
Theranos Didn't Just Harm Investors - joering2
https://www.bloomberg.com/view/articles/2018-06-18/theranos-didn-t-just-harm-investors
======
tptacek
Levine spends a good chunk of this engaging with Felix Salmon's Slate article
about how many startups could be charged with wire fraud.

But I think Salmon overstates his case and oversimplifies wire fraud and I'm a
little surprised Levine, a lawyer, doesn't catch him on this.

Salmon says wire fraud is among the easiest crimes to prove: everything is
done by wire now, so "you show the lie, you show the wire, boom". But it's
actually not enough to show a "lie" and then a "wire". Check out a federal
court's model jury instructions for wire fraud. The burden on the prosecutor
is higher than showing simple dishonesty; they have to prove "intent to
defraud", which means that the accused had to have lied deliberately in order
to cheat victims. There are, even in the jury instructions themselves,
multiple mitigating factors for "intent to defraud". And, aside from that,
there's a legal difference between that and wildly extrapolating from
realistic revenue forecasts to irrationally high outcomes you merely _hope_
could happen if everything breaks your way.

I think you can make the case that Balwani and Holmes got indicted because
their dishonesty was unusually brazen and directly connected to the business
they were in. They lied about what they were doing in the (then) present
tense. They didn't make simply make unrealistic forecasts or put the rosiest
possible color on how their engineering work was going; they fabricated entire
medical procedures.

~~~
mchannon
As someone with intimate first-hand knowledge of this part of the process, let
me show how "Thomas" is off-base.

First off, there's usually a massive wrestling match between prosecution and
defense as to what the jury instructions will actually have and not have.
There's a reason they call them "model"; they're not compulsorily relayed
verbatim, and in fact, even the models vary by court circuit (often with
substantial distinctions).

Model instructions are also written by judges, and read like stereo
instructions. A typical juror does not understand them, everybody knows this,
and the judges who occasionally revise the model jury instructions are totally
fine and dandy with this fact.

"intent to defraud", if it is defined at all in a given set of jury
instructions, is defined circularly, and doesn't rule in or rule out edge
cases. "Beyond a reasonable doubt" is deliberately kept vague, and nearly
every judge will expressly forbid defendants' defining it as a percentage of
certainty (e.g. 95% sure, 99% sure). The famous technicolor thermometer in the
OJ trial expressing different levels of doubt is also typically banned by
judges.

You have to sympathize with the jurors: they're trying to do a good job with
the information they're given, and the system they have to work with is
somewhere on the spectrum between being out of touch and giving the jury the
finger. (BTW, most federal trial judges make more each day than the ENTIRE
jury).

I've gotten to the point of deep suspicion of anybody who points to jury
instructions as an exemplar of anything other than how seriously messed up the
system is.

~~~
bradleyjg
On top of that almost cases don't go to trial. To defend against a high
profile federal prosecution takes seven figures. And even before you get to
the actual indictment stage you may have sealed your fate by lying to the FBI.
I and many others have said that no one should ever talk to the FBI but
somehow it happens again and again with people that should have very
sophisticated counsel.

The bottom line is that if the federal government decides to go after you, you
are in for a very bad time. There is a heck of lot of fairly broad discretion
placed in the hands of FBI field office directors and US attorneys (political
appointees) to ruin lives.

~~~
mchannon
When FBI agents point assault rifles at your head, you _will_ find yourself
talking to them in spite of that advice.

Happened to my wife.

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madengr
Just finished Bad Blood. Hopefully they both get felony prison time, and there
is precedence for it. I don't see how it's any different than a pharmacist
diluting drugs. After diluting blood samples, they purposely doctored the
statistics to reduce the deviation.

~~~
fmstein
I disagree with this sentiment. After reading Bad Blood as well, I must say
that nobody at the company deserves much punishment. It's Theranos's investors
and Theranos's business partners that are mostly at fault. They didn't do
their due diligence and simply assumed (hoped) that the technology worked.
They were too concerned about missing out on the "big one", which clouded
their judgement.

No patients were harmed. The only losers in this are the investors that
invested in Theranos. Given that they blindly trusted the pitch, without
verifying that the technology worked, that makes them very bad and unskilled
investors.

Unskilled investors losing a lot of money is, in fact, a very good thing for
the Silicon Valley ecosystem. It's how bad influencers are flushed out of the
system.

~~~
alonmower
Patients received incorrect blood test results and it's impossible to argue
Theranos didn't know that this was a risk of what they were doing. In Bad
Blood there were anecdotes of people being sent straight to the hospital
because of worrying results.

Beyond the psychological harm in the reported false positive cases why are you
confident that no patients were harmed in even worse ways (i.e. false
negatives, not catching a condition early)?

~~~
drspacemonkey
There was at least one case of a false negative resulting in a preventable
heart attack.

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toss1
The patients are indeed potentially hurt more than anybody in this fraud, and
it makes it much more egregious than the more ordinary silicon-valley <fake it
till you make it> fraud (& I've been angry about since before it was popular
to hate on Theranos).

However, in ending with "the venture capitalists are just fine", the article
also completely misses another class of people who are also hurt by these
types of fraud -- all the other more worthy honest startups that went unfunded
or under-funded when Theranos sucked $700 million out of the investment
ecosystem.

All of the other bogus companies mentioned ( Hampton Creek; Zenefits; Lending
Club; Skully; ScoreBig; Rothenberg Ventures; Faraday Future; Hyperloop
One...), and many others not only suck the life out of the system, they
destroy the ability of other honest startups to make it.

The VCs legitimately risk failure; it's the nature of VC.

But they aren't supposed to be risking fraud, which is perhaps why they don't
catch it as much as they should in Due Diligence. Seems they need to do better
Due Diligence, checking not only whether everything matches their
expectations, but also whether it actually is what it is represented to be.

~~~
avip
There's another overlooked class of people in the hype/fraud cycle: normal
people like you and me, via our pension funds.

~~~
sokoloff
I believe that is a risk that's priced into venture investing already.

Not to defend the fraudsters here, but a certain amount of high-risk
investments are going to end up failing because of fraud and investors
knowingly bear those risks (and/or pay a money manager to smoke out and avoid
those risks).

~~~
toss1
True, some aspect of the fraud is likely priced in by investors at the
individual investment level.

But, do they price in the damage to the overall startup ecosystem, which makes
a more difficult landscape for everyone to succeed, them included?

E.g., an overall broader perception of fraud, smoke, and mirrors will make it
harder for them to raise their next funds, and general skepticism of the
startup environment, reduces the liklihood of success of all the ventures.
This environment is either a virtuous circle that'll lift all boats (to mix
metaphors), or the opposite...

~~~
mmt
The article states:

> it is hard to distinguish among the CEO who promises the impossible because
> she is committing fraud, the CEO who promises the impossible because she is
> deluded, and the CEO who promises the impossible and then goes and does it.

It seems you're suggesting otherwise, except I disagree with you and agree
with the article, at least to the extent that it applies to VCs and other
high-risk investors: they don't have the ability to have enough technical
depth to detech technical fraud, so they have no choice but to price in that
risk.

> This environment is either a virtuous circle that'll lift all boats (to mix
> metaphors), or the opposite

Just the wording makes me think this is a false dichotomy. Why can't it be
neither? The environment is complex, and it's conceivable that it would
lift/sink only some boats or that it's not circular.

~~~
toss1
> Hard to distinguish between fraud, delusion, and currently impossible that
> will get done.

I agree that it's hard for the VCs to distinguish. I've also seen plenty of
situations where the VCs out of their technical depth and make preventable bad
calls in both directions (investing in bad tech and passing on very feasible
tech). I'm just saying that it would be good for the VCs and the entire
ecosystem for them to put more resources into much better vetting of
technology.

> This environment is either a virtuous circle that'll lift all boats (to mix
> metaphors), or the opposite

I'm not saying that it's an absolute with all vectors pointing in the same
direction. Even strongly positive or negative environments will contain
outliers, counter-trend examples, etc. Even on the massive crashing days on
the stock exchange, there are always a few stocks that make good gains.

What I'm pointing to (perhaps badly) is the feedback loops between on one
side, predominantly sound investment, growing startups bringing good new tech
to market, and solid returns, and on the other side, delusional investment,
scarcity of good new tech, and poor returns. The former will bring in more
startup founders and investors, and the latter will become a dying ecosystem.

A major problem with our industry is that in addition to the visionaries,
dreamers, and hard workers, there is a lot of money which is also a magnet for
scammers and a variety of toxic personalities. The better we sort the latter
from the former, the better off we will all be.

~~~
mmt
> The former will bring in more startup founders and investors, and the latter
> will become a dying ecosystem.

OK. I think I see what you're saying, that, on the whole, it's likely to be
one or the other. I'd still argue that it could be neutral/stable, but I don't
have any counter-argument to why that would be likely on a meaningful time
scale, considering the duration of most VC funds.

> A major problem with our industry is that in addition to the visionaries,
> dreamers, and hard workers, there is a lot of money which is also a magnet
> for scammers and a variety of toxic personalities. The better we sort the
> latter from the former, the better off we will all be.

I'm not disagreeing that it would be good for everyone involved. I just don't
see the path to get there. Merely wishing VCs would do a better job, without
some kind of specific mechanism and associated incentive for them to do that
better job, isn't enough.

~~~
toss1
Yup, there could be a balanced middle ground, not sure how big.

How to get the VCs to do better tech vetting? Definitely an issue. I would
have thought that the downside of losing would be sufficient motivation to
invest in really solid tech vetting, but it seems like they treat it more of a
cost center. Perhaps seeing $700 million go "poof" in this instance will
provide some motivation in the future?

~~~
mmt
> How to get the VCs to do better tech vetting?

Not only that, but how _would_ they? Do they keep experts on staff (and risk
that expertise going stale, if it's reliable in the first place)? Do they
bring in outside consultants/contractors (and risk espionage)? Do they
interrogate employees (conflict of interest and perverse incentives galore)?

I'd argue that this is a fundamental problem with traditional VC, in that, in
general, they have no expertise in the ventures, and their financial
incentives and neither well aligned with those ventures nor with their
investors (limited partners).

> invest in really solid tech vetting, but it seems like they treat it more of
> a cost center

To be fair, though, it is, both for them and the target company, assuming that
there's no fraud (or delusion?) involved.

> Perhaps seeing $700 million go "poof" in this instance will provide some
> motivation in the future?

You do bring up an interesting point about the sheer magnitude of this loss.
By comparison, pets.com was only $300 million.

Although it provides _some_ motivation, in that it may exceed what was priced
in, is it enough to change the way the industry behaves?

~~~
toss1
Definitely not holding my breath for change, that's for sure!

Interesting points about the difficulties of in-house staff. Although my first
instinct would be to expand it, you're right about ti getting stale, and also
that structure was one I've seen make mistakes (maybe because they were
stale). Tough nut to crack indeed..

------
matchagaucho
Are there any questions as to the validity of Theranos' IP portfolio? Or was
the tech all junk science too?

The list of assigned patents looks impressive. Perhaps something that could be
developed further by an acquirer?

[http://patft.uspto.gov/netacgi/nph-
Parser?Sect1=PTO2&Sect2=H...](http://patft.uspto.gov/netacgi/nph-
Parser?Sect1=PTO2&Sect2=HITOFF&p=1&u=%2Fnetahtml%2FPTO%2Fsearch-
bool.html&r=0&f=S&l=50&TERM1=Theranos&FIELD1=&co1=AND&TERM2=&FIELD2=&d=PTXT)

~~~
Hermitian909
The book "Bad Blood" covers this a bit. From what I gather the only thing they
ever managed was a bit miniaturization of several existing standalone products
and a way to integrate those products into a single package. When Elizabeth
Holmes presented the tech at an AACC conference
([https://www.youtube.com/watch?v=n6JRG733ReQ&t=3882s](https://www.youtube.com/watch?v=n6JRG733ReQ&t=3882s))
experts in the field were pretty underwhelmed.

~~~
duxup
Based on excerpts from the book almost nothing they had actually functioned in
a production type environment. Even their miniaturization created new issues
that they couldn't resolve.

~~~
fest
That doesn't mean it's not patentable though.

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purplezooey
So the question remains, though, is her baritone voice an act, or is it her
real one?

~~~
jogundas
Does
[https://www.youtube.com/watch?v=pIXAmjUFSso](https://www.youtube.com/watch?v=pIXAmjUFSso)
not count as conclusive evidence on this matter?

~~~
Maro
Why? In this one she has the deep voice, no?

~~~
jogundas
No, only part of the interview. At some point she forgets she has to do it.
And then when asked what one has to do to become successful, she remembers it
again.

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rdlecler1
Interesting background on wirefraud. It seems like any company that says, “we
will” in their crunchbase profile could be liable.

