Last month, a federal grand jury in California indicted two top executives of Theranos – Elizabeth A. Holmes and Ramesh Sunny  Balwani.

The indictment alleges Holmes and Balwani engaged in a multi-million dollar scheme to defraud investors, doctors and patients.

Holmes, 34, founded Theranos in 2003.  Theranos is a private health care and life sciences company with the stated mission to revolutionize medical laboratory testing through allegedly innovative methods for drawing blood, testing blood, and interpreting the resulting patient data.

Balwani, 53, was employed at Theranos from September of 2009 through 2016.

Balwani worked in several capacities including as a member of the company’s board of directors, as its president, and as its chief operating officer.

Federal officials alleged that Holmes and Balwani used advertisements and solicitations to encourage and induce doctors and patients to use Theranos’ blood testing laboratory services, even though the defendants knew Theranos was not capable of consistently producing accurate and reliable results for certain blood tests. The tests performed on Theranos machines were likely to contain inaccurate and unreliable results.

The whole sordid story of Holmes, Balwani and Theranos is laid out not just in the indictment, but in a new book by Wall Street Journal reporter John Carreyrou titled Bad Blood: Secrets and Lies in a Silicon Valley Startup (Knopf, 2018).

Holmes was a 19-year old Stanford dropout when she created Theranos based on her vision to create a machine that would transform blood testing and lead to the earlier detection of diseases.

Holmes had an aversion to needles. Her vision was to create a portable mini lab that could capture accurate results from a drop or two of blood pricked from a finger.

One problem – the device Theranos created did not work. Yet this was an admission Holmes was not willing to make.

“As I was working on this book,” Carreyrou said, “I kept thinking of the lives Theranos put at risk, and the cavalier attitude of the principals running the company, Holmes and Sunny Balwani. They lied to employees, board members, investors and, most importantly, to patients. Failure was not an option for them. This is a dark chapter in the history of Silicon Valley.”

How did you come across this story?

“Elizabeth Holmes had rocketed to fame in early 2014,” Carreyrou told Corporate Crime Reporter in an interview last week. “She actually came onto my radar at the end of that year in the New Yorker magazine. There were a couple of things that struck me as odd in that story — the main one being that a college dropout who had taken just two or three semesters of chemical engineering could just drop out and pioneer groundbreaking medical science. I know that happens in the realm of computers and software. It happened with Bill Gates and Mark Zuckerberg.”

“But from my extensive experience reporting on medicine over the previous ten years – that’s not the way usually breakthroughs in medicine happen. I was suspicious of that. I probably would not have done anything with that hunch if I had not gotten a tip three or four weeks later from a pathologist in the Midwest. He moonlighted as the writer of an obscure blog called The Pathology Blawg. He had read the New Yorker story as well. He was immediately skeptical of Theranos’ claim that it could do summary blood tests off tiny finger stick samples. He wrote a skeptical blog item.”

“He was immediately contacted by this little band of Theranos skeptics, one of whom was Richard Fuisz. He had been involved in patent litigation with Theranos. And he had become convinced that Theranos was a scam during this patent litigation that he eventually lost. Fuisz had just made contact with the laboratory director of Theranos, who had just left the company.”

“The laboratory director told Fuisz that things were not as they seemed at Theranos. The pathology blogger heard about this. He was intrigued, but he didn’t know how to do the story himself. So he passed the tip onto me. And he and I knew each other. We had made contact the previous year. And he had patiently explained to me some of the complexities of laboratory billing for the Medicare fraud story. I was one of several investigative reporters that he knew.”

“When I heard about this, I thought – well, this kind of confirms my initial hunch when I read the New Yorker story. Also, this prospect of there being a primary source who had real information immediately made me stand to attention. I decided to pull on that string, eventually made contact with the ex laboratory director. And he eventually became my first source. And that was the beginning of the investigation.”

You report that Alan Beam was your key source.

“And that’s a pseudonym. I’m still protecting his real identity. For a long time, he was worried that the company would come after him. He’s no longer worried about that obviously. But he doesn’t want his real name associated forever with the taint of this Theranos scandal.”

You would think that the whistleblowers in your book must be cooperating with federal investigators.

“By now, some of them have been interviewed multiple times by federal prosecutors. But not at the time.”

The indictment against Holmes came down last week. Have you been in contact with federal investigators?

“No, no they never reached out to me – neither the SEC, nor the U.S. Attorney’s office in San Francisco, nor the FBI. Not a single contact.”

But you have to believe that this book is a road map to their allegations.

“I think it is. But the first SEC subpoena was issued within days of my first story in the Journal in October 2015. The first Department of Justice subpoena was in December of 2015.”

When did your first story run in the Journal?

“It ran online about 10:30 pm October 14, 2015. It was in the print newspaper October 15, 2015. Federal prosecutors and investigators had corroborated and found on their own much of the evidence I have in the book by the time the book was published. They wouldn’t have been able to build a case in less than a month.”

“The SEC charges came out before the book was published. The U.S. Attorney’s charges came out Friday June 15, 2018 — less than a month after my book was published. It was published on May 21, 2018. There is no way federal prosecutors could have built a case following my book as a roadmap in just three weeks. When my book was published they were already on the cusp of filing charges. It just so happens that they didn’t file in time to beat the book. But their two and a half year investigation came upon the same evidence independently that I had come upon in reporting this story for the paper and then for the book.”

Do we know when Alan Beam spoke with federal prosecutors?

“I don’t want to get into that. This is a sourcing relationship. And in some ways it is still a confidential source. I don’t want to reveal what I know about that.”

You place this corporate criminality in the context of Silicon Valley – where the motto is – fake it until you make it. How is this case different from other startups in the Valley?

“Elizabeth Holmes clearly channeled the Silicon Valley fake it until you make it playbook. Her hero, her idol was Steve Jobs. An early investor was Larry Ellison. Both Steve Jobs and Larry Ellison famously overpromised at times and engaged in this practice called vaporware. You would announce something with great fanfare and then deliver it late, without the promised features or not at all.”

“Larry Ellison in the early days of Oracle was famous for announcing that its software had various features in its database software when it didn’t. He was also famous for also shipping early database software that was crawling with bugs. He was essentially using early customers to help him debug the software.”

“Elizabeth Holmes channeled that ethos, that culture. But in this case, the problem was not just software. It was a medical product — a blood testing machine that patients and doctors relied on once they went live with the drug tests in Walgreens stores to make important health decisions. You can’t really do fake it until you make it and vaporware when you work in the realm of medicine and health care. The stakes are immediately higher. That’s the biggest way in which this is different. And the biggest way in which faking it until you make it becomes reprehensible and more egregious.”

“That said, it was also a financial fraud. She raised more than $700 million once she had gone live with her vaunted finger stick test. And she essentially used the commercialization of the technology through the partnership with Walgreens to say to investors – look, obviously we have a product. Our technology is real. It’s already live. Patients are using it. It is commercialized. And that convinced the last round of investors, including the billionaire families, to put in more than $700 million. And it was based on lies, on deceitful representations.”

You open the book in 2006, 12 years ago, with the chief financial officer – Henry Mosley –

“I’m going to stop you again. That’s not his real name. I agreed to give him a pseudonym. He wanted to guard his privacy in light of the porn issue.”

The porn issue?

“After Holmes fired him, she accused him of using an office computer to view internet porn. She used that to deny him stock options.”

“He was eight months on the job as chief financial officer. And he learned that the demonstrations they were doing for investors were not completely real. The blood test results that investors were shown at the end of the demonstration were pre-recorded and didn’t reflect the demo in real time. And he felt that was misleading. He had certainly been under the impression that the demos were real and live in real time. And that was certainly the impression that the investors were given.”

“He goes and confronts Elizabeth in her office and tells her that they can’t keep doing this because it crosses a bright red line. And essentially it is committing fraud. She turns ice cold, stares at him and says – you are not a team player. I think you need to leave right now. And it is very clear from her tone and her demeanor that she doesn’t just mean leave her office. She means leave the company. He had just been fired.”

“When the head of IT a few days later has retrieved the guy’s laptop and goes through it and notices that the CFO at one point browsed porn from the work laptop, he hesitates telling Elizabeth about it, but ends up telling her. She then uses that to retroactively deny the guy his stock options and tells the board that the reason he was fired was that he had porn on his work computer and that was the reason he was fired. And it fact it wasn’t. He was fired because he confronted her about the bogus demos.”

How old is the company at that point?

“The company is barely three years old at that point. Holmes is 22 years old at that point. It’s incredibly ruthless behavior for someone that young, whether you are a woman or a man. And the company never had another chief financial officer again after that guy was fired.”

“At its height, the company was worth $10 billion. And she ran the company like North Korea. She didn’t give investors and prospective investors financial information or information about the technology and how it worked.”

Both Holmes and Balwani were criminally charged for this fraud. Top corporate executives are rarely charged in corporate crime cases.

“It’s true that prosecutors don’t have a record of indicting executives at big companies. It is rare. I can’t think of a single CEO or top executive who was indicted for what happened during the financial crisis. But the reason for that is that they often can’t come up with black and white evidence that these CEOs maliciously committed fraud. The difference here is that they have come up with that evidence. That evidence is there. It was there both in the records they subpoenaed not just from Therarnos, but from Walgreens and the investors and all of the interviews they conducted, both from former employees and investors. They were able to build a strong case. And that is the difference here. Fraud was committed. And it was provable in court. Whereas proving that Richard Fuld committed fraud at Lehman Brothers was much more difficult and ultimately prosecutors were not able to do it.”

What was your reaction when you heard about the indictment when it came down last week?

“It was tremendously vindicating. I wasn’t surprised. I had tracked the progress of the federal criminal investigation. I knew it was advanced. And I knew indictments were imminent. I was not surprised. But I felt vindicated. And more than that, justice is on its way to being served. This fraud and the actions of Elizabeth Holmes and Sunny Balwani were egregious enough that I felt the SEC charges and the way they were settled were not commensurate with the magnitude of the crime. It would have been a travesty of justice if federal prosecutors hadn’t brought criminal charges. Now that they have we’ll see whether she gets convicted or whether she tries to negotiate a plea deal. I don’t have a crystal ball. But certainly, justice is now on its way to being served. This is a fraud that was egregious enough. It was not just a financial fraud. But it was a fraud that put patients in harm’s way. And it was egregious enough that it had to be criminally prosecuted.”

What about the movie? Is there a deal in the works?

“The deal is two years old. I optioned the film rights to the book in 2016. That was based on the book proposal. I hadn’t written a word of the book yet.  I had written a 10,000 word book proposal that I had used to get my book deal. Barely three months after the book deal, I optioned the movie rights.”

“Adam MacKaye’s production company will produce. Adam MacKaye is going to direct. Jennifer Lawrence is attached to play Elizabeth Holmes. She is also attached as co-producer of the movie. Legendary Entertainment is the studio. Vanessa Taylor was hired three months ago to write the screenplay. She was the co-writer of the Shape of Water screenplay.”

[For the complete q/a format Interview with John Carreyrou, see 32 Corporate Crime Reporter 26(11), June 25, 2018, print edition only.]