Not much punishment for such a fraud, is it?

Aficionados of business scams and frauds will be savouring this from Elizabeth Holmes at Theranos for decades yet. The point being that she was, for a time at least, listed as a multi-billionaire, raised vast sums of venture capital and managed to do both while lying entirely about a product that simply didn’t work – or even exist.

Pretty good going if you remember to cash in and Louis Vuitton yourself out of there to somewhere without an extradition treaty:

The Silicon Valley startup Theranos and its chief executive Elizabeth Holmes were charged by the Securities and Exchange Commission (SEC) on Wednesday with “massive fraud” for raising $700m from investors by allegedly deceiving them about their supposedly groundbreaking blood-testing technology.

Theranos and Holmes agreed to settle the charges without admitting or denying wrongdoing. Holmes, a Stanford dropout who was once hailed as the next Steve Jobs, will pay a $500,000 penalty, return millions of shares to the company, and relinquish her company voting power under the terms of the settlement. She will also be barred for 10 years from serving as an officer or director of a public company.

That’s a pretty light punishment there.

Its rise had seemed unstoppable. Theranos attracted backing from some of America’s biggest political and business heavyweights, with Henry Kissinger joining the board.

The way their raised money is what allowed them to do so. They didn’t go to any of the usual venture capital firms in this space. Instead, they went to wannabe investors in VC. People who rather needed the VC filter – sure, they were pension funds and all that but still needed the VCs – and who thought they were being clever by avoiding them and their fees.


The SEC’s document on it all shows that it was a fraud from start to finish:

Plaintiff Securities and Exchange Commission (the “Commission”) alleges:
1. This case involves the fraudulent offer and sale of securities by Theranos, Inc.
(“Theranos”), a California company that aimed to revolutionize the diagnostics industry, its
Chairman and Chief Executive Officer Elizabeth Holmes, and its former President and Chief
Operating Officer, Ramesh “Sunny” Balwani. The Commission has filed a separate action
against Balwani.

That is pretty clear, isn’t it?

Pretty much all of this has been known for some time now but there’s still an interesting question to ask:

Jeff Skilling was convicted of fraud and fined $50 million dollars and given 20+ years in jail. Elizabeth Holmes — for fraud that is way more obvious and for which she is clearly directly accountable — will get no jail time, a fine of a half million dollars, loss of some voting shares in the company, and a ten year moratorium on being a director or officer of a public company.


Well, Jeff Skilling wasn’t fashionable, a young woman making it in Silicon Valley was. But there is something more, something more reasonable.

Skilling’s work was at a listed – public in that sense of public – company. Holmes was at a public but still private company in those other senses of public and private. And rooking people in a private company is a different thing than rooking them in a public and listed one. The second brings all public markets into disrepute. Thus the penalties are different.

Yes, not as different as they are here but there is still good cause for the two cases, the two crimes, to be treated differently and punished differently.

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  1. “I would” as well. It seems as though the penalty was, “Give up most of what you stole and go away.” That is light, even if she brought a minimum of vaunted Institutions into disrepute. It may even be that those hated fees of venture-capital firms go toward something. Analysis, maybe.

  2. HB – probably that, some bullshit bingo buzzwords, and her lovely smile. Juicero managed to raise $120m before everyone realised their product was the Sinclair C5 of fruit drinks, so anything is possible in Silicon Valley

  3. I just read the entire SEC complaint. It reminds me of the time I was flown to California to help demo a piece of abject vaporware. Proof Of Concept, though, and we never hit up any investors on that basis, nor did the corporation need additional funding to get us to complete a working model much, much later.

    There is some ambiguity in the Theranos case between “nonexistent product” and “product that doesn’t work very well” or 100% as good as the prior art. There could have been a lucrative business in offering some blood work while the patient shops for groceries. However, to do the large number of tests everyone was counting on, you don’t have your friend Sunny just Write Some Code; you must install additional analytic sensors in that “PC-tower-like” gadget. It must have been obvious that this was not being done, and perhaps wouldn’t even fit. Holmes had an inspiring vision of a small package, but I didn’t read about hiring any expertise at miniaturizing the stuff that would have to fit in that package.

    One hell of an impresario, but I guess her university didn’t offer Business Ethics until the third year of study, and that was her undoing.

  4. Let’s see what happens to Ramesh “Sunny” Balwani. Same enterprise.

    Holmes seems to have embarrassed a lot of the right people because she was very good at getting the Great and the Good to sit on her board. Even General Mattis did I believe. It is amazing what a blonde dye job and a pair of breasts can get you.

  5. Pretty sure this is the beginning more than the end. The DOJ and FBI are still investigating from what I understand so there is still a chance she will face criminal charges and jail time.

    Should she? Hell yes.

    Will she? Probably depends on how much money she still has for lawyers. If she has enough for a top notch legal team it makes it less likely she ends up behind bars.

    • I hope she does. Not because I hold any ill will against her. It is just that after Orange is the New Black, I am looking forward to the inevitable Soft Core “Caged Heat” style tele-movie of her terrible prison experience. With shower scenes.

  6. FOX Business now has the only thing that could be less scientific than Theranos’s desire for double-blind evaluation of its prototypes: anonymous comments on an employee blog. FOX notes that the business averaged 2.9 of 5 stars, but runs the most disgruntled (and the best at charming pidgin English). Little real insight except that management was not interested in the true picture. Been there.

  7. I’ve lived in Silicon Valley for a long time, though I’m not a technologist but rather an E&C type. However, it’s hard to live here and not get involved in some startups along along the way. My observation is that when a firm is in its early stages of fund raising a lot of smoke tends to get blown and sometimes downright lies told. Mr. Worstall is exactly right when he says that VCs or experienced investors should be investing in these deals. Of course, there are laws that state you must be a qualified investor, which is based on financial net worth, but even then most such people are better off steering clear or just putting in a nominal amount (as I have done a few times) as a flier. With Theranos, we at least partially have a story of older men who should know better throwing money, resources and time on a cute young blonde – that story goes back at least as far as Troy. She indeed should be jailed. Helps to be cute.

    There was a book some years ago called “I Was an Economic Hit Man”. It was a pretty terrible book – basically, a mea culpa of the author who worked for a large engineering & construction firm and would consult with third world governments to justify a project whose scope went far beyond their needs and whose costs would be far beyond their means to repay. All funded by the World Bank of course and not by more flinty eyed bankers who were actually concerned about being repaid. As I read it (stopped about half way) I kept wondering who was vetting the flawed assumptions? However, when playing with OPM likely much will be spent foolishly.