the SEC is relatively easy if you set your mind to committing fraud without getting caught.

>It actually gave me the impression that avoiding the ire of the SEC is relatively easy if you set your mind to committing fraud without getting caught.

I assure you, it is only possible to avoid risk if you're a small fish and extremely careful. For instance, you have a good chance of getting away with skimming a neighborhood stock fund you setup. If you are managing or receiving millions of dollars in investment, you can bet anything fishy will show up on the SECs radar at some point. Most people with large sums of money don't get where they are by being stupid with it, and if they are the victims of fraud, they know where to go. While the SEC can't bring criminal charges, they have top notch investigators. Once they smell the fish, they won't stop until the entire scheme is unraveled.

I can't speak directly to the observation you made, but I personally know a high up SEC investigator, and he obsesses about the most minute details of the cases he works on and lives to take on the toughest cases possible. My guess is distribution of cases the SEC prosecutes are very heavy tailed. There are many dumb cases that are very easy to find and prosecute that involve 10s to 100s of thousands of dollars. Think skimming, ponzi schemes etc. The more sophisticated and larger cases are also more risky (for the fraudster), harder to execute, and much more rare. That might explain your observations.

How do you not go to jail for this? This isn't fake it until you make it. This is massive fraud. 100 mil vs 100,000 is off by a factor of 1000.

I agree, especially when you use the recent Shkreli case as a point of comparison. You have Shkreli who has been put away for 7 years for a hypothetical 10mil, yet Holmes commits "massive fraud", possibly losing 100's of millions of investors' money, and most likely gets away with a 600,000 fine and no jail time.

Well, parsing that statement:

> claimed that Theranos’ products were deployed by the U.S. Department of Defense on the battlefield in Afghanistan and on medevac helicopters

That is clearly a statement looking at past events, so if it was false it was clearly a lie

> the company would generate more than $100 million in revenue in 2014.

The important word there appears to be "would", in which case it was a forward-looking statement so easier to argue it was based on projections that just didn't pan out.

My interpretation is that most startups don't deal with life-or-death lines of work, whereas Theranos does. There's no room for "creative" business practices there. The government will take note at some point and come chasing.

Yes, if you want to lie about some drone-based burrito delivery service you're probably not gonna draw the same ire as life-saving medical equipment. Although if you swindle investors for over $700 million in either case I imagine the SEC will be knocking at your door eventually.

More along the lines of pitching their startup to someone at the Wall Street Journal who signs up for a demo account but are thoroughly unimpressed and never login again. But in their pitch deck to investors they proudly claim that the Wall Street Journal is a customer.

What does "PPM" stand for?

Private Placement Memorandum

https://www.investopedia.com/terms/o/offeringmemorandum.asp

Private Placement Memorandum - http://www.capitalfundlaw.com/blog/2015/04/05/whats-in-a-pri...

"Private Placement Memorandum" - first result on googling 'investor PPM'

probably private placement memorandum

"fake it until you make it" generally refers to the product implementation vs pitch on the consumer side. e.g. You pitch "The best automated way to do X!", but in actuality you have a horde of people doing the work initially to figure out the problem before building the actual automation. There is nothing wrong with this and remains a completely viable approach. What you don't do is tell your investors you've already built the automation tech and hide the labor cost of doing it manually in your financials.

I think the Concierge and Wizard of Oz approaches [1] are just one thing people mean by "fake it 'til you make it", but I definitely don't think they're the most common meaning.

Startups engage in all sorts of puffery, trying to project the appearance of success long before they have actual success. Fancy websites, fancy offices, sales and investment pitches that cherry pick stories, numbers, and milestones that give an enormously positive impression of what's generally a very bumpy reality.

I personally don't like that, but the game is the game. But it's very easy for that puffery to slide over into outright fraud when things get desperate. Which is why I'm so glad that the SEC is going after Theranos with great vigor. Hopefully these clowns will end up sharing a cell with Shkreli, giving every would-be startup CEO a clear example of what happens when they push it too far.

[1] https://www.allencheng.com/concierge-mvp/

This is fine when the elements of automation aren't beyond the state of the art. However when you have startups like Spinvox et-al hoping that automated transcription will show up and save them (I mean transcription of variety of voice in variety of environments, using uncharacterized microphones and transcoded from mobile to core ect) or the current rash of chatbot liars and charlatans then real real damage gets done to real companies where execs believe the trendy w*nkers vs real people who understand technology. I've seen good engineers hounded out and scores of millions of pounds wasted because of "warp drive over powerpoint" and I've had enough. Not that I'm bitter or anything.

It’s probably “fine” in the sense that nobody will sue you. But you’re basically arguing “it’s okay to lie to consumers about something that’s immaterial.” That’s true, but the standard for materiality under state consumer protection law is pretty low. E.g., under California’s Unfair Competition Law, statements that a lock was Made in America were found actionable under the UCL, even though the lock worked perfectly fine. People might care whether the service is automated or not, even if the end product is the same.

Of course, the benefit from the puffery might outweigh whatever legal risk exists. I’d call that a “calculated risk,” not “fine.”

> But you’re basically arguing “it’s okay to lie to consumers about something that’s immaterial.”

If it's a significant factor in a buying decision, it's not immaterial. If it's not material, it's probably not worth lying about.

>There is nothing wrong with this

Yes there is. You're selling investors on capabilities you don't have, or at least intentionally misleading them about your abilities. Unless you're explicitly telling them that you WILL have "The best automated way to do X!" and are working hard on it, you're deceiving them.

If I, an investor, give you money because you tell me you have automated technology, but really it's people in a room, that's a lie and there is absolutely something wrong with it!!

If you can make the automated technology before I find out, well, maybe I won't sue you, but that sure doesn't make it right or acceptable.

If you say it’s automated, and it’s not, that’s fraud.

> You pitch "The best automated way to do X!"

> in actuality you have a horde of people doing the work

> There is nothing wrong with this

um in what universe does "technically legal in the US of A" equate to "nothing wrong with" ?

using legality as a shortcut for a moral compass is putting the cart before the horse at best, but very often argued out of laziness or pure self-interest at worst. it's a narrative that causes people to stop introspection and think about what is actually right or wrong, instead going for the much, much easier choice of what is legal and what is not. not easier because the legal system is simpler than ethics (it usually isn't), but easier because the choice is made for them.

and as your post demonstrates, once the choice is made, it's easy enough to conflate legality, lawfulness and judgement with morality, rightfulness and justice.

but once you poke at that distinction, the argument just falls apart.

there isn't "nothing wrong with this".

all you're really saying is that it's probably not illegal.

This is "do things that don't scale" not "fake it until you make it."

I have never heard of someone using "fake it until you make it," referring to Wizard of Oz or Concierge as William Pietri (gosu Lean practitioner) below has mentioned.

> You pitch "The best automated way to do X!", but in actuality you have a horde of people doing the work initially to figure out the problem before building the actual automation.

It is plain dishonesty.

"Fake it til you make it" generally refers to acting like you believe in yourself even if you're filled with self-doubt. Not actual fraud.

As with anything there is the way in which something is offered and the way in which it is consumed. I have encountered many people who have internalized "fake it" to mean "pretend that you are hitting all your milestones and you executing against your plan". These folks see this as a way to keep the questions of why they aren't actually doing all of that at bay because later when they are "making it" those questions will be irrelevant.

For example you lie about how your marketing efforts are reaching customers who are signing up in droves while you use mechanical turk and other techniques to make the observable metrics go up. At some point your visibility reaches the point where you actually are reaching your customers and so you can stop doing the shady stuff. By doing this you avoid the inefficiency of the whole "we aren't sure you can do this" discussion which helps no one.

On the outside, one clean narrative, traction and growth from day 1, now a multi-million (or billion) dollar business. Or as my Grandfather would say, all yummy sausage and no discussion at all about what not-yummy things are in there too.

Everyone should believe in themselves. That is just a given, if you don't (or can't) then you won't reach your expectation. There isn't any "faking" there as far as I can see (unless it is suppressing your own doubts about the effort).

Yea, I think people blow up the saying out of context from self-confidence to business. If I say, "We're confident we can develop the machine learning technology to deploy X, even though we are currently using human checking" that's a lot different than saying "We can currently do all these things with this machine learning technology we developed" despite the technology not existing yet.

It's essentially someone stating a vision they have as reality, which is fraud.

You can believe in yourself without faking anything, and it’s healthy to do so.

Faking it implies you want to give others the impression you’re already a big shot, and it dilutes out the accomplishments of people who actually made it.

The downside should be that if you’re faking it and you don’t make it, your shame should be relentless and brutal, and no one should ever take you seriously again. Also, even if you make it you will feel alone and empty in your success, because everyone will have long thought you already “made it” and you have to continue hiding your true story. There is no one to celebrate with except those who are also in on it.

Where as if you would have just been humble and true to where you currently are, people have headroom to express sympathy and support should you encounter a setback.

I thought it was mainly about lying to others about how well you are doing, given that the central idea is that of giving an impression of success before you are successful, in order to gain access to the people and markets you require in order for you to become actually successful.

Most who give that advice are very imprecise about which deceptions they're endorsing.

Almost like they're asserting a confidence in a belief that isn't really merited -- wish we had a term for that.

It's worth nothing that one of Theranos's VC funders, Tim Draper, did defend Holmes despite the fraud allegations:

https://news.ycombinator.com/item?id=11973102

https://www.vanityfair.com/news/2017/01/theranos-investor-cl...

https://www.axios.com/tim-draper-keeps-defending-theranos-15...

"Venture capitalist Tim Draper, an old family friend of Theranos founder and CEO Elizabeth Holmes, who led an early $1 million investment into the company (split between two investment firms).."

SV/tech/USA is so great, anyone can make it big. You just have to be smart and work hard. Oh, and be family friends with billionaires. Yeah, that's all.

That's extremely interesting, thanks for sharing.

Think about the decision that he had to make in 2016. He had to choose between admiting his mistake and doubling down. The downside of admitting his mistake is that he's guaranteed to get negative points; the upside is that it will minimise futures downsides. By dubling down, he's guaranteed to reduce his negative points in 2016 but exposes himself to magnified upsides (if he's proven right) and downsides (if he's proven wrong) in the future.

Now think rationally how you'd choose. The second strategy is a lot riskier so it better have better return as well! But the second strategy can only have higher reward if you either believe high probability of future upsides (i.e. Theranos might be faking till you make it, but they'll make it) or low probability of future downsides (i.e. I'm not sure what's going on, but definitely not fraud). I submit that the only way that you could come to believe either is if you're hugely misinformed about the company.

I.e. that guy is just a bit incompetent.

I think you're ignoring the iterated nature of the game he plays. He is looking for founders to fund -- deal flow is the lifeblood of any VC. This is a signal like many other, and what it says is "As an early stage investor I absolutely have your back."

Tim Draper also stands to gain from Theranos being reviewed positively, valid product or not, being an investor.

He's also stuck by Tezos through its organizational catastrophe, and it's looking as though that might pay off for him.

Generally, "they're family" sounds like a sensible default attitude for a VC towards their investments.

Also Dan Warmenhoven, speaking for the board.

Re a previous Holmes forfeiture: "Warmenhoven added Ms. Holmes showed “a level of selflessness and grace reflecting her commitment to the company’s success.”

Could this be due to the litigation?

Someone called Tim Draper the Trump of Venture Capital[1] :)

[1] https://news.ycombinator.com/item?id=11973420

I think there is a significant difference between lying about what you can do (fraud) and simply saying you hope to accomplish something.

I don't disagree, but recognize that an investor can feel defrauded even when one can show precisely what was said and what was not actually said. Most CEOs I've heard pitch are creating a narrative and they leave out facts that would disagree with that narrative. And sometimes they state the 'facts' in a way that imply more than they actually say.

For example, you can say "We are building a tester that can run tests using only a drop of blood." and "We have test results from blood showing markers" and never mention that the "test results" came from an industry tester and not the "tester you are building". The implication is that your tester did that but you didn't actually say that. What I read from the press release was that this sort of messaging was going to be actionable. If you look at various full disclosure rules the SEC has for public companies, this felt like a shot across the bow to startups that they would do well to think about that instead of glossing over bad news.

Agreed. Here's the support to you:

The complaints further charge that Theranos, Holmes, and Balwani claimed that Theranos’ products were deployed by the U.S. Department of Defense on the battlefield in Afghanistan and on medevac helicopters...[i]n truth, Theranos’ technology was never deployed by the U.S. Department of Defense...

Right, but that doesn't mean that fraud can't happen with very early stage companies....there are plenty of b2b SaaS startups out there who are raising on non-GAAP metrics like "bookings" and who are grossly inflating both the certainty and pro forma value of these projected numbers.

The last para is even crazier.

> Ms. Holmes and Balwani falsely claimed to investors [...] and that Theranos would generate more than $100 million in revenues in 2014, the SEC said in its complaints. In fact, the company’s revenues were a little more than $100,000 that year.

I couldn't figure out why investors were putting all that money in. Telling them you were making $100m makes the investments make a hell of a lot more sense.

What's 3 orders of magnitude between friends? She deserves prison time for this.

"fake it till you make it" is one thing if your product is a new dating app to compete with grindr, or a clone of flappy bird... entirely another thing if you're making tangible claims about the ability of a medical device.

"For all those entrepreneurs are trying to "fake it until you make it" be aware that the SEC considers your strategy both fraudulent "

Sigh. The SEC is concerned with lying about actual numbers. Not about future projections. What a terrible comment on a startup forum. "Fake it until you make it" it as about having confidence -- not about lying to investors. Please downvote this parent comment.

The SEC is concerned with lying about actual numbers. Not about future projections.

Our experiences are different I suspect, Check this out https://www.sec.gov/fast-answers/answers-regfdhtm.html. I sat in the courtroom once as one of the officers of a company was being prosecuted for violating this disclosure rule. There are a number of regulations that the SEC enforces that have nothing to do with "actual numbers" and everything to do with information asymmetry where the company knows something and the investors don't.

They have historically been all about that when non-accredited investors are involved (aka public companies). And reading their action with respect to Theranos suggested to me that they are going to bring that hammer into the startup space.

Also, "fake it until you make it" might work for photo sharing apps and such but it should never be the case when human health is involved. Holmes and people around her were no other than quacks who promised the world to whoever they met.

Don't get me started on the whole ICO, crypto hype. Responsible optimism and execution is key to a company's success. Disregard this, and you'll face consequences like these.

It really depends on whether the intent to defraud was there or not. The SEC is probably not out to outlaw founders being true believers in their vision, even if their beliefs are often misguided. On the other hand, if there is solid proof that founders knew their vision had no hope of succeeding but presented it as though it did, that could and should be a problem.

These are desperately embattled claims at scale. If you lie to the SEC and you are an ass to the government they will crush you. Oldest story in the valley, and certainly beyond... another tale of hubris that ends in classic tragedy.

Well, 'prosecute'... no one is going to jail. White collar crime is normalized and expected in upper class circles. A single case like this is a drop in the bucket. While certainly not a majority, there are absolutely people in this world that believe if someone will not come to you and put a gun to your head, back you into a cage, and lock you in it, then whatever they are doing is fair game. If people really wanted to stop them, they'd take it that far. So they see any other standard as frivolous and silly to pay attention to. Ethics? What ethics?

>For all those entrepreneurs are trying to "fake it until you make it" be aware that the SEC considers your strategy both fraudulent and they feel they have the jurisdiction to prosecute you.

Holmes was, in many ways, embodying that HN mentality, acting on the basis:

- that an entire industry has been doing it wrong

- that it can be fixed by a low-bureaucracy, Angel-funded startup

- that once you have enough success you can just rewrite the laws that were slowing you down

- that no one knows what they're doing anyway, major projects are 100% guesswork, and you should just "fake it till you make it"

- that any skill is just a matter of 10,000 hours of practice

- that you can outsmart an industry before even passing or placing out of sophomore level classes

- that any self-doubt must be Impostor Syndrome, and so it's not worth your time to even check if that doubt has a factual basis

Yes, I've posted this twice before but I'm citing it and admitting to it, and it got heavily upvoted both times (thanks to Algolia for making comments so easily searchable btw):

https://news.ycombinator.com/item?id=12071172

Please don't copy and paste content into Hacker News, regardless of how good you think your past comments were. The threads here are for conversation, not reciting from the record.

There is no "HN mentality", just a large statistical cloud that people see what what they want in. Most of that cloud has been the opposite of what you're suggesting. Commenters here have been not just skeptical but cynical and outraged by Theranos for years, to the point that it became tedious. It looks to me like you're engaging in a bit of revisionism for the purpose of posturing above the community. That is a popular sport but a distasteful one.

People here gave me talking points based on what you are saying years ago when I expressed skepticism about Theranos. I worked in the diagnostic industry and know that 1. Many tests (that are in the comprehensive panel that is routinely ordered) cannot be done with a finger stick, they need venous blood. 2. This isn't like a social network you can start out of a dorm room, it is a 50+ billion dollar industry that is highly regulated and needs real science.

What if some 20 year old business major drop out said they are going to make chipsets double the speed of the old and lumbering tech companies like Intel? Everyone here would say no way and never think that would be disrupted so easily. So yes it is a case of people with HN mentality thinking that well taking blood via a venous draw and giving me my results a day later is cumbersome and stupid, and rife for disruption. Someone thinking outside the box despite me or that person knowing next to nothing about clinical lab tech can easily make it better than Roche, Quest, Lab Corp, Abbot etc. because they can move quicker, and disregard the old paradigms. With no consideration for the physical impossibility with known scientific knowledge!

So yeah please by all means look at how smug a lot of us were on earlier Theranos postings about the Steve Jobs of med tech. It is a valuable lesson to learn. Not everything is inconvenient for no reason, and not everything can be disrupted without some serious demonstrable tech.

You can have all of those listed beliefs and still be honest about the actual state of your company, progress towards goals, etc. Doing so will probably beat those beliefs out of you, and you can come to an honest understanding of your limits.

Arrogant, presumptive behavior is annoying -- but I think it's important to keep a bright line between that and dishonesty, because one self corrects and the other doesn't. And, a pinch of presumption is necessary for exploration.

Theranos was more about using politically connected power-brokers to set up deals with kickbacks (their board/investors were government and military elites), less about "disrupting the industry with new ideas"

- that an entire industry has been doing it wrong

- that it can be fixed by a low-bureaucracy, Angel-funded startup

- that any skill is just a matter of 10,000 hours of practice

Some of these things are correct sometimes. Many industries have been doing things wrong for very long, and massively productive changes disrupted the industry. Who knew that boiling water would change the coal industry forever? Some guy came up with the pump idea and changed everything. The mine owner that invested in him made a lot of money. The industry changed. Things like that happen.

She is too intelligent to have believed even half of these things, so I'm going with wilful deception.

> that HN mentality

Is that the HN mentality? It might lean more that way now, I suppose, but I've always felt it was more in the "scratch your own itch" territory and less in the "complete industry outsider disrupts XYZ industry with revolutionary ideas" area

good thing you told us it was heavily upvoted before, now i know to upvote it this time too

Which of those ideas caused her to defraud investors for hundreds of millions of dollars?

- dropping out is a positive thing (the implication being that education is either a scam or for dumb people, not smart people like us)

I’m glad, and frankly I’m tired of all these “fake it till you make it”, “lean” startup, wizard of oz type companies polluting people’s attention with fake or half baked product offerings for shit that doesn’t exist just so they can get a signal to see if something is really worth doing or not. Consumer hostile.

Lets not pretend that everyone isn't just following the leaders here with grandiose messaging. Major tech corporations have done this as much as small startups.

IBM's Watson comes immediately to mind.

The difference is whether or not you can come through with some percentage of your promises. The ones who can eek out some kind of repeatable traction long enough to exit are successes, the ones who never get to scale are frauds.

No, Theranos outright committed fraud. They did things like used test results from some other kind of blood test to "prove" their test worked.

That isn't "We are on shaky ground with new, unproven tech." That's "We know it doesn't work. We are comfortable lying about it because money."

> IBM's Watson comes immediately to mind.

All of the industry AI labs follow the same pattern, even (perhaps especially) the en vogue ones (well, I guess depending on wtf "solve intelligence" is supposed to mean...). Watson is just old enough that it's now obvious the advertising agency was given too much leash.

Ditto for self-driving.

Ditto, in fact, for basically any basic or applied research happening in the research arm of any for-profit organization. And at a lot of universities besides! In fact, as far as I can tell, positive PR is some non-trivial aspect of the ROI for industry research labs.

BUT... there's a HUGE GAAP ( ;-) ) between marketing hype and lying in financial disclosures. One is eye-rolly and should be called out on internet message boards and during sales pitches. The other is criminal.

His name is Tyler Shultz.

He is the main reason we know know what Theranos was doing.

He had his life destroyed, he knew it would happen, what Theranos would do to him, and he did the right thing all the same. Tyler Shultz is a hero.

Never let someone tell you that you don't matter. Try hard to do what is right. We need more people like him, be one of them too.

Be like Tyler Shultz.

https://www.vanityfair.com/news/2016/11/explosive-new-detail...

Edit: Pic: http://www.dailymail.co.uk/news/article-3944392/Theranos-whi...

He has started his own company Flux Biosciences in 2017 after learning some important lessons...

"With Theranos I learned that entrepreneurs have to sell their vision," he said. "But you have to have some line between having a vision and seeing something that’s just not there."

"[Flux Biosciences] is developing point-of-care medical tests on blood, urine or saliva. Right now the company is working on a test for testosterone in saliva which could give a consumer health information but wouldn't serve as a diagnostic test that would affect medical care, as Theranos' tests aimed to."

https://www.forbes.com/sites/elliekincaid/2017/10/03/after-b...

It seems that there is justice in this world, then.

By going public Tyler Schultz very likely saved lives.

I can only wish him the best in his new endeavors. For certain, anyone doing business with him knows his handshake is worth something real.

Wait... How did he have his life destroyed? It just says that he hasn't talked to his grandfather in awhile...

He went on to start a biotech company (that seems to be doing alright) and was a Forbes 30 under 30 in 2017...

I don't see how his life was destroyed...

It's probably more accurate to say that, at the time he became a whistleblower, he had reasonable idea to believe that it could wreck his life. From the WSJ article:

http://archive.is/wO4B0#selection-955.0-958.0

> He says he was told by his parents that Ms. Holmes called the elder Mr. Shultz in the summer of 2015 to complain that their son was being unreasonable. Tyler Shultz says he also got a tip that private investigators were watching him.

> In a conversation in his parents’ kitchen, they pleaded with him to agree to whatever Theranos wanted, he says. Even though his heart sank when they discussed selling their house to cover the costs of defending him against a potential Theranos lawsuit, Mr. Shultz didn’t make a deal with the company.

> His parents said in a statement: “Tyler has acted exactly like the man we raised him to be, and we are extraordinarily proud of him.”

"His parents said in a statement" -- I remember when reading this story when it was originally published (2016) thinking how odd it was that his parents didn't agree to be interviewed in person. Or at least were worried about speaking out of turn at that point in time.

If you're involved in a complicated legal case, and you're not 100% sure what you're doing, no speaking to the press at all is your first preference, by a wide margin, and only speaking to the press in carefully considered, short, written statements in your second. Actually speaking to the press is for those with nothing to lose, and plenty to win -- or specialised training.

This is exacerbated by the dynamic that the part of the press you'll feel most eager to speak to, is that which are making upsetting misrepresentations about you or something you care about -- ie., those who have something to gain by manipulating you to say something controversial or incriminating.

"He and his parents have spent more than $400,000 on legal fees" for doing the right thing https://www.wsj.com/articles/theranos-whistleblower-shook-th...

Here are Tyler Shultz's grandfather and his wife:

https://en.wikipedia.org/wiki/George_P._Shultz

https://en.wikipedia.org/wiki/Charlotte_Mailliard_Shultz

It's unlikely that $400k will drive the family to bankruptcy.

> The day he quit Theranos, Shultz says, Holmes contacted George Shultz and told him that if his grandson did anything to threaten the startup he would 'lose.'

The entitled thug...

and this would create a pretty awesome movie... think "erin brockovich"

I liked the bit where they tried to use the "women in tech are oppressed" narrative to cover her ass:

> Tim Draper, the founding partner of Draper Associates and Draper Fisher Jurvetson, appeared on television on Tuesday—not for the first time—to defend Holmes and Theranos. In an interview on Closing Bell, the world’s most loyal V.C. said Holmes has been “totally attacked,” and that she is “a great example of maybe why the women are so frustrated.”

Same narrative that was invoked in defense of Ellen Pao in her game of thrones with billionaires.

There are people who are fighting for a noble cause, and then there are parasites that use it for their selfish gain.

It's a little unclear to me how this is comparable to the Ellen Pao situation. Admittedly I haven't followed it as closely, but it sounded to me like she had some different ideas about where reddit should go and mishandled a key employee change. One can criticize those choices, but they hardly amount to being terrible at her job or fraud or not deserving the position in the first place.

I think a stronger case could be made that she was mistreated than that Elizabeth Holmes was. I don't know enough to have a position on whether that's right or wrong in Pao's case, but I can see the argument. I think Holmes was pretty clearly being attacked for all the right reasons however, and not for being a powerful woman CEO/founder.

The reference was to https://en.wikipedia.org/wiki/Pao_v._Kleiner_Perkins , not the reddit situation.

It's not too surprising. As soon as any kind of principle, good or bad, starts to have some kind of power when it's invoked, bad actors will swarm around it to use it for their own ends.

It isn't just bad actors. Its our fawning nature. I think that many people were reluctant to question Theranos precisely because she was a female entrepreneur.

Nowadays, you have many, many successful female tech entrepreneurs: stitch, bumble, ipsy, etc... and hopefully we are past the fawning phase and can apply critical thinking.

I can think of a political example, too.

I had a similar thought when this story appeared this morning.

https://www.wsj.com/articles/theranos-whistleblower-shook-th...

As snapshotted by archive.is http://archive.is/wO4B0

Theranos and Holmes have agreed to settle the fraud charges levied against them. Holmes agreed to pay a $500,000 penalty, be barred from serving as an officer or director of a public company for 10 years, return the remaining 18.9 million shares that she obtained during the fraud, and relinquish her voting control of Theranos by converting her super-majority Theranos Class B Common shares to Class A Common shares. Due to the company’s liquidation preference, if Theranos is acquired or is otherwise liquidated, Holmes would not profit from her ownership until – assuming redemption of certain warrants – over $750 million is returned to defrauded investors and other preferred shareholders. The settlements with Theranos and Holmes are subject to court approval.

Someone help me out: Does this settlement really make the affected parties feel the pain? Does it discourage other companies from attempting the same thing? Given the scale of the fraud, shouldn't these two simply be in prison right now?

SEC doesn't put people in prison, it can refer to Justice Department for prosecution. Whether it does or not, depends on the circumstances of the case. They prefer quick resolution rather than years of litigation.

Many people are in jail today because they can't post bail. You can discourage ever facing incarceration by being able to afford a good legal defense. You can be forced to accept incarceration without conviction because you are poor.

Yeah, it's easy for the government to threaten plebs with prison for misreporting a few thousands in taxes...because they can't defend themselves like Holmes does.

Well, according to Forbes, Holmes is worth _nothing_[0], so $500,000 is probably fairly painful. Plus, relinquishing ~19 million shares regardless of their value has to hurt. Also she no longer has the majority of votes in her own company. And as a CEO who can't be an officer of a public company for 10 years, yeah that probably really hurts too. Not to mention her name is effectively toxic pretty much forever now. So she's not going to jail, but those penalties certainly look painful to me.

[0] https://www.forbes.com/sites/matthewherper/2016/06/01/from-4...

It seems like a much larger fraud than Shkreli's, who got 7 years. Also, as someone pointed out, they didn't just deceive investors, they deceived the people who were getting blood tests and that seems much worse. So one might suspect there's some sort of privilege going on. Or maybe the story just isn't complete yet.

Her family is rich and connected. I don't see the punishment is too harsh without her going to jail.

19 million shares of a company worth nothing?

This will wipe her out, and likely kill her career. Remember, this is just the SEC. The pain they inflict is commensurate to investor pain.

The government still should go after them for endangering people’s lives. There should be long jail terms for that.

>This will wipe her out

Will it though? Surely Holmes still has a few million stashed away somewhere that she can live comfortably off of? This settlement isn't going to leave her destitute.

Either that or I'm sure she set up some clever offshore accounting structure that has $10M stashed in the cook islands or some shit. As soon as you get some cash, I think "rich person 101" is you set up some complicated structure to hide rainy day money for this very reason. I would venture to guess she took home at least $50MM in all those rounds of investment (maybe more? i have no idea how that works.), I doubt she blew it all or was stupid enough to leave it in plain sight.

> The government still should go after them for endangering people’s lives. There should be long jail terms for that.

But the SEC won't, because that's not what they do. And this is, I think, as it should be.

Settlement is probably best for investors because they immediately get control of the company and Holmes basically gets nothing.

The job of the SEC is to protect investors so they are probably doing the right thing here.

True, and besides having lost money, their investors also continue to lose credibility, considering the poor if not complete lack of due diligence on their part, as long as this fiasco is in the spotlights.

Yeah, I don't think she gets nothing. She was paid a salary for many years, I would't be surprised if it was a pretty hefty one. There were probably other perks, too (wasn't she known to fly private for business trips?). It looks like she simply relinquished some equity that probably wasn't worth very much anyway. This settlement doesn't look like much of a deterrent to future would-be fraudsters.

I wish we could do this to politicians, once caught in lie and fraud, bar them from taking any public office for 10 yrs :).

I agree she got away lightly.

Funny fact, in 2013, Italy actually banned Silvio Berlusconi from holding public office for 6 years. But, that doesn't stop him from participating and trying to win elections anyways...

Impeachment provides for this. At the federal level, you are bared from public office for life upon conviction. And it doesn't apply only to elected officials, but all public officials. Even some low person on the totem pole could be impeached, removed from their office, and bared from holding any public office ever again. Pardons do not apply to impeachment convictions.

States vary in their impeachment proceedings and what burdens must be met.

Most likely she also has Directors and Officer's Liability Insurance:

https://en.wikipedia.org/wiki/Directors_and_officers_liabili...

As part of the settlement, there was no actual admission of wrongdoing or fraud, so it's quite possible that the insurance would pay the fine.

Maybe, maybe, if the insurer had the option to direct any defense, but it's still mighty hard to insure against willful acts.

If you are convicted for drug trafficking or plead guilty to it, any asset that you can't prove you received through other legal means is likely to be subject to seizure.

Isn't that also true without your if-clause?

It's a slap on the wrist compared to the crime.

So she can’t be a director of a public company? Other than Yahoo, who would even consider hiring her?

This “punishment” doesn’t seem like one. She should be in jail.

I don't know if I agree with you. Personally, I can't imagine the humiliation of carrying this around with me...

> shouldn't these two simply be in prison right now?

Compare and contrast with Shkreli sentencing. Some animals are more equal than others.

I'm not really sure that's fair. In fact, IANAL and have zero knowledge of law, but the two had seemingly nearly opposite intent of their crimes. Who knows what was going on in the girl's head, but it sounds more like a bunch of idiot investors gave a lot of money to a dreamer who wanted to make an impact and didn't know when to quit and fold her hand rather than an elaborate con. That gets taken into consideration before pitchforks come out.

At a certain point you have to wonder why did a 21 year old get paid 700 million dollars on good faith to start a pharmaceutical company with little oversight? I remember reading about the board a few years ago and just looked it up again. Several generals, Henry Kissinger...huh?

This is all seems pretty obvious in hindsight.

Well, Holmes and Balwani didn't actively and loudly antagonize most of the country.

Most rich criminals know that when you scoff at the law, you should do it quietly.

Some animals at least are likeable as people. Others are not.

Remember who was on the Board of Theranos. These upstanding Americans will never serve a day in Prison including Holmes and Balwani. Shkreli on the other hand was thrown in prison for raising the price of a drug, making money for his investors and offering a reward for one hair.

Justice has been served.

Junk away....

Pharma Bro was just sentenced to 7 years in jail for misrepresenting facts to investors, despite said investors did not lose any money but actually made some [1]

Here Holmes not only doctored power point presentations to baloon numbers to investors, but put thousands of lives in danger (if some were lost, we will eventually find out) by providing wrong results for tests to many patients that lives relied on it, and she gets jail-free card and slap on the wrist.

[1] https://www.cnbc.com/2018/03/09/pharma-bro-martin-shkreli-se...

Shkreli received 7 years in prison because he was found guilty by a jury for securities fraud. What you refer to as "Here Holmes..." was were SEC civil charges. A criminal investigation was opened in mid-2016 and, as far as we all know, is still underway:

https://www.npr.org/2016/04/19/474868428/innovative-blood-te...

Yeah, he was kind of a douche, but it's pretty obvious he only got slammed with that kind of time because he didn't play the game right.

People keep complaining about lack of jail time. As has been repeated in a number of subcomments: The SEC cannot send people to jail. Full stop.

They have only civil authority.

They refer criminal cases to the US attorneys/DOJ, and offer assistance. All evidence suggests they did so here.

The decision to criminally prosecute or not is out of their hands.

I don't see any mention of the matter being referred to the Department of Justice in the press release. I mean sure, DoJ surely watched what is coming out of the SEC and will decide separately, but (as we see here) the casual reader who is unfamiliar with agency structure will understandably conclude that the government is done with her.

Absolutely DoJ will jump on it... they don't need other Dept blessings; now seeing Holmes taking deals, its a much easier case for prosecution. Give it 2 years max.

> All evidence suggests they did so here.

What evidence? I have flipped through the SEC filing and some news articles and I don't see anything about it being referred to the DOJ.

Why can't the SEC send people to jail? I don't understand the point you're making. If people believe something is an injustice should they just shut up? Even if they can't send people to jail people should complain if they feel that shouldn't be the case -- it's a signal that perhaps the current process is wrong. After all, all restrictions and rules were created by us to begin with. Complaining can be useful feedback.

Because it does not have the authority to do so.

https://www.sec.gov/oiea/investor-alerts-bulletins/ib_invest...

I've already read that -- it does not explain why. It simply states that it cannot. What law restricted it? Why was that law put into place? How often are recommendations for prosecution followed up on successfully?

EDIT: Thanks everyone for the information -- very interesting.

There is a difference between complaining that the SEC should have the authority to send people to jail and complaining that the SEC can send people to jail but won't.

they don't have the authority to do that...

yes, people should inform themselves before talking. Jail time and other penalties will depend on the Justice Department

Regulatory agencies lack the authority. It's the same with the FAA. If you're a pilot and you fly drunk, the FAA will revoke your certification, but forward the case to the DoJ who have a U.S. attorney assigned to prosecute the case in federal court under federal law, not under FAA regulations. (Of course flying drunk tends to solve itself.)

Again, I will just state that the reason we (maybe secretly) take so much satisfaction / schadenfreude at this story is that someone who was so hyped and the darling of Silicon Valley got so much funding and attention. While others who toil away on good ideas, without nearly so many connections and silver spoons, struggle to even get 1 minute of air time with the kind of funders and backers that she got.

Separately, I hope that they absolutely nail and jail Sunny Balwani, who threatened and intimidated whistleblowing employees with their careers for exposing the massive fraud that Theranos was.

Finally, we should be thankful that the SEC and agencies like DHHS and CMMS actually still have some teeth and reputability to follow through on issues like this and have not been totally gutted. Imagine 100 years ago when hucksters like this were touting every fake medicine under the sun and people were actually grateful for public-serving regulation. The order from CMMS to Theranos actually essentially said, "You are in immediate jeopardy of violating the law and must provide proof that you're reversing the harm caused by your inaccurate / fraudulent medical test results. Simply closing your lab will not remove this jeopardy." Thank god for rules.

Schadenfreude is a word commonly used in discussion of the Theranos debacle and it really aggravates me because it presumes that anyone not throwing a pity party for these pathological liars defrauding people of money and potentially putting lives at stake with their bullshit tests that don't work are somehow bad people with negative personality traits.

No, Holmes and her people are bad people with negative personality traits. The folks going "Fuck yeah, this bullshit never made sense to me and I am glad to learn I am not crazy" aren't suffering some personality disorder. They just are glad to find reality aligns with their understanding of reality.

Also: Justice is a thing. Righteous anger over bad behavior is not schadenfreude.

Why do you think schadenfreude is a negative personality trait or a personality disorder? It is just a name for a specific emotional state. It seems perfectly apt here.

Schadenfreude is when you take satisfaction in someone else's misfortune. I think what the parent comment is saying here is that many of those who are satisfied with the Theranos outcomes aren't satisfied because they take delight in the leaderships' misfortunes; they're satisfied because they take delight in finding out they were right, that they weren't crazy to think that the promises of Theranos didn't make sense, and that there are consequences to the kind of fraud that seems to get some people ahead.

It means taking joy in someone else's suffering, which is basically sadism. I don't see that as being the same thing as being happy to see the truth come out and justice finally happen.

First, Kuddos to John Carreyrou from the WSJ for great investigative journalism. I’m too tired of all these “fake it till you make it” lines of thought, and it is not only a YC issue, it is pervasive across the valley. Cloning flappy birds, "uber" for pet grooming, etc I don't care. But when things get serious and your life and money is at stake, there is no room for BS "disruptors" with 20 hours of training on subjects such as insurance, medical care, banking, or your lifetime investments. The list of "pseudo disruptors" is pretty long: Remember Zenefits' Parker Conrad fraud: https://www.nytimes.com/2016/02/18/technology/zenefits-scand... or that 3D printer for makeup: https://techcrunch.com/2014/05/05/mink-is-a-3d-printer-for-m... There are a lot of very comments here, at least that is reassuring. Folks get it.

From the Financial Times:

Here's the nuance of her formula:

Commit fraud as an attractive, well-connected WASP woman who happened to be neighbors with well-connected VC Draper family.

Tell a great story: Stanford drop-out who studied Chinese, afraid of needles, wants to help the world.

Leverage Silicon Valley connections to pull in other really big fish, such as Kissinger, et al, who would be really, really embarrassed that they were so hoodwinked by an ingenue.

Use that cognitive dissonance to raise more and more money, while having no technology whatsoever.

Get even more and bigger fish such as Biden to vouch for you.

Wrap your company in total mysterious secrecy.

Declare anyone against you as against women in business. Works like a charm and will happen again in the future.

>Declare anyone against you as against women in business.

ie Sophia Amoruso, who ran her company into bankruptcy and immediately jumped into running a media company and having a Netflix show about women in business

Your timeline is off. The show was ordered several months before the company went bankrupt.

Be a man: “what a scammer”

Be a woman: “this woman used her gender to scam”

I mean, in this case, she literally did use her gender as part of the cynical narrative.

No, be Elizabeth Holmes and Tim Draper and use gender as a means to dismiss valid investigative reporting from the Wall Street Journal.

And yeah, bad actors will sometimes use accusations of sexism / racism / etc-isms to silence those speaking the truth about them.

Relevant XKCD https://xkcd.com/385/

> Works like a charm

I dunno, I'd say it kinda failed here.

I'd say it worked fantastically. For the sake of timing lets compare Shkreli and Holmes. She committed a much larger fraud and lost people huge amounts of money. She is spending exactly zero days in prison. She is getting a $500,000 fine - which Theranos is probably paying for - and a slap in the wrist[1].

Meanwhile Shkreli - who's "victims" lost zero money - is going to spend 7 years in jail and has lost at least $10 million because the government decided to take it over.

I would love to see people complaining about gender gaps addressing the huge gender gap in our justice system, because cases like this are a slap in the face.

---

[1] https://www.reuters.com/article/us-theranos-sec/theranos-and...

As far as I've read, it only failed because of a whistleblower. Overall, she was able to waste quite a few resources, as well as steal taxpayer money, without any real consequences (so far). I would bet she's probably better off having done what she did than if she had followed the rules.

That's an interesting interpretation. But in that logic, how come she never sold any of her shares?

> Holmes has never sold any of her Theranos stock.

https://www.sec.gov/litigation/complaints/2018/comp-pr2018-4...

"Holmes subsequently raised $6 million in funding, the first of almost $700 million that would follow. Money often comes with strings attached in Silicon Valley, but even by its byzantine terms, Holmes’s were unusual. She took the money on the condition that she would not divulge to investors how her technology actually worked, and that she had final say and control over every aspect of her company. This surreptitiousness scared off some investors. When Google Ventures, which focuses more than 40 percent of its investments on medical technology, tried to perform due diligence on Theranos to weigh an investment, Theranos never responded. Eventually, Google Ventures sent a venture capitalist to a Theranos Walgreens Wellness Center to take the revolutionary pinprick blood test. As the V.C. sat in a chair and had several large vials of blood drawn from his arm, far more than a pinprick, it became apparent that something was amiss with Theranos’s promise."

I hadn't seen this before, or if I had, I've forgotten, but Theranos created an account on HN to post to the "Who is hiring?" threads

https://news.ycombinator.com/user?id=Theranos

First message was May 5, 2014

https://news.ycombinator.com/item?id=7701095

> Visit a lab for a Doctors appointment recently? Two vials of blood is a lot isn't it? Theranos is looking to completely redefine healthcare by solving speed and accuracy issues of current lab testing by combining SW engineering and life sciences using 1/1000 less blood than what is typically drawn today; our process have results in Doctors’ hands in as little as 2 hours allowing them to provide significantly more accurate treatments in a timely manner.

The first time someone replied:

https://news.ycombinator.com/item?id=8401792

> I was rather disappointed that the site doesn't say much about the underlying assay technologies you're using.

>Theranos and Holmes have agreed to settle the fraud charges levied against them. Holmes agreed to pay a $500,000 penalty, be barred from serving as an officer or director of a public company for 10 years, return the remaining 18.9 million shares that she obtained during the fraud, and relinquish her voting control of Theranos by converting her super-majority Theranos Class B Common shares to Class A Common shares. Due to the company’s liquidation preference, if Theranos is acquired or is otherwise liquidated, Holmes would not profit from her ownership until – assuming redemption of certain warrants – over $750 million is returned to defrauded investors and other preferred shareholders.

3 years ago, I never would have thought that such an outcome would actually happen.

Pretty good outcome, especially if she avoids criminal charges.

Presumably she's still pretty wealthy, enough not to have to work again or to lie-low for the next decade before staging a comeback.

If I recall, she hasn’t gained any liquid wealth from Theranos - her net worth was recently reported to be zero.

https://www.forbes.com/sites/matthewherper/2016/06/01/from-4...

http://www.paulgraham.com/founders.html

> 4. Naughtiness

> Though the most successful founders are usually good people, they tend to have a piratical gleam in their eye. They're not Goody Two-Shoes type good. Morally, they care about getting the big questions right, but not about observing proprieties. That's why I'd use the word naughty rather than evil. They delight in breaking rules, but not rules that matter. This quality may be redundant though; it may be implied by imagination.

> Sam Altman of Loopt is one of the most successful alumni, so we asked him what question we could put on the Y Combinator application that would help us discover more people like him. He said to ask about a time when they'd hacked something to their advantage—hacked in the sense of beating the system, not breaking into computers. It has become one of the questions we pay most attention to when judging applications.

Too naughty, Sam? I suppose it all depends on whether or not you pull it off. If her oversold, semi-vaporwear tech ultimately panned out, and she ultimately got the Defense Department deals she lied to her investors about having, I could easily see her being held up as another celebrated example of "fake it 'till you make it." (Or until the SEC shuts you down for fraud).

I still find it crazy that her response to a question on how the tech worked was:

"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."

Exactly. "A Chemistry is performed"... yeah, that's a phrase I'd expect out of a second grader, not a Stanford dropout...

This sounds like Vincent Adultman from Bojack Horseman.

Lawdy. Was Sarah Palin her speechwriter?

I'll be very curious to see how and if her charges compare to Martin Shkreli who got the book thrown at him (7 years and $7.4m). Shkreli was a scapegoat mostly because of his public/social media persona, cockiness, and arrogance.

Meanwhile the crooks that caused the financial meltdown have not been charged with anything.

Bene vixit, qui bene latuit— "He lives well who conceals himself well."

Shkreli had an ongoing fraud and sec violations before Turing Pharma. Though it looks suspicious, his prosecution is coincidental with the Turing stuff and revolves around the truly atrocious management of his hedge fund.

Shkreli deserves what he got, but not because of his public bravado or raising the price of a drug, but because he actively embezzled money and created a Ponzi scheme.

Was it a Ponzi scheme? I've read that he basically lost his investors money in a real investment failure, and then 'donated' some of his shares from his other, unrelated company to make the investors a profit and look good.

I don't think he was a scapegoat per se, he did actually do illegal things. But I imagine that things would have gone a lot better for him if he had not jacked up the price of Daraprim to the extent he did. It seems that drew attention to his previous activities.

He didn’t hide from what he was doing - he embraced it. Make no mistake, big pharma is doing the exact same things.

I for one am appreciative that he called attention to the power monopolies have over the pricing of medicine.

He had the book thrown at him because he drew attention to what modern capitalism is.

> jacked up the price of Daraprim

Which by the way is completely legal and common in the pharmaceutical market, but the media outrage and SJW backlash made it seem illegal.

>Bene vixit, qui bene latuit— "He lives well who conceals himself well."

The Trump administration should've hired you as a consultant.

The SEC title says Massive Fraud. I think the title here should reflect that.

is the "Massive" part just grand standing, or does it correspond to a legal qualification of the alleged offense? Interestingly I can't google that because I get drowned under Theranos results.

Unfortunately pricks.com, by Blake Ross, is no longer online. However, the CDN that hosted it is still up so here is the direct link - it's a script for a comedy show based on theranos, and painfully close to reality https://web.archive.org/web/20160604083644/http://static1.sq...

Hah good memory! I guess I'll resurrect it for the trial :)

I passed it on to everyone I knew that was in any way related to the comedy/entertainment industry. And a lot of other people besides. It's excellent writing, even though it's for a medium I generally don't enjoy. Thank you for putting it out there! And that was an excellent use of that domain name.

Link does not work : the website expired.

Courtesy Wayback Machine:

https://web.archive.org/web/20160604083644/http://static1.sq...

For those interested in learning about the United States government moving from prosecuting white-collar criminals to settling, the difference between the SEC and Justice Department misses the point.

The book The Chickenshit Club https://www.amazon.com/Chickenshit-Club-Department-Prosecute... by a Pulitzer Prize winning journalist tells a more thorough and comprehensive, though infuriating and tragic, story.

Aside from everything else rightfully pointed out in this thread - the other interesting bit is that it's likely that their investment in commercial real estate will net a pretty massive return. I can't think of many places in the Bay that are better for a large office that can hold 100's of employees.

For reference, the HQ they built in PA: https://www.google.com/maps/place/1701+Page+Mill+Rd,+Palo+Al...

They didn't actually build it. Stanford owned the land and building (and built most of it) while Theranos paid for internal improvements. Stanford also recently sold the property (maybe a year or so ago) and 1701 is available for lease now.

Oh wow, TIL. I thought they had bought it from HP.

You can commit most crimes in this world with relative impunity, but the number one rule is never steal from the rich.

"Lying about deals with the same government that will eventually prosecute you" seems like another pretty obvious rule.

Claiming you have contracts signed when you don't is fraud, but claiming you have $100M in DoD revenue when you don't is elaborate corporate suicide.

I have seen this idea from time to time. I don't think it's right. The problem is they are stealing from people with abilities, smarts, and resources. Of course, there are going to be backlashes.

That's ridiculous. She would have gotten thrown in jail if she carried an ounce of cocaine. "Stealing from the rich" resulted in a "civil" violation. Big deal.

When the Department of Justice charges, convicts and throws her in prision -- then we can talk about the "number one rule."

Times like this when I appreciate big government and bureaucracy. This is exactly what they should be doing. This is in the interest of the public.

call me back when the ex board members get hit for this..

IMHO the fraud wasn't the investors getting fleeced, it was the US public through obamacare payments made for pharmacy blood screening..

and given the players this will never, ever, ever see the light of day..

for now, it sounds like they are taking the fall to cover the higher ups to me..

https://en.wikipedia.org/wiki/Theranos

Since its incorporation in 2003, Holmes has been the company's chief executive officer. She recruited Channing Robertson, a chemical-engineering professor at Stanford, to be a technical advisor and the company's first board member during its early years. Sunny Balwani, a software engineer Holmes had met during high school, joined the company as its president and chief operating officer in 2009.[54] In July 2011, Holmes was introduced to former Secretary of State George Shultz, who joined the Theranos board of directors that same month.[55] Over the next three years, Shultz helped to introduce almost all the outside directors on the "all-star board," which included William Perry (former Secretary of Defense), Henry Kissinger (former Secretary of State), Sam Nunn (former U.S. Senator), Bill Frist (former U.S. Senator and heart-transplant surgeon), Gary Roughead (Admiral, USN, retired), James Mattis (General, USMC), Richard Kovacevich (former Wells Fargo Chairman and CEO) and Riley Bechtel (chairman of the board and former CEO at Bechtel Group).[55][56][57] The board was criticized for consisting "mainly of directors with diplomatic or military backgrounds."[11]

As of May 2016, the Theranos board of directors were:[64]

    Elizabeth Holmes, Founder and CEO
    Riley Bechtel, former Bechtel Group CEO
    David Boies, a founder and the chairman of Boies Schiller & Flexner
    William Foege, former director U.S. Centers for Disease Control and Prevention
    Richard Kovacevich, former Wells Fargo CEO and chairman
    James Mattis, retired USMC General
    Fabrizio Bonanni, former executive vice president of Amgen

Board members may have been incompetent, guilty of a dereliction of duty, or were tricked themselves. Meeting minutes would shed light on this.

It’s noteworthy that none of the board members had experience in the medical device industry. They were most likely just in over their heads.

Is Holmes still rich after this? I can't tell just how much of her wealth she's being forced to return in form of shares.

She's half a million poorer from the fine. Any proceed from the sale of the (worthless) shares will need to be returned to defrauded investors amounting to 750 mil before she gets anything.

So i think unless her entire position is sold for more then $36 a share she has lost everything from the company.

No idea what her personal finances were going in to this event.

Do we know if she was rich before? Maybe she was able to cash out a lot of her shares during some of the financing rounds, but she also could have just been "rich" on paper by owning many Theranos shares. If she was rich by virtue of holding Theranos shares, her wealth has decreased a ton in the last couple years since the value of the company has surely plummeted.

The SEC document says that she never sold any of her shares, and says

> Holmes was paid a salary of approximately $200,000 to $390,000 per year between 2013 and 2015

I'm sure she must have sold some part of her shares when Theranos got funding in the early days.

>Is Holmes still rich after this?

But why it matters at all? Penalty should be proportional to the deed, not to the person's finances.

As a curious aside: In some scandanavian countries, the penalties are directly tied to wealth (e.g. the $103,000 speeding ticket [1]). The idea is to make the punishment proportional to each individual so that wealth cannot simply grant you a free pass to violate "minor" laws.

[1] https://www.theatlantic.com/business/archive/2015/03/finland...

I think there is a reasonable argument that it should be proportional to finance. Let's say two people both get speeding tickets, one of whom is making $10 an hour the other makes $100 an hour. There is an argument that you should fine them based on their income as a proportional punishment, otherwise the fine may be excessive for the person with a small income, but negligible and not a deterrant for a person with a large income.

> But why it matters at all? Penalty should be proportional to the deed, not to the person's finances.

I would argue the opposite, why do you think this is the case?

no, individualized sentences are part of the justice procedure.

It matters because fixed fees mean a % of the population will be unscathed by those consequences, and a % will be unable to afford the fine.

Why don't they have to serve jail time for this?

Two major differences:

The SEC can only bring civil charges, not criminal ones. So SEC investigations won’t bring jail time by themselves, although if the FBI or other agencies get involved that could happen

Also, Holmes and Theranos settled, which probably had some impact that on the penalties they faced

Are Meredith Perry and uBeam next?

Holmes isn't in trouble for hyping -- she's in trouble for lying in financial documents. Unless the uBeam pitch deck claims that they have earned $100M in revenue when they haven't or that they have accolades from Public companies when they don't, they're fine to say that they are going to change the world with wireless charging.

And eventually Magic Leap

Didn't she sort of demonstrate that it worked? Or least that is the headline I read.

My (limited) understanding is that they've demonstrated a level of wireless power transmission, but nothing approaching some of the early hype that had things like mobile phones recharging in people's pockets whilst they were in a coffee shop.

The controversy there isn't whether you can transfer wireless power or not, but whether you can transfer enough in an easy enough way to make a practical consumer product.

If you want (alot) more detail this is a good thread to read http://www.eevblog.com/forum/projects/the-ubeam-faq/1175/

And Energous.

Ugh Finally.

More than just the financial fraud, these folks engaged in behavior that actively endangered the public. I hope this isn't the end of the government actions against them.

Her public behavior was exceptionally bizarre and almost none of what's been revealed comes as any real surprise. For timeline purposes:

Dec 24, 2017 - They get $100m lifeline investment https://www.wsj.com/articles/blood-testing-firm-theranos-get...

June 21, 2017 - Walgreens settlement https://www.wsj.com/articles/theranos-walgreens-reach-deal-t...

May 30, 2017 - Crisis on the Board https://www.wsj.com/articles/court-documents-shed-light-on-t...

April 21, 2017 - Caught using outside lab gear to fake tests https://www.wsj.com/articles/theranos-secretly-bought-outsid...

April 5, 2017 - Holmes found to owe $25m to her own startup https://news.ycombinator.com/item?id=14047457

Jan 19, 2017 - Closes last lab after failing inspection https://news.ycombinator.com/item?id=13433840

Jan 17, 2017 - second lab fails inspection https://www.wsj.com/articles/second-theranos-lab-failed-u-s-...

Jan 6, 2017 - Lays off 41% of workforce https://news.ycombinator.com/item?id=13338996

Nov 17, 2016 - Whistleblower comes out https://www.kqed.org/futureofyou/283681/theranos-whistleblow...

July 8, 2016 - Banned from operating a lab for 2 years https://news.ycombinator.com/item?id=12053721

Jan 27, 2016 - Letter from the feds https://news.ycombinator.com/item?id=10983747

Dec 20, 2015 - Some skepticism https://news.ycombinator.com/item?id=10765562

Oct 16, 2015 - Struggles with tech https://www.wsj.com/articles/theranos-has-struggled-with-blo...

And not to forget this tragic story, the suicide of one of Theranos's chief scientists: https://www.telegraph.co.uk/technology/2016/10/22/british-he...

pls reorder in time-sequence typo: $25 ==> $25mm

great catch. Appreciate the note. Fixed.

great list. thank you

VCs seem to care a Stanford/google background more than anything else. They should be punished by watching “moneyball” non-stop for a week.

It still baffles me how this ever got started. How does a 19 year old sophomore dropout have sufficient expertise in microfluidics plus clinical testing to garner hundreds of millions in investment with pure vapor? Nevermind the learning curve of running the business and developing a real saleable product.

Here's the complaint: https://www.sec.gov/litigation/complaints/2018/comp-pr2018-4...

So this was complete bullshit too?:https://www.youtube.com/watch?v=rGfaJZAdfNE

Here's the danger of "Fake it till you make it."

So do those of us accused of sexism for not supporting Holmes a few years ago now get vindicated? Attacking her competence and questioning the Theranos Kool-Aid was seen as sexist and unfair, but it turns out we were right — she is a criminal — or at least a civil violator of securities law.

Can you link to threads/places where people ripping on Holmes (post-WSJ investigation) were under heavy fire? Investor Tim Draper continued to call critics sexist/malicious but I wouldn't call him status quo by any stretch of the imagination:

https://www.axios.com/tim-draper-keeps-defending-theranos-15...

You don't get anything because the world doesn't work like that. Move on.

The accusations (at least the ones I made) were never about her guilt or innocence.

From what I remember, HN and similar just had dozens and dozens articles each week on this case, far more than for other, comparable cases. MtGox was around the same time, I believe.

My subjective impression was also that Holmes featured far more prominently in the articles and discussions than male CEOs in other cases.

Here is one commentator in this thread comitting all sorts of crimes against grammar to accentuate her gender: “The FBI should recommend charges for this Holmes lady.”

Edit: I just noticed the comment I cited was by the same user I was replying to :) I guess my sexism-radar is well-tuned today.

700 million dollar fraud, 500.000 dollar penalty. That's an impressive RoI for the fraudsters.

No one is lining up to buy Theranos shares, where is the ROI here?

In salaries, perks etc ... I can imagine that a large part of the 700 million dollars would have been spent on salaries, perks etc ... 500,000 dollar fine seems paltry when you've essentially been able to con people out of 700 million.

Martin Shkreli = 7 years, $7.5M fine

Investor capital lost = ~$0

Elizabeth Holmes = $500k fine, D&O bar

Company value lost = ~$8 billion

People have been talking for a while about the SEC moving towards some sort of regulation/legislation of ICOs. I believe the following paragraph in their announcement is telling (emphasis mine):

“Investors are entitled to nothing less than complete truth and candor from companies and their executives,” said Steven Peikin, Co-Director of the SEC’s Enforcement Division. “The charges against Theranos, Holmes, and Balwani make clear that there is no exemption from the anti-fraud provisions of the federal securities laws simply because a company is __ non-public, development-stage, or the subject of exuberant media attention __.”

Theranos is a case study about the consequences of Wizard of Oz Experiments.

It's about time. Blatantly lying to investors is fraud and should be prosecuted as such. People who defraud others should face consequences for doing so.

Why no jail time? We should start sending CEOs to jail.

Good. While they had a good idea, it's run by unethical and terrible people who really have no regard for the safety of the public. It seems like every time they were forced to show any level of proof they lied until they were caught. If a pharmaceutical company operated like they do, I doubt anyone would be praising them for any reason.

What was the good idea exactly? As far as I'm aware the details of their (non-existent) tech have never been shared, not even with investors. Anyone can think up some pie in the sky idea.

> What was the good idea exactly?

Using tiny amounts of blood to do a whole entire blood workup.

> their (non-existent) tech

Some of it existed. It just required them lying about using other companies' products with a standard volume of blood. The rest of course was entirely made up.

> Anyone can think up some pie in the sky idea.

I agree. I just said the idea was good but unfortunately for her, even being a mega-uber-disrupter-genius like Elizabeth Homes, our level of technology isn't there yet and maybe never will be.

Most of the wealthy did similar things but were not prosecuted.

Behind Every Great Fortune There Is a Crime.

Very few super wealthy made their money honestly.

I think there is a fair distinction between "fake it until you make it" and actually willfully defrauding your investors and customers. Sure this may work at the beginning but you have to do some kind of magic or goal at the end of "faking it" and have results.

While we enjoy the fruits of capitalism we should also accept its Dark Side. There will always be people who abuse a Goodwill system. I'm not completely satisfied with the outcome, but I hope this serves as a warning to the abusers of capitalism.

Thank you SEC and the Justice Department.

Again, what have you expected? https://medium.com/multiple-personalities-order/how-to-be-th...

Fake it 'til you break it...

So how are they able to still operate? It was revealed to be a scam a couple of years ago now? How are they still running? Even if no one is jailed right away, I would expect everyone to leave and them not be able to hire anyone again.

It seems the settlement of a $500k for Holmes was rather weak justice and sends the wrong message. With the kind of fraud she perpetuated to investors jail time would be more appropriate.

This should terrify pretty much anybody who did an ICO last year.

So if you commit massive fraud you get a slap on the wrists. Meanwhile people committing minor crimes (in comparison) are incarcerated.

This is why due diligence is important folks.

I’m guessing she wasn’t renting a small studio in Palo Alto. Wonder if they’ll claw back any of these ill gotten gains.

Wouldn't she be going to prison for this? Did I read incorrectly, or are they not trying to send her to prison

What does "charged" mean here? Is this criminal or civil?

Could the SEC litigation be whybthe VCs has to keep quiet?

the more these stories come out, the more that Holmes is coming off as sociopathic, to me at least.

It took them long enough!

Fake it till you make it?

Why is there such a culture of fake it till you make it in SV? If the tech is good, no need for faking. If the tech is bad, figure it out, don't fake it. Otherwise, if it doesn't work and it is faked, things will get really bad and at worst lives could be lost.

It seems like there is a lot of stupid money around and a lot of scam artists trying to suck the supply dry.

> Why is there such a culture of fake it till you make it in SV? If the tech is good, no need for faking.

Nothing happens in a vacuum. If you don’t work hard to hype and oversell your cure for cancer, investors will be passing you by to invest in this nonexistant blood analysis product hyped to the skies.

In VC it doesn’t matter what’s you have. The game is to attract enough captital to the point where you can hopefully crate what you sold investors on already having before he house of cards collapses. It’s like one big hype/investment ponzi skeam after another, however companies can openly loose money for years after years without anyone calling bullshit as long as the prospect of gains are hyped enough. Though importantly, you have to work the right line between outright lying and hyping. Prefix everything with “might be” and “could potentially” dumb investors will still be fooled but you might survive the legal fallout more gracefully.

Believing your own hype does not make it any less a scam.

It may be the case that Theranos could not "figure it out" as it may be impossible to do what they claim they could. In that case there is no reason for Theranos to exist as the real fix would be to do what existing labs already do (draw more blood) and they would not have any competitive advantage in their field.

The correct move is to always be honest with results and to pursue one of two strategies. Spend the rest of the money they have attempting to perfect a machine that is likely to never work, or return the rest of your investors money and close up shop.

The healthcare market does not tolerate fuck ups. If you are working in this space you have to be tough and competent. Things need to work as advertised or you will be sued out of existence.

Won’t see a day of jail time while Shkrelli gets 7 years.

Martin Shkreli was, honest to god, an idiot. He got several chances to "kiss the ring" and show remorse, and what did he do? He put some extra oil on the fire and kept acting like an idiot until the very last moment. Sometimes you need to realise when to fold and suck it up.

While I see the same distinction and it's hard to watch, we can enumerate Shkreli's mistakes:

1. giving the finger to Congress

2. refusing to settle and going to court

3. talking shit the entire time he was on trial, both to court journalists and on TV ("junior varsity", etc.)

4. offering money for Clinton's DNA while on bond shortly after she lost the most embarrassing election of all time (while hilarious and obviously satire, of course "they" used this against him)

And I'm sure someone else could add to my list. Meanwhile, I don't even know what Holmes looks like, let alone what her voice sounds like.

Well he did mouth off to congress. Once that happened they were always IMHO going to dig until they got him on something.

AFAIK Theranos is still under criminal investigation, which hasn't yet publicly concluded: https://www.nytimes.com/2016/04/19/business/theranos-sec-jus...

Well, she didn't disrespect Wu-Tang.

More seriously, this is why often people who know they've been caught dead-to-rights settle early: the government wants the W and doesn't want to have to spend money to get it. Shkrelli made them go for the conviction, and so he got the actual, un-discounted penalty.

and lost his wu-tang album :(

There's often a thin line between "startup founder" and "confidence man".

No, there isn't often a thin line. Most founders are not out there committing massive fraud. They may be doing a lot of marketing, and are probably promising things that still have to be built, but they're not out there lying that they have millions in revenue from contracts that don't exist, or falsifying demos.

Take a TV from a truck that's left open behind a warehouse; get months if not years in jail.

Deliberately commit fraud for years and steal millions and millions of dollars; slap on the wrist.

Our system is so ridiculous.

The SEC is a civil agency and can not jail anyone for anything, they can only levy penalties. Justice has to take over the case for an offender to go to prison.

Good. Now lets put everyone who they paid to hype them in prison as well, every journalist, blogger, hacker news poster who received money in exchange for writing a favorable comment.

So... the punishment for getting caught in massive fraud is that you just have to give back the stuff you got through fraud? Sign me up.

Unless of course you steal Holmes' car. Then you'll probably be killed, or at best, incarcerated for 10 years.

Remember kids, the rich are not playing the same game the rest of us are.

What exactly needs to happen for white collar criminals to be punished commensurate with their crime and consistent with the magnitude of "regular" criminals' punishment?

Holmes' punishment is effectively nil. Meanwhile:

[1] A man sells $40 with of cocaine and eventually 5.9g of weed lands him 20 years in prison.

[2] "Illegal" voting lands a woman 8 years and deportation.

[3] Possession of a few shotgun shells gets a man 15 years.

Meanwhile, defrauding investors hundreds of millions results in... nothing, really?

There's a word for this.

Unacceptable.

[1] http://www.baltimoresun.com/news/maryland/crime/bs-md-ci-twe...

[2] https://www.nytimes.com/2017/02/10/us/illegal-voting-gets-te...

[3] http://www.nytimes.com/2013/08/11/opinion/sunday/kristof-hel...

> There's a word for this. Unacceptable.

Expressing emotion and anger can be healthy. But let's discuss this and find out why this is and can and what should be done?

* US justice system is designed for settlement. In US 97% of civil cases are settled or dismissed without a trial. 90% of federal criminal cases resolve without trial. 94% of state cases end via plea bargain.

* Normal criminals accept harder sentences when they plead guilty. Is it because it's easier to find them guilty or because they don't have access to better lawyers?

* Criminals can be put into prison only if they can be convicted. Many financial crimes are very hard to prosecute and end result is uncertain. Proving intent can be very hard. Concrete proof even harder. Getting something is better than getting nothing. When federal prosecutors go ahead, it's not uncommon that the result is acquittal.

sources and backround

The Difficulty of Proving Financial Crimes https://dealbook.nytimes.com/2010/12/13/the-difficulty-of-pr...

What prosecutors have to prove in order for you to be charged with a financial crime http://www.businessinsider.com/what-proof-for-financial-crim...

So what do we want? Do we want to relax the the burden of proof in financial crimes? More regulation and paper work that leads easier to prosecute trail (called bureaucracy that increases the cost of enterprise).

The SEC can't jail people, they only have civil authority. They can only refer criminal cases to the us attorneys and DOJ and offer assistance (and i assume they did)

Those people couldn't pay $500,000 and the shares worth in fines.

I wonder if Holmes was male if she would be treated like Martin Shkreli and attacked in every horrible way possible. Don’t see much rhetoric against her.

Theranos was a punch line in my office just this morning, and she'll forever be associated with that.

But Shkreli has brought on himself another order of magnitude of personal criticism because of his statements and actions beyond the price fixing. In my experience from the days after his sentencing, people who know nothing about tech or healthcare know his name and react to it with scorn, while quite few of them know the name of his funds or companies.

Maybe it's because you weren't paying attention to it at the time. Or wasn't* reading HN when the investigations were coming out: https://news.ycombinator.com/item?id=12053721

Less than a year later, before punishments really started to be officially levied against her and Theranos, a movie project with Jennifer Lawrence drew a frenzy of bidding.

https://www.vanityfair.com/hollywood/2016/06/jennifer-lawren...

edit: added "wasn't"

Hoo boy, you are right, the world sure is hard for us white males. Discrimination lurks around every corner. I can't believe nobody realizes that ol Martin wasn't punished because he made a public ass of himself and openly mocked the justice department. It was because he was a white male.

Isn’t she a pretty close relative of some congressman? If so, this could be a good test of how much justice there is left in the justice system. It’s pretty hard to deny she caused a significant amount of damage.

Guys, we're talking about some serious meme potential here.

Headline is misleading. Securities Fraud is not fraud fraud.

Still slightly amused that my uncle thru marriage..his brother was the CEO of a very well known national store who invested in Holmes. My uncle in 2014 mentioned how excited his brother was to help Holmes out and her mission. Which seems like there was no mission just a spoiled brat telling lies for her ego's sake all the while leading all her parents rich friends to be defrauded.

I tried so many times to get investment from his brother yet his brother just played along/followed his rich friends vs. helping out a distance family member. I even had a startup in which I met with Google per their invitation to talk about buying us and every huge tech name knocked on our door. We only received 25k of investment from a Baltimore incubator, yet tried to get additional but I'm not a cool kid or a kid with rich friends or parents with rich friends.

> Holmes — a Steve Jobs wannabe who dressed exclusively in black turtlenecks — settled with the regulators for $500,000 while neither admitting nor denying the accusations.

What Holmes did is most likely a fraud... but what the regulators did in this part above is pure and simple blackmail and extortion... the only problem is that who's gonna prosecute the persecutors....

This is really not far from wild wild west hundred years ago, where everyone was wearing guns at their belts. Truly mind boggling!!

> but what the regulators did in this part above is pure and simple blackmail and extortion

Settling out of court is blackmail and extortion?

If they thought they were innocent they could have had their day in court but instead they basically pleaded "no contest" and took their lumps.

Reply on news.ycombinator.com