By Pam Martens and Russ Martens: May 24, 2018 ~
On March 14 the Securities and Exchange Commission charged Theranos founder and CEO Elizabeth Holmes with a “massive fraud.” According to the SEC, Holmes had made wild and false claims about the company’s purportedly revolutionary blood testing device as the company fraudulently raised $700 million from investors.
But despite the SEC investigators’ well-developed “massive fraud” charges against Holmes, five days later the SEC let the 30-something woman off the hook with a $500,000 fine, surrender of her shares in the company, and barred her from being an officer or director of a publicly traded company for 10 years. In other words, when Holmes is in her early 40s, she will have the opportunity to once again run another massive fraud and bilk investors. This is exactly the kind of hubris we have come to expect from the SEC. (See related articles below.)
This past Sunday, CBS’s 60 Minutes detailed the history of fraud at Theranos. It had to own up to the following: “…almost every media outlet including us here at CBS bought into the Theranos myth.”
Smart people bought into the Theranos myth because Holmes had learned a pivotal lesson from Wall Street: stack your board with prestigious names and hire a big name lawyer and you can pretty much get away with enormous amounts of fraud for a very long time. At its peak, Theranos was valued at almost $10 billion, making Holmes’ a billionaire from her stake in the company.
Holmes’ board of directors carried heavyweight names like former Secretaries of State George Schultz and Henry Kissinger; current Secretary of Defense James Mattis; and former Senator Sam Nunn. All of her impressive board members were paid in shares of Theranos stock, thus incentivizing them to let the company’s value soar on wild, unsubstantiated claims.
Theranos’ lawyer was David Boies, now disgraced from his Harvey Weinstein involvement and gag orders. Boies was also paid in Theranos stock, worth about $4.5 million at the time. According to media reports, Boies ended his legal advisory work to Theranos in 2016.
Theranos never became a publicly-traded company where it could have seduced mom and pop investors to buy into its multi-billion dollar scam. It raised its money from well-heeled investors like media-titan Rupert Murdoch, Oracle founder Larry Ellison and the current, controversial Secretary of Education Betsy DeVos. But it wasn’t the SEC or the Justice Department that saved small investors from losing their life savings. It was brave company insiders who blew the whistle, a courageous reporter, John Carreyrou, and his equally courageous editor, Michael Siconolfi, at the Wall Street Journal who took on the media sycophants and intimidating lawyers like David Boies to bring this fraud to light.
In the 60 Minutes episode on Sunday night, Carreyrou called Holmes “a pathological liar.” As for the due diligence performed by her star-studded board of directors, Carreyrou says: “This is one of the most epic failures in corporate governance in the annals of American capitalism. They did nothing to verify that her scientific claims were true.”
Sadly, this is not “one of the most epic failures” in American capitalism. The carcasses of corrupt, epic failures under the unwatchful eye of the U.S. Justice Department and SEC could fill the Grand Canyon at this point. We’re thinking of the $68 billion Bernard Madoff Ponzi Scheme where Harry Markopolos was ignored by the SEC for years as he wrote detailed reports to the SEC on why Madoff had to be a fraud. Then there was the massive fraud at Tyco International where another big name lawyer, Mark Belnick, played a pivotal role. And there were also, of course, Enron, WorldCom, RiteAide, Countrywide and dozens of other swindles of epic proportions.
Carreyrou has written a book, Bad Blood, about Theranos that lays bare the “prestigious” names that played an enabling role in this massive fraud. It’s an important read for anyone thinking about investing in a startup in America today or relying on the SEC and/or Justice Department to stamp out Wall Street frauds.