Last week, the New York Times reported that a jury found Theranos founder Elizabeth Holmes guilty of four counts of fraud (three counts of wire fraud and one conspiracy to commit wire fraud ) after 50 hours of deliberation. In the article, Erin Griffith and Erin Woo wrote that if convicted, Theranos “is likely to stand as a warning to other Silicon Valley start-ups that stretch the truth to score funding and business deals.” But is it?
People are hoping that this case means that the DOJ will finally start prosecuting high-tech fraud, but many folks don’t think that this will necessarily mean that the DOJ has developed a spine for this industry. As the NYT writers pointed out, executives are rarely charged with fraud, and even less often convicted.
And I can certainly relate to this case. At Theranos, there was an internal whistleblower, Tyler Schultz – the grandson of Theranos board of directors member George Schultz. In return for specifically warning Holmes and Ramesh Balwani (Holmes’s lover and Theranos COO) of the company’s massive problems, Schultz received threats if he pursued his whistleblowing.
I, too, tried to warn executives at Citigroup and watched as the fraudulent behavior continued unchanged.
Schultz also warned regulators, which helped accelerate scrutiny.
I also went to the SEC, FCIC and DOJ, while other whistleblowers in many of the other large banks did the same – but in my case, the fraud was all covered up and the DOJ refused to prosecute.
In fact, coming out of the financial crisis, the DOJ did not prosecute any high-level banking executives for the fraudulent representations and warranties given to investors which resulted in massive losses and directly led to the financial crisis.
And even if the DOJ takes to prosecuting high-ranking executives for fraudulent behavior, will that save victims of that fraud down the line, or just the wealthy investors who lost money. In an interview with Bobby Ghosh for Bloomberg, Tim O’Brien pointed out that, “the jury found it easy to decide that investors had been defrauded by Holmes, and possibly others, at Theranos. But they found it more difficult to draw the same conclusion about patients.” This is a concern for us all. As we saw in The Con, the fraud committed by bank lenders led to personal bankruptcies and many suicides, yet to this day the DOJ has held nobody to account.
There is a saying: “It is prosecutions which act as a deterrent to future wrongdoing.” Maybe the tech industry will learn this and move forward more honestly. But coming out of the financial crisis, the only lesson the large banks learned is that there is no downside to again committing fraud. For that reason alone, there will certainly be another financial crisis.
As Bethany McLean asked in a New York Times opinion piece: “What degree of dishonesty is acceptable, especially if the dishonesty is the result of a certain amount of self-delusion?” Apparently, until this trial, quite a bit. As McLean pointed out, “As a society, we’re willing to tolerate this — to a point.” I hope that point is now and we, as a society, demand more accountability from the justice system.
We’ll have to see what comes of Holmes’s appeals to be sure if this case stands out as more than a lesson in planned nuisances for unethical companies in the future. But, for now, we can see that the federal government can hold people accountable for clear cut fraud for lying to investors when they want to pursue it. The question is, will they pursue accountability and justice equally across the board, or is this a one-off case?
Richard Bowen is widely known as the Citigroup whistleblower. As Business Chief Underwriter for Citigroup during the housing bubble financial crisis meltdown, he repeatedly warned Citi executive management and the board about fraudulent behavior within the organization. The company certified poor mortgages as quality mortgages and sold them to Fannie Mae, Freddie Mac and other investors.
