In the US where we are inundated with stories of the lifestyles of the rich, it should not be surprising that some people dream of joining that group. But most people are not born into wealth and need to find some way of getting there. Some have an entrepreneurial bent and try to market an idea. The tech world is appealing and the person who is held up as a model is the founder of Apple, Steve Jobs. If you do not have an idea for a product or the stomach to do all the work of developing one, the next best thing is to identify someone who has and become an early investor so that one can reap the benefits if and when the product becomes wildly successful.
But identifying good ideas in the early stages is a gamble, especially if one is unfamiliar with the world in which it operates. What may seem like a terrific idea can turn out to be a smoke-and-mirrors exercise in which someone with very persuasive skills manages to convince rich people who lack the technical knowledge to cough up lots of money by promising a product that will revolutionize the field. The FOMO (Fear Of Missing Out) phenomenon can be a useful lever of persuasion, where people fear that by not investing, they may be missing out on the equivalent of the next Apple.
That seems to be what happened with Elizabeth Holmes who is currently on trial because she and her company Theranos are accused of fraud, promising investors that they had developed a test kit that could provide about a thousand test results from a few droplets of blood taken from a single prick of a finger. It turned out that they could only get a dozen or so results and that they were getting the other results from conventional test analysis using other commercial equipment or laboratories.
But what is revealing about this case is how she was able to get a whole slew of rich people, many of them old guys, to believe her. She may not have had the technology she claimed to have but she certainly had the ability of extract money from them. The one good thing about the Theranos scandal may be that the people swindled out of the most money are some of the worst rich people in the world. One of them is Henry Kissinger who by all rights should be in prison for war crimes. It should be noted that Holmes herself came from a wealthy and extremely well-connected family and used those connections to gain access to these people.
Ben Burgis writes that Elizabeth Holmes scammed these people by making them feel that they had the inside track into the next big thing in the world of technology, despite her and her co-conspirator Ramesh Balwani being seemingly ignorant about their product or the science and technology behind it. He writes that she milked the Steve Jobs model relentlessly and suffered from delusions of grandeur.
My favorite piece of Theranos trivia is that Holmes, who micromanaged every detail of the company’s operations, mandated that the temperature in the office be kept in the mid-60s, because otherwise she’d be too hot in her “preferred daily uniform of a black turtleneck and a puffy black vest,” an outfit she wore to evoke a female Steve Jobs. Similarly, while she doesn’t seem to have lost much sleep over what was inside of her blood testing machine, it was important to her that the outside look sleek and modern, with an interface like the touchscreen of an iPhone.
When Holmes talked to investors about “changing the world,” her deep voice and oddly unblinking stare were no less important than her knockoff Steve Jobs uniform and the attractive exterior of her largely worthless project. Like the rest of the venture capitalists throwing money at dubious projects throughout Silicon Valley, her investors were worried about missing the next big thing. They responded to the feel of something big and revolutionary coming down the pipe.
…Her office was modeled in imitation of the Oval Office. Her phalanx security guards were instructed to refer to her for “security reasons” as “Eagle 1” as she was rushed to the airport to “fly alone on a $6.5 million Gulfstream G150.”
Burgis describes how she managed to get all this money and that the “very existence of Theranos might be an indictment of our economic system.”
There’s an important and underappreciated point lurking here about the relationship between innovation and economic inequality. If Holmes had been forced to get all of her money from research grants provided by state institutions, or even loans from regular private banks, a number of people would have been tasked with independently examining the evidence for her extravagant claims. Some of these people, one hopes, would have had relevant expertise. At the very least, a few might have asked obvious follow-up questions about how it all worked and why Theranos wasn’t allowing third-party verification of its claims.
Rich investors, however, are under no obligation to verify outlandish assertions. If a black-turtleneck-wearing con-woman is sufficiently spellbinding, they don’t need to justify themselves to anyone before they cut a check.
Despite Holmes’s scientific illiteracy, it’s hard to overstate the effectiveness of her pitch. The Walton family was massively invested in Theranos. Joe Biden visited the lab when he was vice president. Both Clintons were chummy with Holmes until a shockingly late stage in the scandal. Multiple former generals and former cabinet secretaries served on Holmes’s board.
One of those former cabinet secretaries in particular seems to have played a pivotal role. More than half of Theranos’s $700 million in investor money came from the Waltons and three other ultra-wealthy families — the Coxes, the Oppenheimers, and the DeVoses. All four families were sold on the project by estate lawyer Daniel Mosley and his employer Henry Kissinger.
…The Waltons, Coxes, Oppenheimers, and DeVoses collectively added another $370 million. Bloomberg reports that $50 million more came from two friends of Kissinger and a wealthy Greek investor named Andreas Dracopoulos who consulted with Mosley before sinking his own millions into Theranos.
Burgis writes that Homes ran her company using fear and intimidation that seemed designed to prevent the truth from coming out.
One of her employees wrote an email saying that Holmes ran her company Theranos “through fear and intimidation,” and that this not only made the company a miserable place to work but also made it impossible for the company to do what it was supposed to. It was the kind of work environment, the employee wrote, “where people hide things out of fear.”
And that’s what they said in an email to her. I’d encourage you to imagine what the workers said to each other, but Holmes seems to have ruthlessly prevented cross-departmental employee communication.
…Elizabeth Holmes seems to know about as much about medical science as I do. When asked how her supposedly miraculous blood testing machine actually worked, her reply was, and I swear I’m not making this up, “A chemistry is performed so that a chemical reaction occurs and generates a signal from the chemical interaction with the sample, which is translated into a result, which is then reviewed by certified laboratory personnel.”
…Holmes was living high on their money even as she and her equally clueless business partner Ramesh “Sunny” Balwani — who knew so little about how his product was supposed to work that “employees had fun trying to sneak a fictitious scientific terms into a presentation, which Sunny dutifully repeated to the quiet amusement of his subordinates” — cheerfully lied about Theranos’s progress.
What took down Theranos was a secret months-long investigation by Wall Street Journal reporter John Carreyrou who got a tip from a medical expert that the blood testing device seemed dubious. Carreyrou started talking to whistleblowers in the company. When Holmes learned of this, her lawyers tried to stop him but the story was published in 2015 and that began the unraveling.
Her trial started on August 31 with Balwani’s trial to come later. On Friday, in a move that took legal analysts by surprise, her lawyers put her on the stand where it is clear that they are going to try and show that she is a well-intentioned innocent who was led astray and even abused by her erstwhile business and personal partner Balwani. They may feel that if she could charm rich people out of their money, she may be able to charm the jury too, despite the risks involved in being cross-examined.
“A chemistry is performed …” 😎
Not the real point of the post, but its beginning, “In the US where we are inundated with stories of the lifestyles of the rich, …” also made me laugh. I have no interest in the lifestyles of rentiers and the infamous; and I don’t understand those who do.
Another FOMO market is the
Dutch tulip marketnon-fungible token (NFT) -- the sales pitch is “this is your chance to get in on the ground floor of the next bitcoin!”… Holmes ran her company Theranos “through fear and intimidation,” …
How odd that the reporter did not cite this as another example of well-calculated Steve Jobs emulation.
Gosh! I did a chemistry yesterday! And I’m planning to do a ligistics shortly, maybe even a technology!
*logistics.
Or apparently I am doing a linguistics right now, changing the language like that.
Here’s what I think is wrong with the system: it’s absolutely NOT that this woman was able to bilk these people out of money. It’s that she’s being punished for it. In a sane system, the fraud trial would go like this:
Day 1: Mr. Kissinger, you invested $x million dollars in this company. Can you produce the independent due diligence report on the validity of the product that you referred to before investing? No? Move along please. Next! And so on, until there’s nobody left. End of day one, each of the complainants gets, at the defendant’s expense, a printed A4 sheet of paper with the words “CAVEAT EMPTOR” laser-printed in 72 point Helvetica in the middle, and the case is closed.
Instead, these people are able to just lash out their cash on a handful of magic beans and then when their laziness costs them, they get to use OUR justice system to get revenge to cover their embarrassment. Fuck ’em.
@sonofrojblake
On the one hand, yes most of those investors are idiots who deserve to lose their money for their stupidity.
On the other hand, a predatory liar does not deserve to get away with their greedy lies just because some of their victims are reviled. Don’t forget that real people were hurt by the numerous inaccurate results of Theranos’s so-called “tests”. She wasn’t any Robin Hood doing this for the greater good, she was in it for herself.
It’s unfortunate that this trial is about investor fraud rather than medical malpractice, because that should be the bigger scandal. Regulators were asleep at the fucking wheel, but I’ll take what I can get.
sonofrojblake@#6:
Here’s what I think is wrong with the system: it’s absolutely NOT that this woman was able to bilk these people out of money. It’s that she’s being punished for it.
For your next trick are you going to tell us how unfair it was that Bernie Madoff was prosecuted, because his clients should have done their diligence and therefore deserved to be robbed?
So, there’s a notion of “qualified investor” which means, basically, that you can afford to lose the money you put into something. But, capitalism being the way it is, it’s not the case that the investor class are willing to shrug and write off their losses in the event that they invested in a sham. There are all sorts of disclosures of risk factors that are supposed to be in the prospectus for an investment, but even those do not adequately cover all the possible liabilities. In the case of outright fraud, there isn’t any reasonable claim that investors could have expected that Theranos would deliberately fake demos and deliberately hide the fact that they were using other products to produce the results claimed for their product.
There have been plenty of companies that raise large amounts of money, e.g.: Iridium, WeWork, Magic Leap, Roberts Space Industries, and then spent it unwisely pursuing a basically flawed business model or failing to execute. The question is whether there’s outright fraud -- executive management deliberately and knowingly deceiving the investors. I have to say when I first heard of Theranos, I thought it might just be another silicon valley flash in the pan, but then all the stuff started to come out about secret labs and fake demos and that Holmes was stupid enough to put some of that stuff in email. As my accountant always says, “there are only 2 kinds of people in hell -- those who were caught in the act, and those who left notes.” Not strictly true, of course, but in the case of Theranos, Holmes appears to have left adequate documentation that the situation had spiraled out of her control and she was in over her head and decided to try to lie her way out.
(Disclosure: I lost money on some ‘friends and family’ shares in Iridium. I seemed like a great idea. Basically, Elon Musk is doing the same thing with Starlink and this time it may be working)
While I have absolutely zero sympathy for these incredibly rich, stupid investors, fraud is still a crime. Just because I hate all of these people doesn’t mean Holmes didn’t commit a crime that deserves punishment. This is one of those rare cases where I can just sit back, eat my popcorn, and watch a bunch of assholes all get what they deserve.
(off topic)
@ 1 billseymour
Generations of soap operas and sitcoms, since the days of Coronation Street, Days of Our Lives, The Honeymooners, and Til Death Us Do Part, say you’re a rarity.
(/off topic)
Silentbob @11: yes, I observe that I’m a rarity. I have no theory about why that’s the case. 😎
you’re a rarity.
Probably by definition, commenters on FTB are a self-selected sample of rarity!
While I agree with the basic sentiment of not worrying much about the embarrassment or even ruination of arrogant super-rich folks, if they’re defrauded they’re victims of a crime just like anyone else. If you dismiss one crime as OK, what others might you allow? Kind of a slippery-slope argument, perhaps, but some slopes are a bit.
Aside from that, from the purely pragmatic point of view, if rich people are going to pour large quantities of money into projects, it might be to our benefit, even if disproportionately small, to have it go to something that works, or even does some good, rather than tossing it down a rathole at the bottom of which is only another super-rich wannabe.
I’m all for prosecuting the hell out of Holmes and company, and while at it making sure that her dupes are suitably embarrassed by their stupidity, with the admittedly slim hope that they’ll learn something.
@1 BillS: “I have no interest in the lifestyles of rentiers and the infamous”
Same here. I’ve so little interest in the financial shenigans of Kissinger etc. that I read this blogpost diagonally.
“… show that she is a well-intentioned innocent…”
It was self-defense. /s
Indeed. I was being hyperbolically sarcastic. It obviously didn’t come across.
A recent case (where the company is still limping along after firing the boss and liar-in-chief, even though it beggars belief that the rest of their management wouldn’t have known it was all lies) is Nikola (FOMO on “the next Tesla”[1], as if that wasn’t obvious from the name), just the latest in a long list of shady dealings of Trevor Milton, who seems to have targeted smaller investors rather than the big boys, still got rich, and the end was triggered by the research of some investment firm. I hear investigations by the DoJ and the SEC are still ongoing.
Though at least, in this case, many people suspected all was not right before that investigation report and were openly talking about it, which is how I heard about it. He did manage to pull in GM for a while, they don’t seem to know what “due diligence” means.
[1] For the same reason, a number of EV startups that haven’t delivered any product, or only a very small number of cars, have insanely high values in the stock market. At least Tesla only reached the stratosphere after actually delivering a shit-ton of vehicles to consumers all over the world. And even then, I believe Musk himself said that he thought Tesla was somewhat overvalued.
FOMO [a]ccording to a new study in the Journal of Social and Personal Relationships… has much more to do with loneliness and social anxiety…
[This concerns ordinary-people behavior, not irrational investors.]