CEO SUMMARY: The trial of former Theranos President and Chief Operating Officer Ramesh “Sunny” Balwani ended with convictions by a jury on 12 counts of wire fraud and conspiracy. Now all eyes are looking ahead to the sentencing of Balwani and Elizabeth Holmes, the founder and former CEO of Theranos, who was found guilty on four charges earlier this year. Both face significant prison time for their crimes.
JURIES HAVE SPOKEN: TWO SILICON VALLEY EXECUTIVES AT DISGRACED BLOOD TESTING COMPANY THERANOS orchestrated one of the biggest corporate fraud conspiracies in U.S. history.
Now, those executives—Elizabeth Holmes and Ramesh “Sunny” Balwani—will spend the coming months pondering their fate as they both prepare for possible prison time.
Their sentencings will once again capture the attention of medical laboratory directors and pathologists who have followed the strange saga of Theranos, which may be entering its final chapter.
Text Messages Sway Jury
On July 7, a jury in San Jose, Calif., found Balwani—the former president and chief operating officer at Theranos—guilty of two counts of conspiracy and 10 counts of wire fraud.
Holmes, the founder and former CEO at the blood testing lab, was convicted in January on one count of conspiracy and three counts of wire fraud, and she was acquitted on seven other charges. Wire fraud is the use of electronic communications, such as email, to further a crime. (See TDR, “Jury Finds Elizabeth Holmes Guilty in Four of 11 Criminal Counts,” Jan. 10, 2022.)
ABC News Correspondent Rebecca Jarvis, who extensively chronicled the Theranos story, appeared on the ABC News Start Here podcast on July 8 to talk about Balwani’s verdict. She said text messages between Holmes and Balwani that prosecutors showed to the jury were powerful.
“They presented a text message from Sunny to Elizabeth, and it read, ‘I am responsible for everything at Theranos,’” Jarvis observed. “Well, that was in the context of a lot of other text messages, but it very likely made a big difference with jurors at this trial.”
Sentencing is Coming Up
Holmes will learn her punishment on September 26, while Balwani’s sentencing date is Nov. 15. Each count for which they are guilty carries a maximum 20 years in prison and $250,000 fine. Both individuals also face possible restitution to victims.
Federal judges do not have to sentence defendants to the maximum prison term. Also, the judge can decide that multiple terms may be served concurrently.
Meanwhile, Holmes has appealed her verdict; a hearing is scheduled to occur in July, CNN reported. Balwani also will likely file an appeal. Both remain free on bond until their sentencing.
At the core of both trials were dubious claims that Theranos’ proprietary technology worked properly. The company said it could take a few blood drops of blood from a patient and successfully analyze the specimen using a machine called Edison.
During both high-profile trials, The Dark Report and its sister publication, Dark Daily, provided clients and regular readers with exclusive insights as to how lawyers from prosecutors and defendants were questioning the actions and responsibilities on the role of laboratory directors as governed under the Clinical Laboratory Improvement Amendments of 1988 (CLIA). (See TDR, “CLIA Lab Director Testimony Shows Risks to Pathologists,” Nov. 8, 2021.)
Lab Director’s Obligations
For example, attorney Matthew Murer, JD, a partner at Chicago law firm Polsinelli, told The Dark Report last year that clinical lab employees should consider it their responsibility to report failures to use analyzers correctly to the CLIA laboratory director. Subsequently, the lab director should report that failure to lab owners and management.
Under CLIA, the laboratory director is ultimately responsible for a lab’s operations and testing accuracy. Further, if executives ignore a lab director’s concerns, that director should leave the company, Murer warned.
“In my opinion, as a lawyer who has represented labs and lab directors in these cases, when a lab director believes the lab is not being run properly, and he or she cannot get ownership to agree that the lab is not being run properly, those lab directors should resign,” he told The Dark Report.
The government alleged that Holmes and Balwani—who were romantically involved during their time at Theranos—began a multi-million-dollar scheme to defraud investors and patients in connection with operations at the company.
For several years, Holmes and Balwani benefited from the incredible news coverage that Theranos generated within the healthcare industry and the media.
By 2014, Theranos, which Holmes founded in 2003 at age 19, was valued at more than $9 billion as a private company. However, by 2015, the public began to learn about serious problems in the company. At least some employees at Theranos doubted that the Edison analyzer performed accurately, but Theranos executives shrugged off those concerns.
“For example, Holmes, Balwani, and others knew that the analyzer had accuracy and reliability problems, performed a limited number of tests, was slower than some competing devices, and, in some respects, could not compete with existing, more conventional machines,” according to the U.S. Department of Justice (DOJ).
Whistleblowers from the company talked to the Wall Street Journal and federal investigators. In 2018, the U.S. Securities and Exchange Commission accused Theranos, Holmes, and Balwani of raising more than $700 million from investors by making exaggerated or false statements about the company’s technology. That same year, Balwani and Holmes were indicted by the DOJ. Within months, Theranos shut down.
Balwani Deceived Patients
Holmes and Balwani were both found guilty of defrauding Theranos investors. However, an interesting point for laboratory directors to note is that unlike Holmes, Balwani also got convicted of defrauding patients.
Those charges stemmed from a deal Theranos struck with Walgreens Boots Alliance in 2012 to offer specimen collection and testing in some stores in California and Arizona. According to the indictment, Balwani’s actions induced patients to pay for blood testing under the false pretense that the Theranos technology produced accurate results.
It’s not yet clear why the jury convicted Balwani of more crimes than Holmes, given the two faced the same charges. It could simply be two juries reached different conclusions, or perhaps Holmes garnered more sympathy when she took the stand in her own defense.
In her trial, Holmes, 38, took the stand and alleged that Balwani, 57, was abusive to her while they dated. He denied this claim. Balwani never testified during his trial. “The biggest difference is that he didn’t take the stand to say, ‘I didn’t do this,’ or to raise his own objections to the claims against him,” Jarvis noted.
The New York Times postulated that the government was able to present a more polished case against Balwani given his trial occurred after Holmes’ trial.
“Since Mr. Balwani went to trial after Ms. Holmes, prosecutors essentially got a do-over and honed their case,” The Times reported in July.
Ramesh “Sunny” Balwani Convicted of 12 Crimes
BALWANI WAS CONVICTED ON 12 COUNTS during his Theranos trial. Here are more details about those charges:
- Count one: Conspiracy to commit wire fraud against Theranos investors.
- Count two: Conspiracy to commit wire fraud against Theranos patients.
- Counts three through eight: Wire fraud (electronically transferring $154.7 million from various investors’ bank accounts to Theranos’ bank account).
- Counts nine through 11: Wire fraud (electronically transmitting questionable blood test results to three patients).
- Count 12: Wire fraud (electronically transferring $1.1 million from Theranos’ account to a media company’s account to purchase ads for Theranos Wellness Centers).
Among the investors noted above were Lakeshore Capital Management (a firm owned by the family of Betsy DeVos, former U.S. Secretary of Education); PFM Health Sciences (a healthcare investment firm); a company associated with Daniel Mosley (former estate attorney for former U.S. Secretary of State Henry Kissinger, who introduced Mosley to Theranos CEO Elizabeth Holmes); the Walton family (heirs to the Walmart fortune, who were introduced by Mosley to Holmes); and former U.S. Secretary of Defense James Mattis (who also became a Theranos board member).
Another Former Lab CEO Sentenced to Prison
IN OTHER FRAUD-RELATED NEWS, the former CEO of a now-defunct clinical laboratory will spend the next two years behind bars.
Executive Jae Lee must also pay restitution of $7.6 million, according to the U.S. Department of Justice (DOJ).
Lee previously pleaded guilty to charges that he helped Northwest Physicians Laboratory in Bellevue, Wash., obtain more than $3.7 million in kickback payments by referring urine drug test specimens to two labs that billed the government for the services. This resulted in government payments to those two labs of more than $6.5 million, the DOJ noted.
To conceal the payment of the kickbacks, Lee described the fees paid to the lab as being for marketing services. However, the DOJ argued that no marketing activity occurred.
Lee’s sentencing is one more recent example of federal prosecutors cracking down on individual responsibility stemming from clinical lab fraud. (See TDR, “DOJ Charges Execs over Alleged Lab Kickbacks to Obtain Restitution,” June 6, 2022.)