
Major Investor Sues Theranos - dsacco
http://www.wsj.com/articles/major-investor-sues-theranos-1476139613
======
julianpye
One thing I find really weird is the choice of CEO photos in media reporting.
If there is good news, they chose 'nice', attractive photos. If there is bad
news, they look for worse ones. This is true for male and female founders. In
this case, everything about this photo is an 'outtake', from hands, choice of
framing, facial expression, eyes - it's a photo a photographer would not keep
in their image selection.

~~~
hkmurakami
Why is that weird? The photo choice manipulates the reader impression just as
they intend.

Perhaps what you might mean is something like "disingenuous" or "biased" or
"unethical"

~~~
camillomiller
As a journalist, I disagree. In this case the technique is used more to
portray the way Holmes is perceived publicly (a "neurotic and delusional
powerful woman out of control" \-- not my opinion, just what the photo
conveys), than to add a spin to a story that's already independently and
factually spun in a very clear direction.

The use FoxNews does of this photo-picking with President Obama or liberal
politicians is much worse. Or check the tabloids, they're masters at that.

This one? Just fine. I also want to point out that the picture is all but an
outtake. Photography agencies publish photos like this on their online
collections all the time, they won't discard them. Exactly because they know
outlets may pick them for a story where they would fit.

~~~
NumberCruncher
>>As a journalist, I disagree. In this case the technique is used more to
portray the way Holmes is perceived publicly

As a non journalist this is what I call manipulation.

~~~
celticninja
Then so is the text.

------
jupiter90000
If one assumes Holmes didn't realize their product didn't work (questionable
at best), imagine how it must be to work 7 days a week, forego friendships and
intimate relationships, and not even watch TV, then after 12 years of that
discover what you tried to make didn't/won't work. In too deep or something to
just admit it's over and move on.

Sounds like a very undesirable number of years with little positive to show,
although maybe there were some lessons in there. Maybe time for a workaholic
recovery program for her, who knows. Sad to hear the prime of a life spent
like this... though perhaps not any worse than other destructive paths one
could travel.

~~~
ben_jones
Except the boatloads of money she's already extracted from the company. What
about the hundreds of people who propped up her vision and fueled the hundreds
of puff pieces by A-level publications that walk away with absolutely nothing?
What will it mean to have been a lab tech at Theranos?

~~~
jupiter90000
Hopefully those people weren't giving up everything in their life for a job...
but I guess that's anyone's choice. Money is nice to have, though I've enjoyed
time with friends, loved ones, and leisure more personally.

------
jacquesm
I'm definitely not a friend of Theranos, _but_ : they failed to do due
diligence before investing, the error is theirs. I wonder if they would sue as
well if Theranos had scored big time.

If you treat investing as gambling don't sue if you lose a hundred million
dollars of _your_ customers money.

~~~
onion2k
The investor's argument is that Theranos _lied_. The investor believes
Theranos fraudulently produced evidence that their product worked in order to
fake the responses to the investor's due diligence. If that's true, and the
investor can prove it, then that's not simply part of the typical risk of
investing, that makes the investor the victim of a serious crime.

~~~
jacquesm
That's a dumb argument then. See, when you do due diligence you should
_assume_ that the company lies. That's why you go there in the first place, if
you believe everything they tell you then you're going to get fleeced if they
lie.

Theranos did not comply with their duty to inform truthfully, but the
investors did not comply with their duty to research. Asking the company is
not research, the technology being complex is not an excuse, you're going to
have to do your own homework, you _can 't_ rely on the company because they
have an incentive to not be truthful.

It's not as if there is accounting with double bookkeeping that was withheld
from you, it's a bunch of machinery that should perform in a certain way.
Bring your own samples for which only _you_ know the outcome, have them run
those through the machinery in your presence and check the results.

That this will take more than some pencil pushing is where things went wrong,
they simply didn't feel that on an investment this size they needed to
_actually_ look at the technology, they basically lapped up what the company
told them and forked over the cash.

FWIW I do this sort of thing for a living and I'd take it quite personal if a
company lied and got away with it because I failed to properly look at their
technology.

Belief doesn't enter into it.

edit:

Downvoters are invited to discuss what they think is wrong with this comment
or where the disagreement lies.

~~~
Gatsky
This is a valid comment. Theranos' claims for their technology should have
been readily verifiable. The reason for this mess is they were given money
without asking enough questions. It's actually not even that complicated as
having to test the machines yourself, if they had just tried asking a few more
questions, it would have become pretty obvious this was a bad investment.
There were many smart VCs who kept their money because they did this. eg see
here: [http://www.vanityfair.com/news/2016/05/theranos-silicon-
vall...](http://www.vanityfair.com/news/2016/05/theranos-silicon-valley-media)

"When I’ve asked V.C.s why they didn’t pour millions of dollars into a company
that appeared to be changing the world, I was told that it wasn’t for lack of
trying on Holmes’s part. She met with most top venture firms. But when the
V.C.s asked how the technology worked, I was told, Holmes replied that it was
too secret to share, even to investors. When they asked if it had been peer-
reviewed, she insisted once again it was too secret to share—even to other
scientists."

~~~
meowface
Is this common among VCs and investors in general, or was it just that
Theranos' supposed technology was more complicated than what they were used
to, so they couldn't accurately assess it? Or both?

~~~
jacquesm
Investors will invest in all kinds of stuff they personally have no knowledge
of. This is perfectly ok if it is their own money and they have no
responsibility to others (especially to limited partners who have no say in
the matter, or, for instance in the case of a pension fund).

The way it works with such parties is that they hire people who _are_ versed
in the technology to prepare a report on the subject at hand. This is called
'due diligence', specifically, technical due diligence.

So if you cross the t's and dot the i's there will be a nice report saying
'this technology is a-ok' by some party in a drawer somewhere. If so then that
party shoulders a large part of the blame. Absent such a report (and I find it
hard to believe the investors did not perform due diligence, but then again,
so far none of them have stepped forward to point the finger at their
technical advisors) the investors themselves are far more responsible.

------
chx
Don't forget people have invested in uBeam which was known to be peddling
something scientifically impossible. The only possible explanation for that,
and truth be told Theranos too is the investors are playing a Ponzi scheme
where later rounds are the ones holding the bag. It's an excellent question
who should be suing who.

~~~
nickfromseattle
Check out Energous (ticker: WATT). Like uBeam the company is focused on
wireless charging, unlike uBeam it's a publicly traded company so you can
short it for profit. The market does not seem to have caught on yet.

------
mikeryan
Not that I'm surprised that the firm sued but I wonder what their end goal is
and how they're planning on getting any sort of meaningful settlement from a
company that's currently on fire. This seems mostly a face-saving measure.

~~~
sytse
Theranos raised $348.5M Private Equity on March 1, 2015. There is probably
still cash on the balance sheet. Maybe by filing a suit they hope that the
company will be liquidated and to be at the front of the line when the
proceeds get split.

~~~
davidw
Honest question: how does this not trigger a "stampede for the exit" including
lawsuits for everyone else who wants to get _their_ money back?

~~~
oneloop
Probably. I'd imagine that's why Theranos will insist part of the deal is that
the exact terms will never be disclosed.

~~~
FireBeyond
Their other investors will be entitled to the balance sheets as is. They can't
just say "and an undisclosed sum to [prior investor]" and redact their balance
and liabilities.

To the public, yes.

~~~
oneloop
Hah good point. So Theranos is literally fighting for their lives, because if
one investor gets 25% of their money back, all the other investors will want
the same.

------
bcjordan
Official response posted: [https://news.theranos.com/2016/10/11/company-
statement-regar...](https://news.theranos.com/2016/10/11/company-statement-
regarding-investor-lawsuit/)

~~~
jacquesm
Theranos will have a hard time proving that they did not make the same or
similar statements to the investors prior to making those claims elsewhere.
They've now directly confessed they actually did make the claims at least
once, which will make it more believable - not less - that they made those
claims at different points in time as well.

'Staff writer' will have a busy time in the next coming weeks.

------
thinkcomp
It costs $21.60 to "search" for this case at the Delaware Court of Chancery,
even if you know the case number. And another $40.00 to download a single
document. The complaint is marked as confidential and is not available.

Lexis-Nexis owns the site that maintains the court's entire docket.

------
breadtk
Mirror: [https://archive.is/v3sNR](https://archive.is/v3sNR)

------
Ayraa
If you read the interviews of a lot of investors, many of them mention they
invested because they believed so strongly in the founder. Afterwards, when
their crazy concept works (example: Musk with SpaceX), these founders are
lauded a visionary. When their concept fails (as is the case with Homles and
Theranos), these founders are branded a fraudster.

~~~
taeric
To be fair... It isn't that the idea failed. It is that the failures were
misrepresented. Badly.

------
astaroth360
Isn't her activity like the textbook definition of fraud? Not to mention the
dude who she basically pushed into committing suicide. I hope she gets at
least as much time as Madoff.

~~~
Fricken
What Madoff did was illegal and malicious from the outset.

Do you believe that when Holmes was handed the opportunity, at 19, to bring
the Edison to market that she set out with the intent of defrauding investors?

The only thing she's provably guilty of thus far is believing in her company a
little more than is sensible and being preternaturally competent as a
fundraiser.

When Musk claims he can get people to Mars for $200k, do we say 'That's
preposterous!', and slap him in cuffs? It's up to the investors of Spacex to
decide whether or not they want to gamble on that proposition.

Would you put 100 million into Magic Leap because Rony Abovitz says 'it's
rad', or would you insist on seeing a demo first? Because none of Theranos
investors did that.

~~~
oneloop
How do you know that Madoff was malicious from the outset, I wonder? The guy
had a 30 year career, have you studied his beginnings? Maybe you did, but
knowing nothing I'd find it more plausible that the guy started small fudging
a couple of numbers hoping the next year would be better and eventually
snowballed out of control.

~~~
dredmorbius
My somewhat cursory read of Madoff was that he tarbabied himself. He _had_
been running a successful investment company, but hit losses.

The good, and lawful, thing to do would have been to come clean at that point.
He didn't, and his downfall began there.

Instead he did the bad, and illegal, thing: doubled down and paid off the
small number of exiting investors with new investor's deposits, whilst lying
about returns.

If you've read John Kenneth Galbraith's _The Great Crash: 1929_ (a short and
highly readable account), you'll find a very familar story in Madoff. He fell
prey to what JKG calls "the bezzle".

------
tschellenbach
Does anybody know if investors sometimes win these cases? I imagine they must
have done some serious due diligence before investing 100m.

~~~
elsewhen
there is a chance that the primary purpose of this lawsuit is for the fund to
be able to address the concerns of their LPs. in other words, it could be more
about optics and less about actually recouping losses.

~~~
breatheoften
As in -- "trust us investors, look we are going after a failed company to try
to recoup the investment we convinced you to make in us and them" \-- that
doesn't seem like great optics unless they have some possible chance of
recouping cash ...

~~~
kevinpet
I think it's about being able to say "we weren't idiots who couldn't figure
out if it was a good investment, we were straight up lied to".

~~~
matt-attack
Unfortunately the key skill in being an investor like this is to be able to
make the right decisions _in the face of being lied to_. In other words, being
lied to simply isn't an excuse.

------
pcsanwald
Honest question: Why is Holmes still CEO?

~~~
kovrik
I would say: why is she still not in jail?

~~~
gvb
_The wheels of justice turn slowly, but grind exceedingly fine._ \-
[https://en.wikiquote.org/wiki/Justice#F](https://en.wikiquote.org/wiki/Justice#F)

------
garrincha
I have a feeling that this level of lying is much more pervasive in startups
than people realize.

~~~
jondubois
I think humanity is literally evolving to lie and cheat at a biological level.

Soon, universities will have courses in 'Mastering the art of cheating and
lying'.

~~~
chrsstrm

      >I think humanity is literally evolving to lie and cheat at a biological level.    
    

It's naive to think we were not already born with these core qualities.
"Survive at all costs" is a demonstrated maxim that all living beings possess.
We didn't consider lying and cheating to be frowned upon until we decided we
were a civilized society with rules based on [opinions | deities | etc.].
Having experienced multiple pathological liars firsthand, it makes more sense
that rather than "evolving" these qualities, people are resorting to their
core human nature as they feel more and more threatened.

~~~
CarpetBench
> We didn't consider lying and cheating to be frowned upon until we decided we
> were a civilized society with rules based on

Eh, what? Where are you getting that from? Any organism with cooperative
dynamics also has to contend with cheaters, and yet cooperation is extremely
prevalent in nature. There's a reason parasitism isn't considered the norm in
the animal kingdom.

I sincerely doubt that primitive human tribes widely tolerated healthy adults
who contributed absolutely nothing to the group.

~~~
chrsstrm

      > I sincerely doubt that primitive human tribes widely tolerated healthy adults who contributed absolutely nothing to the group.    
    

It's certainly not hard to imagine that no, they would not have tolerated such
behavior. But does this mean that you are suggesting the members of this tribe
convened and decided to put rules in place to define a member's behavior and
potentially institute punishment if these rules were broken? That sounds
suspiciously like a society. It's almost as if the larger population felt that
attempting to hinder a particular perceived flaw in human nature was a net
positive for the group as a whole.

The existence of cooperation or the desire to cooperate does not disprove that
cheating and lying are embedded instincts in living beings. Cheating and
cooperation are not mutually exclusive concepts. The parent comment was
suggesting that we are somehow evolving to lie and cheat and I'm suggesting
that we have been more than capable of this behavior all along. In fact, I've
gone so far as to say that not only were we immediately capable since the dawn
of humankind, but we have actively suppressed these "survival skills" because
they are deemed bad qualities.

~~~
CarpetBench
> But does this mean that you are suggesting the members of this tribe
> convened and decided to put rules in place to define a member's behavior and
> potentially institute punishment if these rules were broken?

No, although I could trivially say that any group of humans living together
will be a society in some respect (and thus "natural" human behavior involves
being in a society anyway).

Ignoring that, though, removing cheaters doesn't need to involve any sort of
centralized group decision making. Your immune system doesn't convene and
decide what kind of foreign bodies are unacceptable, and it's largely
effective at what it does.

> ...does not disprove that cheating and lying are embedded instincts in
> living beings.

Sorry, the burden here is on _you_ to prove that cheating and lying are
embedded instincts (which I'm assuming means "typical in primitive humans"
here). You're the one who made an affirmative statement.

My counterpoint is that cooperation is plentiful in nature (with many examples
of cooperation in comparison to parasitism) and thus cheating is unlikely to
be typical behavior in the wild.

 _You_ need to prove otherwise.

> Cheating and cooperation are not mutually exclusive concepts.

Are we defining cheating differently? What's your definition of cheating?

> The parent comment was suggesting that we are somehow evolving to lie and
> cheat and I'm suggesting that we have been more than capable of this
> behavior all along.

Humans are capable of any type of behavior. If your definition of "embedded
behavior" is "humans are capable of doing that," then sure, it's trivially
true because humans are numerous and any type of behavior can be found with
such a large population.

> but we have actively suppressed these "survival skills" because they are
> deemed bad qualities.

Right, and my argument is that they're primarily suppressed because they're
inferior survival skills in aggregate. Cheating and lying are classic "tragedy
of the commons" behavior.

------
flylib
if they can't do the proper due diligence then they shouldn't be investing
other people's money

------
samgranieri
Discovery on this will be interesting to say the least

~~~
oneloop
Will discovery be made public?

~~~
morninj
Unlikely, unless it gets leaked. Some of it may come out in court filings (or
trial, if it gets that far).

------
kristofferR
This recent article explains the whole Theranos mess well:
[http://www.vanityfair.com/news/2016/09/elizabeth-holmes-
ther...](http://www.vanityfair.com/news/2016/09/elizabeth-holmes-theranos-
exclusive)

------
socrates1998
Who pivots AFTER a $billion+ valuation? This chick is crazy and delusion. The
sad part is that she will find someone dumb enough to be bullied by her and
will keep founding companies with other people's money.

------
calinet6
Kids, you should start companies. Really. But maybe get some experience first
before taking major investments.

------
alee788
[http://www.wsj.com/articles/major-investor-sues-
theranos-147...](http://www.wsj.com/articles/major-investor-sues-
theranos-1476139613)

------
fizixer
Odd coincidence (or maybe not) that the father of the founder, Elizabeth
Holmes, worked at Enron (per wikipedia).

~~~
carterehsmith
Heh, I imagine a Bring Your Child To Work Day @ Enron.

PR: "And this, kids, is our Fraud, Swindle & Embezzlement Department"

Kids: "the fuck does that mean"

PR: "Well, this is the magical place where we figure out how to steal other
people's money. "

Kids: "Oooooooh, magical? But wait... isn't that bad?"

PR: "Free pizza & pop for everyone!!"

Kids: "Yaaaaaay!"

------
dsacco
This is the first article on this news, so I couldn't find a non-paywalled
source. For those who don't subscribe to WSJ, the tl;dr is as follows:

• SF-based hedge fund, Partner Fund Management LP, is suing "Theranos and its
founder", alleging they lied to attract nearly $100M in funding.

• Sources are an internal "fund document" and "people familiar with the
matter."

• The fund document was reviewed by WSJ and states:

 _" Through a series of lies, material misstatements, and omissions, the
defendants engaged in securities fraud and other violations by fraudulently
inducing PFM to invest and maintain its investment in the company"_

• Suit was filed in Delaware Court of Chancery this afternoon.

• A Theranos spokesperson responded:

 _" The suit is without merit and Theranos will fight it vigorously. The
company is very appreciative of its strong investor base that understands and
continues to support the company¹s mission."_

The rest of the article is catch-up background on Theranos' controversy.

~~~
ThrustVectoring
FYI, the "web" link is exactly for this. Paywalled sources get penalized in
Google's search results, so most of the time searching for the article's title
and clicking the Google search results link gets you the full article.

~~~
dreamcompiler
That used to work for me; it doesn't any more.

~~~
xanderstrike
It won't work if you're signed into the WSJ.

~~~
notgood
It doesn't work regardless, even after deleting all the cookies.

~~~
mkhpalm
Which begs the question, why bother getting around it? I just stopped reading
the wsj when they implemented all this.

------
bertiewhykovich
Good.

------
balls187
Am I wrong if feeling no sympathy for a Hedge fund getting bilked?

Like it's nice that for once it's not the "little guy" getting screwed over.

~~~
dsacco
Hedge funds frequently have charitable foundations and pension funds as
limited partners. Unless the hedge fund is just a family office, there's a
high probability that the "little guy" will be impacted, somewhere.

I can't tell you if your schadenfreude over hedge funds losing money is right
or wrong, because that's based on normative values. But I'd encourage you to
adjust your understanding of the financial dynamics involved.

~~~
balls187
But if the Theranos deal panned out, who would have benefited from the
investment by the hedgefund?

Would it be the "little guy?" Or would it be the fund managers, and all the
"insiders."

It goes hand and hand with the notion that the system is rigged.

~~~
Pyxl101
> But if the Theranos deal panned out, who would have benefited from the
> investment by the hedgefund?

A hedge fund is an investment fund that pools money from investors and then
invests it according to the hedge fund's strategy. So, the primary people who
will benefit or lose are _the people who invested their money with the hedge
fund_. Hedge funds also tend to take a percentage of profits as part of their
compensation.

I don't see what connection there is to the notion that the system is rigged.
No one is obligated to invest in hedge funds and the people who do are aware
of the hedge fund's compensation structure. Anyone who invests money is aware
that investments have risk and can fail. The purpose of a hedge fund is to
invest money to generate (better-than-market) returns, and so the hedge fund
will be compensated if that happens. The fact that they're compensated from
profits acts as an incentive for them to actually generate profits.

