John Carreyrou Explains What's Next for Theranos and Founder Elizabeth Holmes

John Kerry who you brought to light in 2015 in an article in The Wall Street Journal something very wrong with theranos a blood-testing startup and its founder Elizabeth Holmes Elizabeth was charged just a few months ago with massive fraud by the SEC what's next for her well potentially two things are going to happen in the next few months one is that there knows which believe it or not is actually still a going concern he's going to run out of money and its assets are going to be seized by fortress Investment Group the New York private equity firm that lent Elizabeth Holmes money at the end of last year and fortress will then liquidate the assets it already has the patent portfolio as collateral to the loan so very likely thoroughness will cease to exist probably by the end of the jaw end of July early August the other thing that bears watching is the criminal investigation there's been a parallel criminal investigation conducted by the US Attorney's Office in San Francisco for more than two years now and my sources tell me that that investigation is drawing to a close and may well result in criminal indictments of Elizabeth Holmes and and her ex-boyfriend Sonny ball Lonnie do you think Elizabeth ultimately faces prison time it's certainly a possibility if they indict her they would then of course have to prove their case at trial and it's probably not a slam-dunk case because you know she has shown her ability at convincing people and manipulating people and so she'll present a sympathetic figure to a jury and and possibly be able to manipulate a jury the other thing that if prosecutors do indict her that they'll have to overcome is the argument that her lawyers are sure to make which is that she wasn't enriched by this fraud and why was she not enriched because she never sold her shares when the company was worth ten billion dollars in early 2015 she didn't sell any shares so they're gonna argue that as a result she didn't profit from the Frog well that's an important point because I guess at that time when the company was worth ten to fifteen billion dollars her net worth was upwards of five billion so a is there any estimate in terms of how much money she made over they say 15 year period well my understanding is actually that the SEC levied relatively small fine which was $500,000 because that was essentially the amount of money that she had to her name if she had had she had made more money from ther knows whether it be by selling shares or through a salary they would have fined her more than that and we should point out you Chronicle all this in your new book bad blood secrets and lies in a Silicon Valley startup it's out today so we'll watch for that Elizabeth Holmes started the company at age 19 in a few lines what was her motivation what was she trying to do with their nose and and what went so wrong right so she had a vision and it was for a diagnostic device at first it was a wristband that would feature these micro needles that would draw your blood and diagnose instantaneously what ailed you and then also instantaneously inject you with a drug the appropriate drug to cure you she and her co-founder quickly realized that that vision for the for the wristband was science fiction it wasn't feasible so they pivoted to essentially something derived from those portable blood glucose monitors except she wanted it to be the device that could test for all blood tests not just blood sugar and so that meant a device that would be a lot more involved a lot be a lot more complex and that was her pitch to Walgreens which was signed on for a huge deal with them right and so in 2010 now bear in mind this was six or seven years into their noses life she was still having trouble developing the technology yet she went to Walgreens that she told Walgreens that she had a device that it was ready that it worked and that it did the full range of tests on just to drop her blood and that was actually when when she made those assertions to Walgreens it was not true not only was it not true then in 2010 it was not true three years later when she went live with the blood tests in Walgreens stores and when I'm reading the book you know there were issues as far back as 2007 2008 your article in The Wall Street Journal came out in 2015 why did it take so long for someone to call a reporter about this right well I mean ther nose had a culture of secrecy and fear that was enforced by Elizabeth's ex now ex boyfriend Sonny ball juani who was the the number two executive at the company and made employees sign non-disclosure agreements the threat of litigation was always in the air employees knew that Elizabeth had sued employees in the past they knew that the outside counsel for the company was David Boies you know arguably the most famous lawyer in America and he was sort of a scarecrow you know he gave credence to this specter of litigation if anyone said anything and so you know I believe people were silenced by by this this culture of fear and secrecy and by the lawyers who were so ever-present now she raised what nine hundred million dollars over her ten year as CEO if you count those 65 million that fortress put in at the end of the last year it's almost a billion dollars so going back to the criminal investigation for a moment is this or a matter of hey she defrauded investors allegedly and this is why she should be prosecuted or is this a matter of hey this is just a startup that went bad and that's how it goes sometimes in Silicon Valley well it's a it's a startup that over it's a start-up and a start-up founder who over-promised and who hopes that eventually you know the the reality of the development of her technology would catch up with what she had promised years before the problem is that she not only did she raise money based on those promises that were never fulfilled she also went live with those blood tests so when you when you look at what charges prosecutors may bring if they decide to bring charges certainly securities fraud would be one but I believe another one another bucket of charges would be lying to federal officials that the inspectors who came to inspect the Thera know slab in late 2013 were not shown the part downstairs that had the Edison machine the hacked Siemens machines they were only shown the part of stairs with the regular analyzers that's deceiving federal officials and then I think if there are charges it may also come to include conspiracy of Medicare fraud conspiracy charges when we look back at some of the the biggest fraud in corporate America obviously Enron comes to mind right in your view is there any reason to equate Enron to thoroughness is there any connection there in your view well certainly Enron involved more money it would at the time that Enron went down it was the seventh largest company in the u.s. their nose is just a start-up in Silicon Valley albeit one that defrauded investors out of a billion dollars but I would argue that that the Thera nose scandal is on par actually with Enron because there's a component to it that that the Enron story didn't have which is that their nose went live with blood tests that that weren't reliable that were faulty and put patients in harm's way and when I exposed the company it was actually on the cusp of going national with its blood tests it was about to roll them out to Walgreens as 8,000 other stores and if that had happened the chances that someone would have died from either a wrong diagnosis or an unnecessary medical treatment would have skyrocketed and when we talk about the billion dollars or so in funding a good amount of that came from very high-profile investors if you could name a few that would be great and also talked about the board and the advisors that she had many of whom were also very high-profile right so I mean the board was a who's who of famous you know former statesmen George Shultz Henry Kissinger Bill Perry who had been secretary of defense under under Clinton Sam Nunn James Madison our secretary of defense in the Trump administration I could go on and on and actually this was one of Elizabeth's tactics as she surrounded herself with people with prestigious reputations and and and that gave her credibility in terms of the the high-profile investors who invested and who in part were sold on the company by this prestigious board there's Rupert Murdoch who actually controls the Wall Street Journal my newspaper who was the single largest investor invested 125 million dollars in ther knows also Betsy DeVos his family our current education secretary her family put in a hundred million the Coxes the billionaire Cox family who controlled Cox Enterprises in Atlanta they put in a hundred million dollars Carlos Slim the Mexican billionaire put in thirty million dollars and all that money's gone all that money is going it's gone poof and it's gone a lot of it has gone to pay lawyer fees over the past two and a half years so so when I hear this list of prestigious names I'm not hearing any doctors or folks with medical expertise so it's a prestigious list but it's not necessarily related to the core business how big of a problem was that right I mean she avoided venture funds with experience in medical technology and in health care like the plague you know she really stayed away from them and she targeted these rich individuals and and very wealthy families who who were sort of you know you could crassly call them the dumb money they're they're certainly not the smart money in the sense that they're they're not investors who do sophisticated due diligence and and have teams of people to do that due diligence for them so on that note was the Thera nose frenzy a frenzy in terms of the money that it raised was that a symptom of Silicon Valley hype and a lot of the money that rushed into Silicon Valley over the past decade or so we see all these unicorn companies that are worth more than a billion dollars right it absolutely was I mean what you've had happen in Silicon Valley over the past decade is this enormous flow of money in part because the Federal Reserve kept rates at close to two nothing to offset the effects of the devastating if I crisis a decade ago and as a result you had investors who went looking for returns elsewhere and one of the places they went looking with Silicon Valley that led to these enormous flows of money into the valley ecosystem and you had startup founders like Elizabeth Holmes who were able to pick and choose who their investors were and who were able to turn away investors who asked too many questions or who asked unpleasant questions and if I remember correctly in the book she actually walked out of meetings that maybe didn't go her way right she walked out of a meeting in 2004 with a venture fund that actually had a lot of experience in medical technology and you know she was getting these probing technical questions from the partners around this conference table and got more and more defensive and after about an hour got up and left in a huff so has there been any noticeable change in how some of these private companies are valued or at least changes in the VC community and how they're approaching some of this stuff I'd like to hope so a friend of mine who works in our Silicon Valley Bureau at the journal says that every dinner he attends in the valley Theron owes comes up as a cautionary tale as an example of what can go wrong so I think that that this story has definitely left its mark I think it will leave its mark even more if federal prosecutors file criminal charges because that will be a signal that the federal that the Justice Department and the SEC to a lesser extent are no longer tolerating these shenanigans and that this huge ecosystem private ecosystem in Silicon Valley is no longer immune to you know the authorities and to law enforcement if if wrongdoing it gets committed and it's a much different situation but we're certainly seeing the tech sector under pressure when it comes to those data security concerns certainly lawmakers are paying attention to the right issue there's there's definitely a backlash right now against Silicon Valley and against tech and and Thera knows as part of that Elizabeth Holmes and her idea of democratizing the blood test was she on to something and it just that that was that the science wasn't there yet and maybe it gets there someday she was definitely on to something you know a lot of people do not like to get their blood drawn a lot of people dread having that that big syringe you know inserted into their arm and and having five tubes of blood drawn from them and and so to the extent that these capillary blood tests these finger stick tests could have made blood testing something that people were more willing to do more often which would have potentially led to more timely diagnosis I think it could have been a game-changer unfortunately you know she her technology wasn't there at all by the time she went live with her blood tests in 2013 her mini lab as she called it was AM alpha male functioning prototype that was years from working and so you know is the technology going to eventually get there possibly but no one yet has managed to crack the nut of running dozens of tests off that little blood especially blood that's from from the finger which is not the the same as venous blood venous blood is pure and there there isn't that the tissue in the cells that you get with capillary blood that interfere with tests you tried to interview homes many times to no avail I tried before my first story was published in October 2015 I had tried interviewing her for five and a half months and then on a regular basis since then I've asked for interviews and and I've been repeatedly turned down and and so I had to report and write this book without her participation what would you like to ask her if you had the opportunity I would ask her how were you able to justify how were you able to rationalize in your mind risking patient's health how is that acceptable to you was that serious of an issue that serious of a technology absolutely I mean nearly a million blood test results have been voided or corrected since my first stories came out and so you have a lot of people who received a lot of flawed blood test results and if the company had expanded nationally and its services had been available on every you know at every Walgreens on every street corner then the chances that someone really would have gotten hurt would have multiplied it's quite a story John Kerry roux we appreciate you coming by to talk about it author of bad blood out right now it's my pleasure thanks for having me you

Channel: TheStreet

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Id: 8JPOXURfqDs

Length: 16min 17sec (977 seconds)

Published: Mon May 21 2018