Elizabeth Holmes, the founder and CEO of Theranos, a startup company that parlayed the promise of revolutionary diagnostics into a business valued at $9 billion before crashing, was sentenced Friday to 11 years and three months in federal prison on charges that the company defrauded patients and investors.
U.S. District Court Judge Edward J. Davila also sentenced Holmes, 38, to three years of supervised release, and ordered her to report on April 27, 2023, to an as-yet-undetermined federal prison.
Davila made no decision on a request by Holmes’ lawyers to let her remain free on bail while she pursues an appeal of the 135-month sentence.
“The tragedy of this case is Ms. Holmes is brilliant. She is creative and a woman who got access in a male-dominated world,” Davila said, according to published reports, before imposing the sentence in his San Jose, CA, courtroom. “Was there a loss of moral compass here? Was it hubris? Was it intoxication with the fame that comes with being a young entrepreneur?”
Whatever accounted for Holmes’s actions, Davila concluded, they went beyond the simple failure of a Silicon Valley business, rising to fraud based on “misrepresentations, hubris, and plain lies.”
Davila, who has overseen the Theranos case since 2018, was appointed to the U.S. District Court for the Northern District of California in 2011 by President Barack Obama.
Addressing the court in tears, Holmes did not admit to any crimes, but apologized to patients and investors, claiming that she took full responsibility for her actions.
“I am devastated by my failings,” Holmes lamented. “Every day for the past years I have felt deep pain for what people went through because I failed them.”
“Looking back there are so many things I’d do differently if I had the chance. I tried to realize my dream too quickly,” Holmes added.
Holmes could have been sentenced to as many as 20 years in prison, and a fine of $250,000 plus restitution. Federal prosecutors had requested Holmes be sentenced to 15 years in prison, as well as three years of supervised release and restitution of $804 million—a sum reflecting the amounts of capital Theranos raised from investors in 2013 and 2014, plus investments from business partners Walgreens Boots Alliance and Safeway, as well as from former Secretary of State George Shultz, who served as a director on Theranos’ board.
Holmes’ lawyers had requested of Davila a sentence ranging from home confinement to no more than 18 months in prison, and countered that the amount lost by investors ranged from $44.3 million to $48 million. The U.S. Probation Office, an independent arm of the U.S. District Court, had recommended a nine-year prison sentence, citing what it calculated as a loss of more than $550 million suffered by Theranos investors.
However, Davila pegged the losses attributable to fraud by Holmes’s fraud at $121 million.
Letters of support
Friends and supporters of Holmes—who include U.S. Sen. Cory Booker (D-NJ) and venture investor Tim Draper, founder of 30 venture funds and Draper University—have sent more than 130 letters to Davila requesting leniency in sentencing Holmes.
“As author Bryan Stephenson has said, each of us is more than the worst thing we’ve done,” Booker wrote to Davila. “I firmly believe in the possibility of rehabilitation and in the power of redemption for anyone. And I believe that Ms. Holmes has within her a sincere desire to help others, to be of meaningful service, and possesses the capacity to redeem herself.”
Supporters of Holmes have also cited Holmes’ living a quiet life in recent years with 29-year-old hospitality heir William “Billy” Evans. The couple has a 16-month-old son.
“You hold the life of my partner in your hands,” Evans pleaded in his letter to Davila. In that letter, Evans disclosed Holmes is pregnant with their second child.
“I must ask you to please help her. To help her help others. Her life will be one lived to its fullest potential. One of service to others and dedication to causes both great and small. And a life dedicated to protecting our son from the world Liz has now realized requires a bit of hesitation alongside her hope.”
Holmes was convicted in January on 4 of 11 federal charges that Theranos engaged in fraud against its investors and patients by claiming that its technology could diagnose dozens of health disorders using just drops of blood drawn via finger stick.
A jury found Holmes guilty of three charges of wire fraud against investors related to wire transfers of $38,336,632 on or about February 6, 2014; and of $99,999,984 and of $5,999,997, both occurring on or about October 31, 2014. Holmes was also found guilty of one count of conspiracy to commit wire fraud against investors between 2010 and 2015.
Holmes was found not guilty of four other charges—two counts of wire fraud connected to a patient’s laboratory blood test results, of which one occurred on or about May 11, 2015, the other on or about five days later; one count of wire fraud related to a wire transfer of $1,126,661 on or about August 3, 2015: and one count of conspiracy to commit wire fraud against patients who paid for Theranos’ services between 2013 and 2016.
Jurors failed to reach a verdict on three of the 11 charges leveled against Holmes by prosecutors from the U.S. Attorney’s Office for the Northern District of California. All three were of wire fraud related to wire transfers—one of $99,990 occurring on or about December 30, 2013; one of $4,875,000 occurring on or about December 31, 2013; and one of $5,349,900 also occurring on December 31, 2013.
Taking the stand
Holmes—whose investor presentations and attire evoked comparisons to Steve Jobs—and her lawyers denied committing fraud by counter-asserting that she believed in what Theranos attempted to do. Holmes took the stand in her own defense during the trial, alleging that she was a victim of emotional and sexual abuse at the hands of Theranos’ president and COO and her former boyfriend Ramesh “Sunny” Balwani, who was charged along with Holmes—and who had denied any wrongdoing.
Balwani was convicted in July of two counts of conspiracy and 10 counts of wire fraud by a jury that deliberated for 32 hours after a trial that ran for 13 weeks. The 12 counts for which Balwani was convicted included all 11 charges that had been leveled against Holmes. Balwani was to have been sentenced on Tuesday, but Davila postponed that proceeding to December 7, so that the U.S. Probation Office could have more time to recommend a sentence for Balwani.
During her own testimony, Holmes admitted responsibility for including the logos of Pfizer and Schering-Plough (since acquired by Pfizer) in Theranos documents circulated to investors, saying she thought at the time that she acted appropriately because the documents covered work performed with the pharma companies. During the trial, executives for Walgreens and several investors testified that they believed the companies had validated Theranos’ technology.
“I’ve heard that testimony in this case and I wish I had done it differently,” Holmes acknowledged.
Holmes founded Theranos in 2003 as a 19-year-old, dropping out of Stanford University where she had been majoring in chemical engineering. The company raised more than $700 million in private capital from venture capitalists and other investors, and attracted luminaries to its board of directors that included two former U.S. Secretaries of State, Henry Kissinger and George Shultz; former U.S. Secretary of Defense James N. Mattis, and former U.S. Senators Sam Nunn and Bill Frist.
Theranos ceased operation in September 2018, nearly three years after news reports about its operations made the company one of 2015’s most important biopharma stories.
Theranos’ business model and diagnostic tests came under withering scrutiny from The Wall Street Journal starting in October 2015, when reporter John Carreyrou offered the first of several news stories on the company. One report found the company’s Edison lab testing instrument was used for only 15 of its 240 tests as of December 2014, according to four former employees. The other report said Theranos stopped collecting tiny vials of blood drawn from finger pricks for all but one of its tests, following an unannounced FDA inspection.
The disclosures contrasted with Theranos’ since-withdrawn website claim that its “breakthrough advancements have made it possible to quickly process the full range of laboratory tests from a few drops of blood.”
Transparency promise
Holmes responded at the time by promising to increase her company’s transparency, telling Bloomberg Businessweek that Theranos invited independent medical experts to examine its technology and discuss their findings publicly. Theranos also promised to publish testing data submitted to the FDA in a medical journal.
However, the news reports touched off investigations by the U.S. Attorney’s Office in San Francisco, the U.S. Securities and Exchange Commission, and other federal as well as state agencies.
Holmes’ legal trouble sparked concerns raised in an editorial by GEN founder and chairwoman Mary Ann Liebert that Theranos’ debacle may make it harder for women to attract financing for their companies.
“Holmes is a pariah among the highly qualified women whose accomplishments and integrity are absolute, and we need to ensure that what she has done does not destroy the possibility of more women-owned initiatives,” declared Liebert, who is also founder and chairwoman of Mary Ann Liebert, Inc., publishers.
Theranos’ primary source of revenue came from Walgreens Boots Alliance. The holding company for Walgreens joined Theranos in September 2013 to launch a partnership that brought the diagnostics company’s services to Theranos Wellness Centers created within some Walgreens stores in Arizona and California.
In May 2016, The Wall Street Journal reported that Theranos had voided all results for tests run on its Edison device in 2014 and 2015, while correcting some blood coagulation tests performed at the Scottsdale lab.
A month later, Walgreens ended its relationship with Theranos in June 2016, shutting down all 40 Theranos Wellness Centers in its Arizona stores and saying it would no longer offer the company’s services. Walgreens at the time cited the voiding of test results and an earlier rejection of a correction plan for the lab submitted by Theranos to the Centers for Medicare & Medicaid Services (CMS).
In July 2016, CMS revoked the CLIA certification of the company’s Newark lab and barred Holmes from owning, operating, or directing a laboratory for a minimum of two years. That action followed a CMS investigation of the lab’s operations that found a number of deficiencies within the operation, including one that posed “immediate jeopardy to patient health and safety.”
Theranos initially pursued an appeal, saying that it made “substantial progress” toward correcting deficiencies identified by CMS—which the company summarized as appointing new lab leadership, strengthening its clinical policies and procedures, and revamping training programs. The company ultimately agreed in April 2017 to pay a $30,000 fine and not operate a clinical lab for two years.
Change of strategy
With the company in the proverbial crosshairs of CMS and other authorities during the summer of 2016, Theranos appeared to pursue a strategy of moving away from delivering services via its own labs, to one that focused instead on selling products.
On August 1, Holmes spoke before 1,000 clinical laboratory scientists at the American Association of Clinical Chemistry (AACC) conference in Philadelphia, where she detailed the launch of the miniLab, a customizable tabletop device that can perform a variety of clinical chemistry, hematology, immunohistochemistry, and molecular biology assays using a small sample of blood. Used in conjunction with the Theranos Virtual Analyzer software that can operate miniLab remotely, Holmes once again said the company would revolutionize the market by moving away from a centralized model of clinical lab testing.
In March 2018, Theranos, Holmes, and Balwani settled charges raised by the U.S. Securities and Exchange Commission that they raised more than $700 million from investors through an “elaborate, years-long fraud” that entailed exaggerating or making false statements about the company’s technology, business, and financial performance.
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 activities scrutinized by the SEC, and relinquish her voting control of Theranos by converting her super-majority Theranos Class B Common shares to Class A Common shares—without her or the company either admitting or denying the allegations in the SEC’s complaint.
Balwani worked at Theranos from September 2009 through 2016, serving as the company’s president, COO, and board member at different times during that period.
Three months after the SEC settlement, the U.S. Attorneys Office filed criminal charges against Holmes and Balwani, accusing them of using ads and solicitations to encourage doctors and patients to use Theranos’ blood testing laboratory services despite knowing the company could not consistently produce accurate and reliable results for certain blood tests.
Investors were defrauded, according to prosecutors, through direct communications, marketing materials, statements to news media, financial statements, models, and other information.