The charges outlined in the indictment are that Holmes intentionally deceived investors and patients by making false statements about her company’s health and the viability of its technology, and that she did so to take their money. This is a textbook definition of fraud, unlike, for example, the cases stemming from the “Varsity Blues” college admissions scandal, in which the colleges that were the alleged victims were not deprived of money or other conventional forms of property.
Holmes’ defense team seems to disagree, arguing that she has been prosecuted for being a visionary who simply failed to meet her own high expectations. Failure, her lawyers have argued, is not a crime. And indeed, it is true that failure — without intentional misrepresentations — is not fraud. Nor is optimism and tenacity. Many startups fail and no one suggests a crime has been committed. But when an individual tells material falsehoods to potential investors to obtain their money, or to patients to induce them to purchase their product, they have crossed the line. You can fake it ’till you make it in the mirror every day of the week, but when you fake it to investors or consumers, criminality is afoot.
This distinction is crucial. It is likely that it is common practice for Silicon Valley entrepreneurs in the tech startup space to convey to potential investors their best-case scenario projections for where their company could be headed in the future, coupled with information about its status grounded in verifiable fact. The text message from Theranos’ then-COO Ramesh “Sunny” Balwani to Holmes that investors were investing in Theranos’ “destiny” is consistent with this template.
Investors ordinarily assess a company’s potential and weigh the upside of owning a piece of it against the risk of loss. Holmes’ lawyers have spent a good deal of their time cross-examining the government’s witnesses, trying to suggest that investors were at fault for failing to conduct due diligence. But in a criminal fraud case, investor due diligence is immaterial: Fraud is committed if a defendant tells lies with intent to deceive, even if the effort is not successful. An attempt to defraud someone is enough.
The legal relevance of investor due diligence, then, might be to suggest that Holmes did not have the requisite intent to defraud. Her lawyers may suggest she believed that her sophisticated investors had access to information necessary to fact-check her and either were doing so or did not care. From Holmes’ perspective, they would have been playing along as willful participants in her scheme, hoping for a big payout if the company eventually succeeded, or at least a healthy return before it fell apart, perhaps leaving other investors holding the bag.
Thus far, the evidence does not seem to support the theory that Holmes’ investors were in on her play. The level of scrutiny they brought to their investments may seem lacking, but criminal wire fraud statutes protect the foolhardy as well as the most diligent. The government is still presenting its case, so Holmes has not yet had the opportunity to fully present her defense, which could be that she did not know that her representations were false, and/or that she was allegedly abused by Balwani, who was ultimately in control. (Balwani has disputed the allegations.) It is still unfolding, but two months into one of the most anticipated and watched trials of recent memory, it appears to be offering up old-fashioned fraud and not a case of business as usual in Silicon Valley.