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Elizabeth Holmes' defense strategy emerges: 'Failure is not a crime'

·Reporter
·5 min read

More than three years after Elizabeth Holmes was indicted for fraud, lawyers for the embattled ex-Theranos CEO defended her as a hardworking entrepreneur who relied on advice from the wrong people during opening arguments in a closely watched trial on Wednesday.

“Elizabeth Holmes worked herself to the bone for 15 years trying to make lab testing more affordable,” Holmes’ attorney Lance Wade told the jury. “She failed … But failure is not a crime.”

Holmes, now 37, launched the Silicon Valley startup in 2003 at just 19 years old, with a vision to overhaul diagnostic health care. Over more than a decade, the entrepreneur sold investors on the idea of developing an analyzer, the size of a desktop printer, that could run a suite of common tests on as little as a drop or two of blood taken from a patient's finger.

In 2018, a federal grand jury indicted the entrepreneur and former Theranos COO and president Ramesh “Sunny” Balwani, who was also Holmes' onetime boyfriend, charging them with wire fraud and conspiracy. The indictment claims the pair used Theranos to defraud investors and patients and misrepresented its technology from 2010 to 2015. The charges each carry a maximum penalty of 20 years in prison.

Elizabeth Holmes in federal court on September 8, 2021. (Source: Alexis Keenan/Yahoo Finance)
Elizabeth Holmes in federal court on September 8, 2021. (Source: Alexis Keenan/Yahoo Finance)

Watch Yahoo Finance's new Elizabeth Holmes documentary here

Throughout his opening statements, Wade made dozens of statements to emphasize Holmes’ dedication to developing a miniaturized blood testing device.

Holmes ultimately made leaps forward in the approach to diagnostic testing, he said, yet she fell short by relying on advisers, as well as company executives and experts. Among Holmes’ most critical mistakes, Wade said, were relying on Balwani, and her former Stanford University professor, adviser, and board member, Channing Robertson.

To address the government’s accusations that Holmes lied to investors about the range and accuracy of Theranos’ tests, Wade cautioned jurors to carefully weigh motives of investors who are expected to testify, and to understand the qualifications that investors were required to attest to before backing the company.

To invest in Theranos, Wade said, required showing significant wealth as well as attesting to the capability to take on significant risk. “They had to recognize that Theranos was a speculative investment...The risks were apparent to investors.”

In anticipation of the government’s claim that Holmes defrauded paying patients, Wade advised jurors to weigh the company’s number of inaccurate results, expected to be highlighted during the government’s case, against the 8 million that Theranos performed.

“How many has the government found? We think about 20," Wade said, referring to patients who paid for and received inaccurate tests, some of who are expected to testify. 

Holmes' attorney also referred to claims raised in court documents that she suffered “a decade-long campaign of psychological abuse” by Balwani, who was also her ex-boyfriend. “There was a side of that relationship that many people saw and will talk about," he said, leaving out the extent of the abuse alleged in the documents. "There was another side to it that nobody else saw.”

Balwani has denied the claims of abuse in separate court filings.

The government’s narrative told a drastically different story, specifically that Holmes intended to lie in order to make money. As part of its evidence of intentional fraud, the government said that it would show a document Theranos allegedly fabricated to fake an endorsement from Pfizer.

“This is a case about fraud, about lying and cheating to get money,” Assistant U.S. attorney Robert Leach said. “By making misstatements to investors and patients, Elizabeth Holmes became a billionaire."

A promising startup undone by a bombshell investigation

A decade after launching Theranos, in 2013, Holmes notched a deal with drugstore giant Walgreens to transition the analyzer from the research and development phase to a commercial product. Under a $140 million contract, Theranos placed the machine, known in its various iterations as the TSPU, Edison, or miniLab, inside Walgreens wellness centers, where customers ordered a variety of common blood tests.

However, former Wall Street Journal reporter John Carreyrou exposed Theranos’ technological shortfalls in a bombshell investigation published in October 2015.

In January 2016, the Centers for Medicare and Medicaid notified Theranos of laboratory deficiencies that it said posed “immediate jeopardy” to patient health. The agency sanctioned the company and agreed to a settlement that banned Holmes from owning or operating a clinical laboratory for two years. The agreement forced the company to shutter its Walgreens and laboratory operations.

Elizabeth Holmes in federal court on September 8, 2021. (Source: Alexis Keenan/Yahoo Finance)
Elizabeth Holmes in federal court on September 8, 2021. (Source: Alexis Keenan/Yahoo Finance)

The revelations prompted Walgreens, three investors, and Theranos customers to sue Theranos and Holmes. Walgreens sued for breach of contract, and the investors claimed fraud. Holmes settled the suits, paying Walgreens $25 million to end its breach of contract claim. An attorney for two late-stage investors said his clients recouped their investments in a settlement with Holmes and Theranos. Separately, Holmes faced claims of fraud from the Securities and Exchange Commission and agreed to a $500,000 fine.

Holmes and Balwani will be tried separately, due to Holmes' abuse claims. In court documents, Holmes' attorneys said she suffered “a decade-long campaign of psychological abuse” by Balwani that caused her to suffer from post-traumatic stress disorder. Balwani allegedly controlled what she ate, how she dressed, and how long she slept. Balwani monitored her phone calls, texts, and emails and threw hard, sharp objects at her, the documents allege.

A jury of seven men and five women was selected last week for the Holmes trial, which is expected to last as long as four months. Balwani will be tried in 2022. Prior to the start of the trial, one of the female jurors informed the court of a financial hardship that inhibits her participation in the trial. The court has taken the matter under advisement and will decide whether to excuse the juror at a later time.

Alexis Keenan is a legal reporter for Yahoo Finance. Follow Alexis on Twitter @alexiskweed.

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