Ninth Circuit Upholds Fraud Convictions for Theranos Founder Elizabeth Holmes

Yesterday, the Ninth Circuit upheld the fraud convictions for Theranos founder Elizabeth Holmes. For those unfamiliar with Holmes and Theranos, the opening to the Ninth Circuit’s opinion lays out the facts pretty well:

“[O]ne tiny drop changes everything.” That was the vision shared by Elizabeth Holmes and Ramesh “Sunny” Balwani, who set out in the mid-2000s to revolutionize medical laboratory testing through a biotechnology company called Theranos. In the early 2010s, Theranos claimed that it could run fast, accurate, and affordable tests with just a drop of blood drawn from the prick of a finger, in contrast to traditional testing methods that require large needles to draw blood from a vein.

Investors, health care professionals and companies, and Silicon Valley spectators were captivated by the potential of Theranos’s revolutionary technology. As a result, Holmes and Balwani were able to establish relationships with major companies, investors, and prominent figures, including high-ranking members of the United States military.

But the vision sold by Holmes and Balwani was nothing more than a mirage. In late 2015, news reporting revealed internal struggles within the Theranos laboratory and the limitations of its technology. The grandiose achievements touted by Holmes and Balwani were half-truths and outright lies. Theranos’s blood-testing device failed to deliver faster and more accurate testing results than conventional technology. Pharmaceutical companies never validated the technology, as Holmes and Balwani had told investors. Contrary to the rosy revenue projections shared with investors and business partners, Theranos was running out of money.

After a two-and-a-half-year investigation, a grand jury returned an indictment against Holmes and Balwani. They were tried separately in lengthy jury trials, and each was convicted on numerous fraud charges. Holmes and Balwani now bring several challenges to the district court’s decisions at trial and sentencing.

There were many issues raised by Holmes on appeal, but I’ll focus on one in this post.

Federal Rule of Evidence 804(b)(3) contains an exception to the rule against hearsay for

A statement that:

(A) a reasonable person in the declarant’s position would have made only if the person believed it to be true because, when made, it was so contrary to the declarant’s proprietary or pecuniary interest or had so great a tendency to invalidate the declarant’s claim against someone else or to expose the declarant to civil or criminal liability; and

(B) is supported by corroborating circumstances that clearly indicate its trustworthiness, if it is offered in a criminal case as one that tends to expose the declarant to criminal liability.

At trial, “Holmes moved to admit excerpts of deposition testimony given by Balwani to the Securities and Exchange Commission (“SEC”), under Federal Rule of Evidence 804(b)(3), as statements against interest. The example noted by the Ninth Circuit was this one:

A: Around 2010, when we started engaging with the retail pharmacies, Safeway and Walgreens, I started building a financial model with the help initially from Safeway and Walgreens that I owned…until I left the company.

Q: By saying you owned, you mean you were the person responsible for the company’s financial projections as you just described?

A: Financial model.

***

Q: Was there anyone else from Theranos who was working on the model while you were working on it?

A: I don’t think so….Nobody with direct access to the model. I don’t think anybody else modified it.

Q: [Holmes] was generally familiar with the kinds of inputs that went into the financial model?

A: She may have been at some point, but I was revving the model and adding so many assumptions that she may not be familiar with all of them or even most of them.

***

Q: Did she ever edit the model?

A: To the best of my knowledge, no.

In finding no error in excluding these statements, the Ninth Circuit concluded that

The district court correctly recognized that Balwani’s statements were not solidly inculpatory because “[it] is…not a crime to take ownership over the creation of a financial model.” Even if a reasonable person in Balwani’s position knew that Theranos’s “financial projections” were in the SEC’s crosshairs, he did not clearly or unequivocally take responsibility for those projections. To the contrary, when the government asked if he was the person responsible for the company’s “financial projections,” Balwani clarified that he was responsible for the “financial model.” Balwani admitted to owning the financial model while expressly disclaiming responsibility for the financial projections, with the latter being the primary interest of the SEC and U.S. Attorney’s Office….

We therefore conclude that the district court did not abuse its discretion in declining to admit these statements.

-CM