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Elizabeth Holmes’s trial spotlights Silicon Valley’s thin line between hype and deceit

Theranos founder’s criminal fraud case will hinge on whether prosecutors can prove an ‘intent to deceive,’ legal experts say

Elizabeth Holmes, founder and CEO of Theranos, arrived at the federal courthouse for her trial. (Nic Coury/AP)

Elizabeth Holmes’s criminal fraud trial, which began Tuesday, is unusual in all kinds of ways, from the defendant’s celebrity status to her company’s world-changing ambitions to her lawyers’ apparent plan to argue that she was manipulated by her ex-boyfriend.

In one respect, though, the Theranos founder’s trial resembles virtually every other criminal fraud case, legal experts say. Namely, it is likely to hinge on prosecutors’ ability to show that Holmes acted with an “intent to deceive.” That concept can be particularly murky in hype-driven Silicon Valley, where entrepreneurs routinely attract investors by claiming they’ve invented something that will change the world — and don’t always deliver.

Holmes’s high-flying biotech start-up, which she dropped out of Stanford at age 19 to launch, promised to revolutionize blood testing by inexpensively performing hundreds of tests based on a single finger-prick. But as Theranos soared to a $9 billion valuation and attracted major customers such as Safeway and Walgreens, turning Holmes into a Silicon Valley icon, investigative reporting led by The Wall Street Journal revealed that its technology wasn’t working as advertised. The company collapsed in 2018, and Holmes now faces 10 counts of wire fraud and two counts of conspiracy to commit wire fraud in U.S. District Court in San Jose.

All kinds of companies talk up their products in ways that could be seen as misleading, and tech innovators in particular face incentives to tout products that are still in development. It’s an adage in Silicon Valley that most start-ups fail, and even the industry’s great success stories have been known to twist the truth.

Apple’s Steve Jobs — whom Holmes admired and imitated — famously fudged a live demo of the original iPhone in 2007 to make it look more functional than it was at the time, and faced no consequences. Tesla’s Elon Musk settled fraud charges in 2018 for claiming that he had “funding secured” to take the company private, when said funding was tentative at best.

“Oftentimes the line between being a visionary and a cliche or a pariah is raising your next round or shipping a product,” said Scott Galloway, an entrepreneur and adjunct professor of marketing at NYU’s Stern Business School.

Elizabeth Holmes’s court date puts Silicon Valley’s ‘fake it till you make it’ culture on trial

The reason Holmes is facing up to 20 years in prison, rather than a slap on the wrist, has to do with the brazenness, magnitude and longevity of her alleged deceits, which included secretly sending blood samples for outside lab tests rather than using the company’s own technology.

It’s one thing for an entrepreneur to exaggerate the capabilities of some peripheral feature or service or to find a sneaky workaround for a bug on demo day, said Jeff Marcus, a former federal prosecutor who is now a Florida-based defense attorney specializing in white-collar criminal cases. “But if you’re faking test results when you’re a testing company — that’s a big problem.”

With the trial being held in San Jose, jurors may understand that start-ups are inherently risky and uncertain enterprises, and that great innovators often make brash claims. The law does allow businesspeople some leeway, said David M. Pohl, partner at the New York-based law firm Parker Pohl.

“You’re basically allowed to fake self-confidence and optimism about the future,” Pohl said. “Courts call that ‘puffery,’ and it’s fair game.”

Blood, labs and fraud: Theranos’s Elizabeth Holmes is about to go on trial

But lying about “a present, concrete fact” isn’t allowed, Pohl said. “You can’t pitch for new business by claiming that your operation has the technical know-how, or a specific software capability, to get the job done, when in fact you know that’s not true, or you don’t know one way or the other — you just want to get the business and plan to figure it out later,” Pohl said. “That’s where entrepreneurs can get into trouble, even if their sincere hope is to deliver as promised at the end of the day. At my firm, we call this ‘fake it till you make it’ fraud, and we see it all the time.”

Some Silicon Valley insiders see in Holmes and Theranos an object lesson in the importance of admitting defeat when an idea doesn’t pan out. Raising venture capital often involves optimistic sales pitches, said Anil Dash, chief executive of Internet company Glitch and an angel investor who did not invest in Theranos. In some ways, everyone in the start-up industry — from entrepreneurs to investors — is part of a “collective, shared hallucination.” But most also find investors who hold their feet to the fire, he added. And they know when to quit.

Elizabeth Holmes expected to argue she suffered abuse from ex-boyfriend during Theranos trial

To convince a jury to convict Holmes, federal prosecutors will have to show not only that she made false claims, but that she did so knowingly and deliberately as part of a scheme to fleece investors and customers. Documents unsealed on Saturday suggested that Holmes’s defense will include claims that she was being controlled and abused by Ramesh “Sunny” Balwani, who was both her romantic partner and Theranos’s president.

The legal argument would be that “she is not in the right state of mind to formulate specific intent because in reality, she’s being dominated by Balwani,” said Lara Yeretsian, a Los Angeles-based criminal defense attorney who has handled wire fraud cases.

That defense strategy would also come with risks, though, said Harlan Protass, a New York-based criminal defense attorney who has represented clients in fraud cases. “By saying that, essentially, ‘Sunny Balwani made me do it,’ you’re in effect admitting that it was done” but “banking on the jury finding that you should not be held responsible.”

Alternatively, the defense could try to argue that Holmes was just a young dreamer caught up in Silicon Valley optimism and really believed in Theranos’s technology despite its shortcomings — perhaps because she left the details of implementation to underlings.

Because the prosecution calls its witnesses first, the defense can wait to see the case’s strengths and weaknesses before deciding on its final strategy, Yeretsian said. And it doesn’t have to prove Holmes innocent — just sow “reasonable doubt” in jurors’ minds. Even so, that could be difficult given the mountain of evidence against her.

That’s where the trial will return to Holmes’s intent. “You have to have the intent to deceive someone into giving you money under false pretenses,” Protass said. “Just being wrong is not a crime.”

Rachel Lerman contributed to this report.