Theranos' Holmes Convicted Of Fraud​

By Jake Rickman​

What do you need to know this week?

Elizabeth Holmes, the founder of the Silicon Valley company Theranos, is not having a good start to the New Year. She was convicted on Monday on four counts of fraud by a California jury. She faces as much as 20 years in prison.

Holmes founded Theranos in 2014 to market and distribute a piece of medical technology which Holmes told investors could detect over 200 different diseases in a single drop of blood. This later turned out to be false.

Jurors found that Holmes made repeated fraudulent representations to investors, some of whom included media magnate Rupert Murdoch and the Waltons, the family behind the American retail giant Wal-Mart.

Holmes’ conviction follows years of allegations and media investigations into the start-up founder’s conduct.

Why is this important for your interviews?

Holmes’ conviction provides us with a window into the dynamics between start-up entrepreneurs and their investors.

The world of tech start-ups, especially those emerging from California’s Silicon Valley, can be a fast-paced, frenetic environment, where investors are constantly trying to find the next big opportunity. For context, venture capital funds, which are investment funds specialising in “early-stage” opportunities, invested $70bn in the first quarter of 2021 alone.

Once a promising start-up has been identified, investors usually want to deploy their capital as quickly as possible to get ahead of any competition. However, the legal and financial due diligence processes, where an investor inspects the company's fundamentals, often pose significant hurdles to investors looking to move as fast as possible.

Additionally, because nearly every tech start-up is a private company, much less information is available to investors than publicly traded companies.

As a result, it is commonplace for the due diligence processes to be comparatively rushed. As was the case with Theranos, investors relied on Holmes’ representations that she had successfully developed the medical technology when, in fact, she had not.

This case demonstrates the dangers of an over-reliance on the representations of tech entrepreneurs. Entrepreneurs must also ensure that they are not misrepresenting any aspects of their business. If they do so, they may face criminal penalties.

How is this topic relevant to law firms?

White-collar crime is a risk all parties in the corporate world must contend with. Those defending allegations of fraud, including Holmes, are entitled to a competent legal defence. Such cases are often factually complex, which requires world-class legal teams from firms like Debevoise & Plimpton and Slaughter and May.

More generally, early-stage equity investors in tech start-ups rely on law firms like Cooley and Fenwick to help them navigate the due diligence processes. Ideally, an investor’s legal team will help them balance the urgency of deploying the capital with the thoroughness necessary to uncover any irregularities or misrepresentations.


Image Credit: mundissima / Shutterstock.com