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Elizabeth Holmes trial: The key question for the jury deciding her fate

·Reporter
·7 min read
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As the criminal fraud trial of fallen Silicon Valley superstar Elizabeth Holmes continues on Tuesday, one legal expert says that a key question hangs over the case involving the failed blood-testing startup Theranos.

Did Holmes always believe Theranos' product was legitimate, or at some point, did she know it was never going to work but kept touting the technology anyway?

"There is a difference between hoping to work out problems and covering up failure," says Jeffrey Cohen, a former federal prosecutor. "The jury will ultimately decide if Holmes crossed the line."

So far, three witnesses — all Theranos employees — have offered testimony that may help answer that question: laboratory associate Erika Cheung; financial controller So Han Spivey; and senior scientist Surekha Gangakhedkar, whose testimony is set to resume on Tuesday.

Watch Yahoo Finance's new Elizabeth Holmes documentary here

'Distasteful, but not necessarily criminal'

Holmes, now 37, launched Theranos in 2003 at just 19 years old, with a vision to overhaul diagnostic health care. Her vision, to which her defense lawyers say she dedicated her life, fell far short of coming to fruition.

In 2018, a federal grand jury indicted Holmes and Ramesh “Sunny" Balwani, 56, who was also Holmes' one-time boyfriend and the former COO and president of Theranos, charging them with wire fraud and conspiracy. The indictment claims the pair used Theranos to defraud investors and patients and misrepresented its blood-testing technology from 2010 to 2015. 

They're being tried separately and could each go to prison for 20 years, if convicted.

SAN JOSE, CALIFORNIA - SEPTEMBER 17: Former Theranos founder and CEO Elizabeth Holmes (L) walks with her mother Noel Holmes (R) as they arrive for court at the Robert F. Peckham Federal Building September 17, 2021 in San Jose, California. Holmes is facing charges of conspiracy and wire fraud for allegedly engaging in a multimillion-dollar scheme to defraud investors with the Theranos blood testing lab services. (Photo by Justin Sullivan/Getty Images)
Former Theranos founder and CEO Elizabeth Holmes (L) walks with her mother Noel Holmes (R) as they arrive for court at the Robert F. Peckham Federal Building September 17, 2021 in San Jose, California. (Photo by Justin Sullivan/Getty Images)

One of the government's initial witnesses, Cheung, the former lab associate, could bolster prosecutors' contention that Holmes was fully aware of deficiencies in Theranos' technology.

Cheung, the prosecution’s second witness, reportedly testified that she escalated problems with Theranos' quality controls to Balwani, board member George Shultz, and her colleagues. Specifically, Cheung testified that she expressed concerns that Theranos had deleted outlying test results to make its blood tests appear more accurate than they actually were. Her complaints, she said, were met with threats from Theranos’ legal team to file a defamation lawsuit against her.

However, Holmes' attorney said during opening statements that Theranos’ laboratory director, rather than Holmes, was qualified to handle quality control issues and therefore responsible for their success or failure.

Even if Holmes had knowledge of issues plaguing the lab, Cohen said, prosecutors must overcome her contention that she truly believed that those issues would be resolved in time.

"Like many Silicon Valley start-ups, Theranos may have had a culture of 'fake it until you make it' that may be distasteful, but not necessarily criminal," Cohen said. "In order to counter this argument, the government must again show that her statements are not just a matter of degree, but are qualitatively false."

For her part, Cheung, who worked at Theranos in 2013 and 2014, eventually resigned over her concerns, and alerted federal agents of the alleged deficiencies in 2015. Cheung's testimony could be effective for the government's case because she explained how she reacted to her concerns, in real time, while she was an employee of the company, according to Kyle Clark, a criminal defense attorney for Baker Botts.

A witness testifies during the trial of Theranos founder Elizabeth Holmes at Robert F. Peckham U.S. Courthouse in San Jose, California, U.S., September 8, 2021 in this courtroom sketch.  REUTERS/Vicki Behringer
A witness testifies during the trial of Theranos founder Elizabeth Holmes at Robert F. Peckham U.S. Courthouse in San Jose, California, U.S., September 8, 2021 in this courtroom sketch. REUTERS/Vicki Behringer

"Often in cases you have people talking about their conclusions with the benefit of hindsight," Clark said. "I think if you're sitting on the jury, it's pretty persuasive to hear that somebody quit their job because of the concerns that they developed...however talented or not talented they were."

Similar impact could hold true for Gangakhedkar, the government's third witness, who also quit her job at Theranos over quality concerns. According to Bloomberg, Gangakhedkar, who worked at Theranos for eight years, and met several times a week with Holmes, testified that she had quality concerns surrounding the company's efforts to place its blood-testing device in Walgreens stores. Gangakhedkar said she made Holmes directly aware of the alleged deficiencies.

On cross examination, Law360 reported, Holmes’ counsel presented Gangakhedkar with a memo from pharmaceutical giant GlaxoSmithKline, stating that Theranos' system provided quality data and eliminated the need for a laboratory. Clark said the memo could help the defense argue that sophisticated people made alternative conclusions about the technology.

Did Elizabeth Holmes give optimistic puffery or utterly false statements?

Holmes isn't just accused of fraud and conspiracy based on lying to investors and patients about Theranos' blood-testing technology. She's also accused of defrauding investors based on misstating its financial state.

The government’s first witness, Spivey, the financial controller who also goes by the name Danise Yam, testified that by 2015, Theranos had accumulated $585 million in losses, CNBC reported. Nonetheless, prosecutors pointed out, Theranos projected 2015 revenue at $990 million in a document for investors.

Spivey also reportedly testified that Theranos lost between $16.2 million to $92 million a year between 2010 and 2013, backing up prosecutors' claims that Holmes knew the revenue projections were false.

The government likely led with Spivey because it helped it show the magnitude of discrepancies between Theranos' financial condition and what it represented to investors, a key for its case, according to Cohen.

"The government's goal at the outset is to paint Holmes as not simply optimistically puffing up Theranos's financial position, but rather to impress upon the jury that her statements to investors were utterly false and misleading by being so different than reality," Cohen said. "The government needs this kind of testimony to ultimately argue that Holmes had the intent to defraud."

Elizabeth Holmes (L), founder and former CEO of blood testing and life sciences company Theranos, leaves the courthouse with her husband Billy Evans after the first day of her fraud trial in San Jose, California on September 8, 2021. - California jurors tasked with deciding whether fallen biotech star Elizabeth Holmes is guilty of a stunning fraud or is herself a victim were set to hear opening arguments in her trial on September 8, 2021. Federal prosecutors in the heart of Silicon Valley have in their filings portrayed Holmes as a villain who swindled investors in the diagnostics company Theranos -- which she founded at age 19 -- with tests that did not work. (Photo by Nick Otto / AFP) (Photo by NICK OTTO/AFP via Getty Images)
Elizabeth Holmes (L), founder and former CEO of blood testing and life sciences company Theranos, leaves the courthouse with her partner Billy Evans after the first day of her fraud trial in San Jose, California on September 8, 2021. (Photo by Nick Otto / AFP) (Photo by NICK OTTO/AFP via Getty Images)

Still, Spivey's testimony also suggested Theranos' financial state was not straightforward — potentially benefiting the defense. On cross examination, according to CBS San Francisco, Spivey said that Theranos also took in hundreds of millions of dollars from paying customers during the timeframe, and that the payments were classified as deferred revenue and not cash on hand.

University of Toledo College of Law professor and former white collar defense attorney Gregory M. Gilchrist told Yahoo Finance that the defense team should be pleased with its cross examination because it cuts against the prosecution's representation to the jury that getting to the truth is simple.

"In white collar cases, complexity, nuance, and confusion tend to favor the defense," he said. "It is more difficult to establish the intent to deceive when there appears to be confusion about what was actually true."

While accounting testimony isn't necessarily riveting, Clark said Spivey's cross examination could be particularly effective in Silicon Valley where jurors are likely familiar with startup culture.

"Nobody wants to hear about Row 5,000 on an excel spreadsheet," Clark said. "But if I were on the defense side, I'd have to think I'd be happy that we're talking about losses versus revenue in a place like Silicon Valley, where people would say, 'Well, of course...lots of companies didn't make money for a long time.'"

Holmes and Balwani are charged with 10 counts of wire fraud and 2 counts of conspiracy to commit wire fraud. Her trial is expected to last three to four months, and Balwani's is slated to begin in 2022.

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

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