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Theranos. Will we learn from Elizabeth Holmes’s downfall?

Theranos. Will we learn from Elizabeth Holmes’s downfall?

Mary Breslin, CIA, CFE, Founder of Verracy

February 2, 2022


Humans are both amazing and flawed. We are capable of accomplishing incredible things sometimes based solely on optimism, hope, belief, faith, and imagination.  This has led to amazing achievements like flight, space travel, the internet, GPS (I’m personally extremely grateful for that one!) and countless others.  But do those same qualities allow terrible events that should have been prevented to occur?

Let’s talk about Theranos. Last month Elizabeth Holmes was found guilty of 4 counts of fraud.  Her sentencing is delayed until September to allow time for the trial of Ramesh “Sunny” Balwani, her professional and personal partner.

The counts of wire fraud for which Elizabeth was found guilty involved the investors PFM Healthcare Master Fund, Lakeshore Capital Management LP, and the Mosley Family Holdings LLC (combined for $144M of investments). While those three were used for proof of the fraud in the trial, there were several other investors that included incredibly wealthy, intelligent and successful individuals, families and corporations. Media Mogul Rupert Murdoch; Oracle founder, Larry Ellison; Venture Capitalist Tim Draper; the Devos Family including Betsy DeVos, former Secretary of Education; the Walton family of Walmart; the Cox Family of Cox Enterprises; Billionaire Carlos Slim Helú; and corporate investors Safeway and Walgreens.


Will investors learn from the Theranos collapse?

There have been many articles and opinion pieces, on whether “unicorn” founders and their investors have learned anything from this.

Opinions vary wildly, such as these two examples:

The Guardian – Holmes verdict an indictment of Silicon Valley’s ‘fake it till you make it’ ethos

Analysis: Experts say guilty verdict will probably land Theranos founder in prison and resonate throughout industry.

And in the other direction –

Protocol – Guilty or not, the Elizabeth Holmes verdict won’t change Silicon Valley

A guilty verdict won’t chasten investors, and a not-guilty verdict won’t leave founders feeling free to lie. The tech industry has already learned whatever lessons it’s willing to take.

For what’s it’s worth, I’m adding my opinion to the mix. Do I think the Theranos verdict will have a lasting impact?


Nothing lasting was learned, behavior will not change. Investors, the group that should have learned the most from the Theranos Scandal are likely to consider Theranos an isolated instance, something they won’t fall prey to again. They think they will see the signs, ask better questions, not be so gullible. In general, intelligent people often believe themselves to be more capable of spotting issues than others. They see themselves as more savvy than others, whether or not they actual are. In reality, personal involvement frequently makes individuals much more subject to cognitive biases that prevent them from seeing the situation clearly, regardless of intellect. Simply put, when personally involved people do not ask the right questions because they WANT to believe.

A couple years ago I gave a talk at the Global ACFE Conference on “Questioning Success” and how how we don’t question success often enough.  Especially in the US culture. My primary audience is internal auditors and I frequently ask if they have ever been asked to audit or evaluate an area of the business that is struggling to meet expectations. Most say yes. When I ask how many have ever been asked to audit or evaluate an area of the business because it always meets expectations. There are always a few people, but most say no. In fact, most are surprised by the question. I then use all the major frauds and scandals where an organization or individual has unprecedent success to illustrate why we should be questioning success. Yet most risk assessments in most organization gloss right over the areas of the business that are performing well. It is one of the reasons scandals like Enron, WorldCom, Bernie Madoff, Theranos occurred.


Will regulations result in changes for these private investments?

So, can anything be done?


Last week the SEC released a statement stating that they want to impose regulations around private organizations – especially unicorns – the billion-dollar Silicon Valley startups that rely on major investors.  How can the SEC impose restrictions on private companies? I have an idea.

What if we held the board accountable? Part of what made Theranos such a desirable investment to potential investors was its board, chaired by former United States Secretary of State Charles Shultz. Over its lifespan, Theranos’s board had an incredibly impressive rooster, including Henry Kissinger, former US Secretary of State; Jim Mattis, retired Marine Corps four-star general and formerUS Secretary of Defense; Richard Kovacevich former CEO of Wells Fargo; William Perry, former US Secretary of Defense; and William Foege former director of the Centers for Disease Control and Prevention. Wow! These are not individuals anyone would ever believe would fall prey to fraud or be involved in a fraud. Yet they were.

Would their involvement with Theranos and Elizabeth Holmes have been different if they knew they could personally be held accountable if Theranos or Elizabeth mislead investors or lenders?

Last month (1/10/22) the SEC announced a plan to push for more transparency around financials and operations for private companies with focus on the Unicorns. It is in its infancy, but it does pose an interesting question – can privately funded organizations be held to a standard that protects those investors, and should they be?

It isn’t entirely unprecedented. Board members can be held personally accountable in non-profit organizations for breach of fiduciary duties based on state law. In Australia, the recently passed (2020) Combating Illegal Phoenixing Act aims to make directors personally liable for the organization’s obligations. Could this new law and the SEC announcement, open the door to greater accountability for board members of all organizations, not just publicly traded ones?

If Mr. Shultz (and the others) knew they could be held accountable financially and criminally, would Mr. Shultz have listened to his grandson Tyler Schultz? Would he still have worked with Theranos lawyers and Elizabeth to muzzle Tyler? Would the other board members have asked more questions? Would they have demanded real tours of the operation and asked for audited financials?

Theranos story is ending. The company shuttered its doors in 2018, Elizabeth’s trial is over, and Sunny’s will occur this year bringing the Theranos saga to a close.  But unless there is change in accountability for start-ups that are heavily backed by investors , I doubt this is the last “Theranos” we will see. Could  “fake it till you make it” be replaced with realism and accountability? Supported by heavy doses of optimism, hope, belief, faith, and imagination? Resulting in safer investments that still have the power to change the world we live in? By forcing board members to serve as true governance, maybe.




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