Jay Clayton’s SEC Lets Theranos Founder Elizabeth Holmes Get Away With Brazen Fraud

Due to the state of my internet connection (barely functioning), I’ll have to be terse and limit myself to a few high level comments about the pathetic punishment meted out to Theranos founder Elizabeth Holmes. This case proves that the Trump SEC is setting new lows by giving get out of jail nearly free cards to fraudsters.

Holmes settled with the SEC, paying a puny $500,000 when she raised and torched $700 million of investor funds. She also surrendered 18.9 million shares and gave up control of the company by converting her Class B shares, which give her voting control, to Class A shares. She is also barred from serving as the director or officer of a public company for 10 years. That bizarrely means she remains as CEO of Theranos. She did not admit or deny guilt.

The Department of Justice is dutifully reported by the press to be looking at a case against her. If you believe that, I have a bridge to sell you. The SEC refers cases to the Department of Justice when it thinks they merit criminal charges and the two agencies work together. It is possible that the Department of Justice could pursue FDA-related charges against Holmes, but the securities law claims were a slam dunk, and the Department of Justice is highly unlikely to pursue a case on its own, particular since it is plenty busy with things like suing California over passing legislation that defies its crackdown on sanctuary cities.

We’ve embedded the filing at the end of the post for your entertainment.

As bad as the overall picture is, some of the items in the SEC filing are eyepopping. Holmes told investors she expected to have over $100 million in revenues in 2014 when she had only $100,000. She told investors that her largely vaporware blood tests didn’t need FDA approval when they did (and why did no reporter bother to check that claim out?). She presented prospective investors with a binder of endorsements with pharma company logos. But only one was real. The rest were made up by Theranos and the put the logos on the page. Holmes also claimed that Theranos was making its own equipment. That should have elicited a lot more study from investors and the press, since that would require engineering expertise that was notably absent on the Theranos team, plus seeing the facilities where the equipment was being made should have been part of the usual investor dog and pony show and apparently wasn’t.

It was disturbing to see so much of the press reports lead with the SEC’s line that the SEC had charged Holmes with “massive fraud” yet for the most part treat the punishment with “just the facts, ma’am” deference, as opposed to seeking expert comment on its suitability. In the Twitterverse, many pointed out that pharma bro Martin Skrelli was just sentenced to seven years in prison, and that even though he had engaged in brazen fraud, he had arguably not lost investors any money in the end. But he was so smug and full of himself that that alone guaranteed he’d get a harsh sentence.

The more relevant comparable is Rajat Gupta, the former managing director of McKinsey who after his retirement was the blue-chippiest of board members, sitting on the Goldman Sachs and Gates Foundation boards, among others. Using Gupta as a benchmark acknowledges the sorry fact that the connected, particularly the very well connected, get better treatment than small fry.

Recall that Gupta had the misfortune to engage in the one abuse the SEC regards itself as well suited to pursue, insider trading, and where it likes to take big scalps to make up for its failure to do much else on the enforcement front. Prosecutors alleged that the recipient of Gupta’s tips, Raj Rajaratnam of Galleon Group, made profits of or avoided losses of $11.2 million. Gupta’s lawyers argued that he received no economic benefit from Rajaratnam.

Gupta was indicted and found guilty of three counts of securities fraud and one of conspiracy. He was fined $5 million and sentenced to 2 years in prison. He served 1 1/2 years in a penitentiary and six months of house arrest.

While there has been some discussion of the failure of both investors and reporters, it’s light compared to what would seem to be in order. Holmes managed to execute the most rarified form of affinity fraud: she managed to network among the very top stratum of the elites. CNN gives a sketch of how Holmes drew on family connections to get Tim Draper of Draper Fisher Jurvetson as an early investor. Other suckers included Larry Ellison, Betsy DeVos and Rupert Murdoch. Her board members included Henry Kissinger and George Schultz, former Secretary of Defense William Perry, as well as Bill Frist, Sam Nunn, and Jim Mattis. Note that the closest parallel was Bernie Madoff, which was to a significant degree a Jewish affinity scam, with victims ranging from charities and not-for-profits like Technion-Israel Institute of Technology and Congregation Kehilath Jeshurun to people who should have known better like former Salomon Brothers chief economist Henry Kaufman, Bed Bath & Beyond co-founder Leonard Feinstein, and the Wilpon family (major NYC real estate developers and owners of the Mets).

Having very famous and powerful backers outside the world of venture capital meant Holmes meant obvious red flags were ignored. Holmes was a college dropout. Unlike computers, breakthroughs in life sciences come from scientists who have not just the educational chops but serious experience under their belts. And there was no one on her team with that sort of experience.

Not a single major life sciences VC invested in Holmes. She refused to share her science with them. Only wannabes backed her.

And when the Wall Street Journal embarked on its remarkable reporting documenting the extend of the fraud, she was given the benefit of the doubt for far too long. I wish the state of my Internet connection would let me do the sorry performance of the media justice. You’ll have to make do with this CNBC clip:

I wish this would be the last we hear of Elizabeth Holmes as a business person, but you can be sure with her astonishing capacity for denial that she’ll be back. An image-burnishing charity is just about certain to be a big part of her rebranding effort.

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    1. polecat

      She could team up with a one mr. Thiel, and give the new venture the moniker “Blood Funnel”.
      I’m positive A team of Goldenmans Sack would jump and writhe, like the ticks they are .. at the chance to board !!

  1. HotFlash

    Reminds me of another person, somehow. Perhaps she’ll go into politics? Biden/Holmes 2020?

  2. FreeMarketApologist

    Truly bizarre that the fine and punishment wasn’t harder, but I’m not sure that the comparison to Gupta is a strong one, given, as you mentioned that Gupta insider traded, where Holmes “only” lied to investors. Compared to Shkreli, she gets off easy. A look at the board members at the time this was all going down may give a clue: David Boies (although the board was completely rebuilt in early 2017, most likely after they knew there was a potential prosecution).

    While she remains CEO, I imagine that the Board will immediately dump her. The lending and investment agreements between the investors and Theranos probably contain clauses that keep her from serving, now that she has an SEC order against her (or the agreements contain triggers that would force immediate repayment).

    It will be interesting to see if any states jump in to prosecute, as the ‘products’ were ultimately used by individual consumers, who were potentially defrauded, and at significant risk of being given inaccurate medical results.

    1. Outis Philalithopoulos

      Comment from Yves, not me (her internet connection is currently malfunctioning):

      Gupta did not trade any securities. He denied he gave any tips to Rajaratnam. He was not paid by Rajaratnam. And there were no victims.

      By contrast, no only did Holmes raise $700 million that she lost while she was getting a salary and incurring a lot of expenses on behalf of the company, but a Wall Street Journal story reported that the labwork she was doing often had significant errors, to the degree it was showing large false positives and false negatives. That mean she was putting people’s health at risk. Even though that is not a basis for a securities fraud violation, that would normally be weighed in terms of her character and the damage she and other Theranos executives did.

      1. FreeMarketApologist

        We’re on the same page re relative size of punishments and who goes free and who doesn’t.

        In terms of punishments I was thinking the Shkreli case a stronger comparison only because they were both ‘securities fraud’ cases, vs the Gupta/Rajaratnam ‘insider trading / tipping’ case. I do hope that states pick up on the health angle, and it is unfortunate that it doesn’t appear to have been considered as part of the punishment.

        (Would love to know just how those SEC punishment guidelines work.)

        1. OpenThePodBayDoorsHAL

          It’s a good thing she didn’t steal a loaf of bread at Walmart.

          Banana republic

          1. wilroncanada

            Stealing bread: that IS punishable.
            “In its majestic equality, the law forbids rich and poor alike to sleep under bridges, beg in the streets, and steal loaves of bread.” – Anatole France
            She was selling bridges, especially Brooklyn, again; she was begging in boardrooms, executive soirees, and exclusive clubs, but not the streets; and bread, out of the question. But BREAD! YES!

        2. Yves Smith Post author

          Insider trading is a securities fraud. Both are violations of the Securities Act of 1933, which prohibits both false and materially misleading disclosures, including failures to disclose material information, as well as insider trading. Neither were charged under the so-called 1940 Act (Investment Advisers Act).

          As for Shkreki, in addition to making misrepresentations, he also pilfered funds, which is seen as a huge no-no. This isn’t the best summary but I am time stressed:

          Prosecutors said that between 2009 and 2014, Shkreli lied to investors at MSMB Capital and MSMB Healthcare about how well the funds were doing, and that while he was CEO of Retrophin, (RTRX) he used the pharmaceutical company as a piggy bank to pay off MSMB investors and to cover personal loans and other debts.


          1. Fraibert

            Just to clarify, insider trading is a violation of the Securities Exchange Act of 1934, not the ’33 Act, via SEC Rule 10b-5, which is an exercise of the SEC’s authority under section 10(b) the ’34 Act.

  3. Larry

    Thanks for pointing out the first family connection of how Holmes got this fraud vehicle off the ground. I had missed that part of the origin story in all the reporting.

    I have a PhD in the life sciences and can say for a fact that ideas are cheap, but eventually they actually have to be born out in the lab /clinic. The fact that Theranos was so secretive was a major red flag from the start.

    In the Boston area we have a similar company that has been running for years, but not attracting press and big investors. They’re mostly defrauding the government.


    I have had a few colleagues interview there and it raises all the red flags you can imagine.

    1. jcusick

      As bad as some of the employee reviews are, their “Mission” statement is the first red flag, right out of Silicon Valley:

      an innovation engine dedicated to creating a new science that emerges from the holistic integration of physics, biomedicine, and nanotechnology. NBS focuses on incubating transformational technologies that have the potential for game-changing impact and commercializing and scaling up these technologies for deployment in developed and developing world markets. NBS leverages science and technology to address our planet’s greatest unmet needs in global health, energy and the environment.

      Are our “greatest unmet needs in global health” really “an innovation engine”, a portable gene analysis system?

      1. lyman alpha blob

        Ferchissakes. If their mission was to compose the most meaningless corporate palaver, they have done extremely well. They did leave out ‘synergy’ though so there is some room for improvement.

  4. Marshall Auerback

    Just look at her: she’s a very attractive, presentable white woman. Gupta was an Indian. Rajaratnam was an Indian. He went to jail. Steve Cohen paid a fine. Preet Bharara is a self-hating Indian. If you believe that justice is colour-blind in the US, then I’ve got a few risk-free CDOs from Citi to sell you.

    1. fajensen

      Magical Item: “Black Polo of Diminished Consequences”, +1450 HP, +500 Fire Resistance, +5000 Enchantment.

    2. polecat

      Her voice is so alien though .. rather off-putting in my mind, and has me wondering if what’s really underneath all that black attire is something other than human.
      ‘Artificial person’ perhaps ? … and, if so, will she continue to fraudulently ‘malfunction’ ?
      … and if she’s got a rolled up tech mag in one hand, better watch out !

    3. Michael Fiorillo

      I get that it’s not relevant to your point, and I also think Bharara is a fraud, but she’s creepy and freakish-looking, and that black turtleneck, along with the start-up cliches, non-answers to questions and secrecy, should have been an immediate tell that she and the rest were crooks.

    4. oh

      The President and COO of Theranos is Ramesh “Sunny” Balwani, another Indian. RIght now, things are not so sunny for him.

    5. pat b

      She was also surrounded by Deep State PowerBrokers.
      Kissinger, Frist, Mattis, etc…

      I’m surprised she didn’t have Cheney on there.

      With friends like that, nobody was going to touch her.

  5. Louis Fyne

    —Not a single major life sciences VC invested in Holmes. She refused to share her science with them. Only wannabes backed her. —

    any lab tech/grad student could tell you that blood pricks are useless beyond a discrete set of uses. barring some star trek level of science breakthrough

    Were the investors willfully blind or completely idiotic or greedy? maybe all of the above?

    1. RUKidding

      Not a scientist at all but formerly married to one & knew many lab scientists via my former marriage.

      While I don’t know all that much, even I know that blood pricks cannot provide what this greedy _______ said they could do.

      Were investors willfully blind, completely idiotic, or majorly greedy? YES.

      Once again, the Trump Admin pushes the envelop on what the 1% and their lackies and wannabes can get away with, while the rest of us are left to suffer and literally die.

  6. Tom Stone

    Where’s the lovely picture of Bill Clinton standing a little behind and to one side of Holmes…I seem to recall seeing that and wondering where his hand was.

    1. Steve H.

      President Clinton speaks with Elizabeth Holmes and Jack Ma (2015 CGI Annual Meeting)

      and that CGI ain’t a good look…

      1. Craig H.

        A close comp might be Comey excusing Clinton for violating security laws and oaths because it was not intended. Ms. Holmes was just trying to be a fast track entrepreneur who cut a couple too many corners; hence the fine and the ten years penalty box. It’s not like she committed a real felony or can’t be cheerfully welcomed back after her ten years in the penalty box. Heck after a couple of years they may finagle that and bring her back to front another operation.

        It’s endemic corruption. There are a bunch of similar scams still going full-force. See uber. See airbnb. See bitcoin. Maybe even tesla. There is a thanatos story I have not yet seen well-written about who got taken, how much they got taken for, and what were the mechanics of the taking. It looks to me like most of the marks were deluded regarding their own tech savvy and the funds were not theirs, merely their responsibility. When thanatos first hit the news I saw a hundred posts decrying it as fraudulent. The metafilter thread was the best I remember. The fake Steve Jobs putdowns were popular. The amphetamine eye-glow not so much.

        If anybody knows a link that has a good breakdown on the victims I would be very interested to see it.

  7. JTMcPhee

    It’s like this:

    “Catch-22 says they have a right to do anything we can’t stop them from doing.”

    “What the hell are you talking about?” Yossarian shouted at her in bewildered, furious protest. “How did you know it was Catch-22? Who the hell told you it was Catch-22?”

    “The soldiers with the hard white hats and clubs. The girls were crying. ‘Did we do anything wrong?’ they said. The men said no and pushed them away out the door with the ends of their clubs. ‘Then why are you chasing us out?’ the girls said. ‘Catch 22,’ the men said. All they kept saying was ‘Catch-22, Catch-22. What does it mean, Catch 22? What is Catch-22?”

    “Didn’t they show it to you?” Yossarian demanded, stamping about in anger and distress. “Didn’t you even make them read it?”

    “They don’t have to show us Catch-22,” the old woman answered. “The law says they don’t have to.”

    “What law says they don’t have to?”


    And who was that lusty young blond teacher who not only did not go to prison for fornicating with a 14-year-old student, because “she was too attractive, would have been raw meat among the beasts,” but got out of even her little probation stint early, under dodgy legal “logic”: http://www.tbo.com/news/crime/court-denies-appeal-rules-lafave-can-end-probation-early-20141016/

    Rules for us mopes, but not for “those special others…” At what point does the pile of contradictions get heavy enough to crack the camel’s spine? But of course then the camel is paralyzed, if not dead, and its only remaining “weapon” is to spit — https://m.youtube.com/watch?v=JCmGuW2Q_JI

  8. Tim D

    We really do need more women sociopaths – men have dominated the category for far too long!

  9. Harry

    I saw the list of her board members. She couldn’t be done for fraud because that would reflect badly on the great and good. Its clearly a great get out of jail card.

    1. David Carl Grimes

      Does her light “punishment” lessen the culpability of her illustrious board members?

  10. Kiers

    How could general Mattis try and get a defense procurement contract for Theranos for a product which doesn’t exist, whilst HE WAS ON THE BOARD of the very same company, sitting across the table from Kissinger? Theranos is Quantum of Solace / SPECTRE / The syndicate in plain sight

  11. audrey jr

    I’m married to a scientist; we’ve had some great laughs at Holmes over the years. And we’ve had even bigger laughs a the folks who invested in Theranos which was always a huge grift.
    I hate to talk agin’ my own kind but I really believe that she was given a pass because she’s a woman. She must have batted her eyelashes at the right people.
    I may be harsh here, but it’s always been a red flag for me when an undergrad can’t or won’t complete even one or two years of coursework. Shows a lack of focus and commitment.
    She really ought to have got at least 2-3 years institutional incarceration.

  12. John Wright

    What happened to the Theranos money?

    At least the small customers got their money back from Corzine’s dealings in MF Global.

    This was true in my case, though it took a while.

    I also remember that many of Madoff’s customers got much of their original principal back as funds were shifted from the early “winners”.

    In Madoff’s case the net money loss was to support his lifestyle, which was relatively small.

    If the Theranos money ended up going to salaries and equipment, Holmes ran a VC sponsored stimulus/jobs program.

    A grateful SEC responded accordingly.

  13. RenoDino

    Tesla and Uber come to mind when reading this. A cult of personality grows up around a charismatic leader.
    There is a suspension of disbelief. Anyone who questions the Chosen One is seen as a fool. Capitalism is our new great religion so it only natural that prophets will arise to lead their followers on a path that transcends the laws of science and physics.

  14. oh

    One excuse given for Elizabeth Holmes and Theranos is tbat they did not know the FDA rules or misapplied them. Ha! With all the money they raked in from the IPO they had ample opportunity to hire a qualified expert or two.

    A long while ago when she packed the board with known (bandit) figures of the political spectrum, I knew that she’d get away with murder.

    The DOJ only goes after little fish who don’t have connections or have little cash to hire big time (crooked) lawyers.

    1. Yves Smith Post author

      They had big ticket lawyers. There was no excuse for not knowing. And the board members had a fiduciary duty to investors. This was a basic question they should have had answered properly.

  15. TedHunter

    Tried to count how often she said “this is what happens when you work to change things”. Is this 21st-century-speak for “this time it’s all going to be different”? Oh no, wait. It’s just another version of “disruptive”.

  16. TedHunter

    Mattis and Theranos on vox.com Quote: “He duly resigned from Theranos on January 5, 2017 — by which time the company was already commonly described as “embroiled in scandal” by press reports — but, remarkably, the whole affair didn’t come up at his confirmation hearings.”

  17. Whoa Molly!

    I keep asking myself whether people got sick or died because of faulty diagnoses… No mention of this anywhere.

  18. Darthbobber

    1. Reminds me of the recurrent cold fusion scams, but with more prominent backers and suckers. Even includes the inevitable invocation of a p2c2e as what passes for explanation.(process 2 conplicated 2 explain, for those who never read Haroun and the Sea of Stories)

    2. Theranos website is still up and selling the grift

    3. Gagworthy piece up on cnn. “Elizabeth Holmes’ Disastrous Error”. Well-meaning kids who get in over their heads and all that. By a white collar criminal defense attorney.

    4. Given the elapsed time, I’m mildly surprised that Theranos seems not to be in bankruptcy court yet. What is it running on?

  19. The Rev Kev

    When Yves says that it is likely that Elizabeth Holmes will be back, I think that she is right. Back in 2016 it was with great surprise that I read that one of the Republican Presidential candidates was no less than Carly Fiorina. It did not matter that there was not much chance of her getting the top nomination but the fact that she was allowed to run in the “bigs” was for me a telling factor.
    Holmes is only 34 years old so there are plenty of runs that she could make as a Presidential candidate. And after all, if Sarah Palin was once the nominated Vice-Presidential candidate, how high can the bar be for such jobs? Someone to add to a hypothetical NC Watch List.


    Reading the complaint I was struct by the absence of any scientists or engineers engage in or consulted during the decision process. None of the investors seemed to care about how the device worked. They deserved to lose their money.

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