Theranos Didn't Just Harm Investors
bloomberg.com
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But I think Salmon overstates his case and oversimplifies wire fraud and I'm a little surprised Levine, a lawyer, doesn't catch him on this.
Salmon says wire fraud is among the easiest crimes to prove: everything is done by wire now, so "you show the lie, you show the wire, boom". But it's actually not enough to show a "lie" and then a "wire". Check out a federal court's model jury instructions for wire fraud. The burden on the prosecutor is higher than showing simple dishonesty; they have to prove "intent to defraud", which means that the accused had to have lied deliberately in order to cheat victims. There are, even in the jury instructions themselves, multiple mitigating factors for "intent to defraud". And, aside from that, there's a legal difference between that and wildly extrapolating from realistic revenue forecasts to irrationally high outcomes you merely hope could happen if everything breaks your way.
I think you can make the case that Balwani and Holmes got indicted because their dishonesty was unusually brazen and directly connected to the business they were in. They lied about what they were doing in the (then) present tense. They didn't make simply make unrealistic forecasts or put the rosiest possible color on how their engineering work was going; they fabricated entire medical procedures.
By putting blatantly false claims, like “Theranos Edison devices are deployed in the backs of Humvees in Afghanistan” and “Theranos technology has been validated by Johns Hopkins”, in writing, they have made it quite easy for prosecutors to meet any mens rea bar.
That said, it’s true that historically prosecutors have used wire fraud charges as an open ended tool. In “The Chickenshit Club”, the author describes in detail how various white collar crime task forces employed US Postal Service inspectors to help build wire fraud cases. It may not be as easy as Felix Salmon is saying, but the idea that any fraud that involves a wire constitutes “wire fraud” is not that far off from federal prosecutors’ historical playbook.
Making one intentionally in order to defraud people is most likely fraud though
First off, there's usually a massive wrestling match between prosecution and defense as to what the jury instructions will actually have and not have. There's a reason they call them "model"; they're not compulsorily relayed verbatim, and in fact, even the models vary by court circuit (often with substantial distinctions).
Model instructions are also written by judges, and read like stereo instructions. A typical juror does not understand them, everybody knows this, and the judges who occasionally revise the model jury instructions are totally fine and dandy with this fact.
"intent to defraud", if it is defined at all in a given set of jury instructions, is defined circularly, and doesn't rule in or rule out edge cases. "Beyond a reasonable doubt" is deliberately kept vague, and nearly every judge will expressly forbid defendants' defining it as a percentage of certainty (e.g. 95% sure, 99% sure). The famous technicolor thermometer in the OJ trial expressing different levels of doubt is also typically banned by judges.
You have to sympathize with the jurors: they're trying to do a good job with the information they're given, and the system they have to work with is somewhere on the spectrum between being out of touch and giving the jury the finger. (BTW, most federal trial judges make more each day than the ENTIRE jury).
I've gotten to the point of deep suspicion of anybody who points to jury instructions as an exemplar of anything other than how seriously messed up the system is.
The bottom line is that if the federal government decides to go after you, you are in for a very bad time. There is a heck of lot of fairly broad discretion placed in the hands of FBI field office directors and US attorneys (political appointees) to ruin lives.
Happened to my wife.
The jury instructions serve no purpose other than to frustrate jurors, and frustrated jurors (especially those that survive the venire) tend to convict. Sometimes the ends justify the means, and sometimes not.
I'd like to see your source for "multiple mitigating factors for 'intent to defraud'", because other than a good-faith instruction, which is optional and the judge and prosecutor will fight to keep out, there aren't any in any model jury instruction I've read (and I've read many of them, multiple times). I really hope you have one, because in case I need to file a 2255, a missed jury instruction might help.
You still don't seem to be following my point regarding jury instructions. My argument isn't that they protect defendants because juries receive them; it's simply that they offer a concise summary of the predicates for felony crimes. A jury's receipt of any given instruction is immaterial.
Take for example, the 9th circuit model jury instruction for Wire Fraud (18 USC 1343).
Numerous legal experts find that it is not a concise summary, but one that leaves out multiple major points.
For example, http://www.kmbllaw.com/intent-to-defraud-is-misdefined-in-th...
My corresponding jury instruction omitted that a loss had to be caused, or explained, really explained, what "materially" actually meant, or how important it was.
If you decided to tell a little fib at the corner store and told the cashier you were Barack Obama as you bought a gallon of milk, that would count as wire fraud according to these jury instructions. Not comprehensive -> Not concise.
My original comment wasn't about jury instructions. It was about the fact that wire fraud isn't simply "a lie plus a wire".
If you get the jury to vote "guilty", then you have proven guilt, even if you have done so using zero logic or critical thinking skills, or provided them with falsehoods and misinformation. That's Salmon's point, and it's true.
In theory, and according to the law, wire fraud is not simply a lie plus a wire. In practice, that's exactly what wire fraud is. There shouldn't be a gulf between the two, but thanks to our lawmakers, judges, and US attorneys, there is.
> And, aside from that, there's a legal difference between that and wildly extrapolating from realistic revenue forecasts to irrationally high outcomes you merely hope could happen if everything breaks your way.
I have to say, I came away from the article with a very different impression than you. I definitely got the impression from Matt that just being unrealistic about revenue numbers etc is not enough to prove wire fraud. Hell, he even compares Theranos to other startups quite directly.
There is one thing in that sentence which is a current fact which is the number of active users. Investors might disagree with the way you measure it but whichever way you do measure it better produce that number for real.
Everything else is based on your models, expectations, and hopes. It's not a crime to be a crazy optimist but you're not entitled to your own facts.
His use of the test in 2015: https://mondaynote.com/theranos-trouble-a-first-person-accou...
Follow up from May 2018: https://mondaynote.com/theranos-could-have-been-stopped-9670...
https://www.imdb.com/title/tt5795144
https://deadline.com/2018/05/vanessa-taylor-theranos-scandal...
It's also a breezy read - I tore through it in a couple of sittings.
https://www.commonwealthclub.org/events/2018-06-07/theranos-...
No patients were harmed. The only losers in this are the investors that invested in Theranos. Given that they blindly trusted the pitch, without verifying that the technology worked, that makes them very bad and unskilled investors.
Unskilled investors losing a lot of money is, in fact, a very good thing for the Silicon Valley ecosystem. It's how bad influencers are flushed out of the system.
You apparently didn't read it very well. Patients went to ERs, had drug dosages changed, invasive tests and procedures performed as a result of these results.
> It's Theranos's investors and Theranos's business partners that are mostly at fault. They didn't do their due diligence
And it's probably the FDA's fault, too, right? You know, since they should have known that a locked and partly covered side door to a lab is where the Theranos equipment really was, and that the lab they were inspecting had been carefully prepared and "sanitized" for their benefit, and Theranos hoped that if this wasn't uncovered they'd be certified based on the "prepared" lab. Balwani and Holmes forbidding anyone from using the real lab, or going through that door when inspectors were on-site was... "just hoping that it would work", not actively deceptive and fraudulent, right? What due diligence might have helped discover that?
I am glad Holmes and Balwani are facing the music. I would have preferred to see more than just Holmes and Balwani face charges though. There’s no way you pass an inspection from CMS and FDA when you have a “pay no attention to the man behind the curtain” part of the building without others being in on it.
Just FYI, the parent was being sarcastic.
In the wake of Theranos I have heard serious criticism of CMS & FDA to this effect (we need more regulations because clearly they're not getting the job done.)
Beyond the psychological harm in the reported false positive cases why are you confident that no patients were harmed in even worse ways (i.e. false negatives, not catching a condition early)?
Did you make an account just to make this dumb comment?
Yes, it is.
#1: Saying you can do something you know you can't do #2: Saying you can do something you think or hope you can do #3: Saying you can do something you know you can do
While there is a human behavior difference between #1 and #2, you're still misleading your investors, right? Like I said, IANAL, so I can't say whether or not it constitutes fraud, but it is still dishonest IMO.
That's not the point. The point is reckless endangerment of patient and there are laws for these kind of thing. You break it and you pay for it.
It's like saying robbing a bank and no one got killed for it. They got the money back. Just let the robber go.
If they can get away with bilking investors while putting a defective medical device on to market you mind as well have a unregulated medical device market. FDA and John Carreyrou got them.
> Unskilled investors losing a lot of money is, in fact, a very good thing for the Silicon Valley ecosystem. It's how bad influencers are flushed out of the system.
The end does not justified the mean.
Just cause Thanos saved the universe by killing half of all living thing doesn't make it good.
Investors are not expected to need to see through blatant fraud. Many laws and regulations exist for the precise purpose of preventing fraud because it's not supposed to be one of the expected risks of investing. The expected risk of investing is that the business might lose value or fail in the marketplace, not that the entire operation is a scam.
This is blaming the victims. The article says that Theranos lied to investors. How can you invest in anything if lying is allowed without consequences?
> It's how bad influencers are flushed out of the system.
Justice punishing wrong behaviour is what flushes out the system. People walking away with money collected from lies and fraud does not.
However, in ending with "the venture capitalists are just fine", the article also completely misses another class of people who are also hurt by these types of fraud -- all the other more worthy honest startups that went unfunded or under-funded when Theranos sucked $700 million out of the investment ecosystem.
All of the other bogus companies mentioned ( Hampton Creek; Zenefits; Lending Club; Skully; ScoreBig; Rothenberg Ventures; Faraday Future; Hyperloop One...), and many others not only suck the life out of the system, they destroy the ability of other honest startups to make it.
The VCs legitimately risk failure; it's the nature of VC.
But they aren't supposed to be risking fraud, which is perhaps why they don't catch it as much as they should in Due Diligence. Seems they need to do better Due Diligence, checking not only whether everything matches their expectations, but also whether it actually is what it is represented to be.
Not to defend the fraudsters here, but a certain amount of high-risk investments are going to end up failing because of fraud and investors knowingly bear those risks (and/or pay a money manager to smoke out and avoid those risks).
But, do they price in the damage to the overall startup ecosystem, which makes a more difficult landscape for everyone to succeed, them included?
E.g., an overall broader perception of fraud, smoke, and mirrors will make it harder for them to raise their next funds, and general skepticism of the startup environment, reduces the liklihood of success of all the ventures. This environment is either a virtuous circle that'll lift all boats (to mix metaphors), or the opposite...
> it is hard to distinguish among the CEO who promises the impossible because she is committing fraud, the CEO who promises the impossible because she is deluded, and the CEO who promises the impossible and then goes and does it.
It seems you're suggesting otherwise, except I disagree with you and agree with the article, at least to the extent that it applies to VCs and other high-risk investors: they don't have the ability to have enough technical depth to detech technical fraud, so they have no choice but to price in that risk.
> This environment is either a virtuous circle that'll lift all boats (to mix metaphors), or the opposite
Just the wording makes me think this is a false dichotomy. Why can't it be neither? The environment is complex, and it's conceivable that it would lift/sink only some boats or that it's not circular.
I agree that it's hard for the VCs to distinguish. I've also seen plenty of situations where the VCs out of their technical depth and make preventable bad calls in both directions (investing in bad tech and passing on very feasible tech). I'm just saying that it would be good for the VCs and the entire ecosystem for them to put more resources into much better vetting of technology.
> This environment is either a virtuous circle that'll lift all boats (to mix metaphors), or the opposite
I'm not saying that it's an absolute with all vectors pointing in the same direction. Even strongly positive or negative environments will contain outliers, counter-trend examples, etc. Even on the massive crashing days on the stock exchange, there are always a few stocks that make good gains.
What I'm pointing to (perhaps badly) is the feedback loops between on one side, predominantly sound investment, growing startups bringing good new tech to market, and solid returns, and on the other side, delusional investment, scarcity of good new tech, and poor returns. The former will bring in more startup founders and investors, and the latter will become a dying ecosystem.
A major problem with our industry is that in addition to the visionaries, dreamers, and hard workers, there is a lot of money which is also a magnet for scammers and a variety of toxic personalities. The better we sort the latter from the former, the better off we will all be.
OK. I think I see what you're saying, that, on the whole, it's likely to be one or the other. I'd still argue that it could be neutral/stable, but I don't have any counter-argument to why that would be likely on a meaningful time scale, considering the duration of most VC funds.
> A major problem with our industry is that in addition to the visionaries, dreamers, and hard workers, there is a lot of money which is also a magnet for scammers and a variety of toxic personalities. The better we sort the latter from the former, the better off we will all be.
I'm not disagreeing that it would be good for everyone involved. I just don't see the path to get there. Merely wishing VCs would do a better job, without some kind of specific mechanism and associated incentive for them to do that better job, isn't enough.
How to get the VCs to do better tech vetting? Definitely an issue. I would have thought that the downside of losing would be sufficient motivation to invest in really solid tech vetting, but it seems like they treat it more of a cost center. Perhaps seeing $700 million go "poof" in this instance will provide some motivation in the future?
Not only that, but how would they? Do they keep experts on staff (and risk that expertise going stale, if it's reliable in the first place)? Do they bring in outside consultants/contractors (and risk espionage)? Do they interrogate employees (conflict of interest and perverse incentives galore)?
I'd argue that this is a fundamental problem with traditional VC, in that, in general, they have no expertise in the ventures, and their financial incentives and neither well aligned with those ventures nor with their investors (limited partners).
> invest in really solid tech vetting, but it seems like they treat it more of a cost center
To be fair, though, it is, both for them and the target company, assuming that there's no fraud (or delusion?) involved.
> Perhaps seeing $700 million go "poof" in this instance will provide some motivation in the future?
You do bring up an interesting point about the sheer magnitude of this loss. By comparison, pets.com was only $300 million.
Although it provides some motivation, in that it may exceed what was priced in, is it enough to change the way the industry behaves?
Interesting points about the difficulties of in-house staff. Although my first instinct would be to expand it, you're right about ti getting stale, and also that structure was one I've seen make mistakes (maybe because they were stale). Tough nut to crack indeed..
The list of assigned patents looks impressive. Perhaps something that could be developed further by an acquirer?
http://patft.uspto.gov/netacgi/nph-Parser?Sect1=PTO2&Sect2=H...
Further, the late Ian Gibbons was the “real” inventor on many of these patents. At the end of his life, he despaired to find out that because Elizabeth Holmes insisted on being listed as an inventor on all of Theranos patents, that was potential grounds for cancelling the patents altogether should someone challenge the patents in court.