View from Washington: Theranos – Silicon Valley on trial

It feels like something from another time and the wheels of US justice have ground not just slow, but Covid-slow. Nevertheless, more than three years after the two most senior executives at Silicon Valley blood-test venture Theranos were indicted in a $700m fraud, the first trial has begun.

Jury selection in the case against founder and CEO Elizabeth Holmes took place last week and hearings are set to begin after today’s Labor Day holiday. It promises to be one of the most intensely analysed tech court actions in many years, and not just because of the egregiousness of the scandal itself.

Two controversial aspects of Valley culture will, based on initial filings, form key planks in Holmes’s defence.

First will be the acceptability of start-ups using the ‘Fake it till you make it’ strategy as a way of attracting investors and customers.

Second, will be ‘Me Too’, the running sore that has highlighted the frequently abusive treatment of women in the workplace, with a number of high-profile tech companies currently – and in too many cases, it seems, rightly – already in the spotlight.

Meanwhile, things don’t look particularly comforting on the prosecution side.

Lawyers for the prosecution aim to highlight Theranos’s recklessness towards the public. Specifically, there is its record of erroneous blood tests as a result of not only the faultiness of its vaunted Edison tester but also poor lab practice where other testers were secretly used.

Healthcare is obviously a massively sensitive sector on this count. But again, an industrial culture that allows Theranos to happen could, if demonstrated to be endemic, have implications for other sectors, with social media being the most notable right now.

So, while there is little current sympathy for Holmes or her fellow defendant, former Theranos President Ramesh ‘Sunny’ Balwani (who is to be tried later for reasons we’ll come to), there is mounting concern that not only will a massive alleged fraud be scrutinised in full but also that the entire Valley culture will be put on trial, with implications for how technology as a whole does its business.

There is much to unpack, so we’ll break down the main issues surrounding the Theranos trial into bite-sized chunks over the next few days. There’s no other way to do it to help you understand its potential implications for engineering and technology.

But for now, a brief reminder of how things got here.

In 2003, Holmes dropped out of the engineering school at Stanford University to develop an idea – a black box that could run more than 200 blood tests using a blood sample taken with just a pinprick.

It was the very definition of a ‘disruption’, and based on her sales acumen – including a wardrobe that copied Steve Jobs – the company was a solid and continuous winner of investment. It was so successful that by 2014, Holmes had become a young female start-up billionaire, earning her all the column inches, conference slots and reputation that you would expect.

As things progressed from that original idea, she won over backers such as media mogul Rupert Murdoch and former US politicians Henry Kissinger and George Shultz.

Problem was that Edison was, to all intents and purposes, never really more than a black box. It didn’t work. Alongside mechanical and analytical shortcomings, it was also dubious that samples so small could ever deliver against Theranos’s claims.

Yet the money kept coming, the valuation kept rising and the deals happened, including one with Walgreens, the US equivalent of Boots, for in-store testing.

Meanwhile, the internal corporate culture is alleged to have included the frequent bullying and dismissal of staff who attempted to flag problems with Edison.

During 2015, Wall Street Journal reporter John Carreyrou began to run a series of stories exposing problems with Theranos’s hardware, corporate culture, lab practices and claims. Confrontation with regulators and partners followed, leading ultimately to the current charges being levelled against Holmes and Balwani in 2018 – and the closure of the company that September.

For those of you who want a deeper dive into the detail of this sorry tale, Carreyou’s book, ‘Bad Blood’, is the touchstone. He has also just launched a podcast to follow the trial with new information – including alarming material on how the company tried to leverage the Ebola outbreak in 2014. For the nitty-gritty, go there. But in the next article, we’ll start to look at those wider implications and why they worry many of technology’s current leaders.