Last summer, I read with great interest the media reports of Elizabeth Holmes’ month-long fraud trial in California. To sum up the story, Holmes left Stanford in 2004 at the age of 19 to start Theranos, which she touted as an affordable and convenient blood testing company. Holmes’ romantic/business partner, Ramesh “Sunny” Balwani, who was a tech mogul in his own right, became COO of Theranos in 2009. Theranos claimed to have technology capable of testing hundreds of health problems using just one finger. blood sting. In 2015, The Wall Street Journal revealed that Theranos’ claims were too good to be true, leading Balwani to resign from the company and the company to collapse. Holmes’ trial lasted four months and ended in January, with guilty verdicts on some, but not all, of the fraud charges against her. With Holmes still on bail pending his sentencing hearing in September, Balwani’s trial began in April and is still ongoing.
Holmes’ high-profile defense strategy included pointing the finger at Balwani as abusive and controlling, as well as cutting into extremely wealthy investors, such as Rupert Murdoch, Walmart’s Walton family and Betsy DeVos, who were allegedly duped by the Theranos claims. . Predictably, Balwani’s strategy has been to point the finger at Holmes as the true visionary for Theranos. For his part, Balwani also faces a steep and difficult climb, as his own text message to Holmes was introduced early in the government case in which he claimed responsibility “for everything in Theranos”.
Although it is theoretically possible that Holmes and Balwani were judged motivated solely by their differing beliefs in their own innocence, as shrewd businessmen they likely calculated the costs and benefits of a trial and decided it was worth rolling the dice. Certainly, the costs are enormous. Holmes’ test team was led by Williams & Connolly partner Kevin Downey. If you multiply a conservative billable rate for a Los Angeles W&C partner of $750 per hour by a ridiculously conservative estimate of 12 hours per day, the 79 days on probation cost Holmes over $700,000. Moreover, by going to trial, Holmes lost the only mitigating measures available to him under federal sentencing guidelines for a speedy acceptance of responsibility. (However, given the draconian enhancements applicable to financial crimes causing millions of dollars in losses to investors, these mitigators were likely relatively insignificant in Holmes’ case.)
Perhaps most importantly, although she may remain “free” longer than she otherwise would have if she had pleaded guilty, the agonizing stress of withstanding a federal criminal prosecution has undoubtedly robbed her of of any peace since she was indicted in June 2018, not to mention the three years prior she was under federal investigation.
So what did Elizabeth Holmes gain by putting the government to the test? Well, for starters, she was able to present a counter-narrative to the government’s case — not only to the 12 jurors who decided her guilt or innocence, but also to the presiding judge who will now decide her sentence. I think there’s a compelling counter-narrative here. Holmes was 19 when she started Theranos, around the same time she fell in love with Balwani, who was 19 years her senior. She idolized Steve Jobs but apparently had no real mentors. His parents would have been generationally wealthy but not necessarily successful in their own vocations. Of course, several very successful old men have invested and lost millions in Theranos, but this story always goes both ways. By the time Holmes receives his sentence, Theranos will have been shut down for four years. Meanwhile, Holmes has become a first-time mother and appears to be in a more stable romantic relationship. Being able to place his offending conduct in the proper context is sometimes advantageous for a white-collar defendant whose misconduct did not take place on a specific date and time, but instead can and should be considered in the context of the misconduct. a wider set of good deeds.
Holmes also preserved his valuable right to appeal any mistakes the government might have made in pursuing his case. Since so few white-collar cases go to trial, there is no plan to try such a case before a jury, and federal appeals courts and even the United States Supreme Court have recently shown their willingness quash fraud convictions. In particular, the 9th Circuit, where the Holmes case was tried, recently ruled that the government’s longstanding practice of using high executive salaries, that is to saymaintenance of the way of life, as the motive for a fraudulent conspiracy is no longer legally viable. United States vs. Yates16 F.4th 256 (9th Cir. 2021) (reversing all convictions).
Perhaps for the first time in his life, Holmes seems to be playing the long game. Time will tell if his gamble pays off in measurable ways. It will be interesting to hear more about the sentence the government is seeking for Holmes and whether, and by how much, the judge ultimately sentences her below the government’s recommendation. Of course, it also remains to be seen whether Balwani is convicted and, if so, whether his sentence is comparable to that of Holmes. These and other questions will have to be answered once I start watching “The Dropout” on Hulu.•
Jonathan Bont criminal defense, commercial litigation and government compliance practices at Paganelli Law Group. The opinions expressed are those of the author.