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Board and Fraud is a blog that aims to bring a practical approach to issues facing the board of directors and the audit committee specifically in the area of governance, risk management, compliance, and internal audit, with a strong focus on fraud, ethics, and internal controls.

Theranos: Too Good to Be True!

groundbreaking science

Overview – Fraud vs. Groundbreaking Science

Elizabeth Holmes (“Holmes”) founded Theranos in 2003 at 19 years old and dropped out of Stanford University to run the company. She marketed a medical laboratory on a chip by promoting a product that could run hundreds of quick and inexpensive tests with one drop of blood.  The results of the tests could be delivered to a patient’s phone in just a few hours.  Holmes owned approximately 50% of the company with the remainder being owned by private investors. Holmes hired Ramesh Balwani (“Balwani”) as the President of Theranos to help her grow the company and the company grew quickly and attracted a few well-known investors and board members. She recruited Henry Kissinger and George Schultz, former U.S. Secretary of State to serve on the Board and investors included Oracle founder Larry Ellison, one of her former professors at Stanford, venture capital firm Draper Fisher Jurvetson, now Secretary of Education Betsy DeVos and media mogul Rupert Murdoch.

In 2013 Walgreens partnered with Theranos in 2013 without ever allegedly testing the technology. At the time, Theranos wellness centers were currently in 40 Walgreens stores in Arizona, as part of a deal to put the company’s blood-testing equipment in thousands of drugstores around the country. Yet the deal went forward without Walgreens ever checking whether Theranos’ test results were accurate. Walgreens executives allegedly feared Theranos would sue for breach of contract if it pulled out of the deal and they were in search of way to grow its business and didn’t want Theranos moving ahead with another drugstore chain.  Walgreens is now a case study of what can happen when an established company that craves growth decides to gamble on an exciting and unproven concern.

By 2014, Theranos was valued at $9 billion dollars and Holmes was attracting media attention, receiving glowing reviews in magazines, and presenting as a keynote speaker at various conference and seminars.

In 2015, John Carreyrou, Journalist with the Wall Street Journal, began investigating the company and uncovered a number of red flags and suspicious claims made by Holmes and Balwani.  It was discovered that Theranos used technology from other companies to runs some of their testing.  He further disclosed that some of the test results were not as accurate as the company claimed.  It was also discovered that Holmes and Balwani were involved in a romantic relationship before she fired him in 2016.

These discoveries led to additional investigations by multiple agencies and charges were eventually filed by the Securities and Exchange Commission (SEC) and the United States Attorney’s Office in San Francisco related to the following schemes to defraud investors:

  • Holmes and Balwani made materially false and misleading statements to investors and failed to disclose materials facts regarding, among other things:
    • Theranos’ proprietary analyzer was presently capable of accomplishing certain but not all tasks as advertised
    • Theranos was presently a financial strong and stable company, breaking even and generating $100 million in revenue in 2014 and generating over $1 billion in revenues in 2015
  • Deceived investors through misleading technology demonstrations
  • Misrepresenting its relationship with Walgreens and with the US Department of Defense
  • Alleging it did not need FDA approval, but were applying voluntarily
  • Misrepresenting the examination and validation process and results of its technology by pharma companies and research institutions

The indictment sets forth claims from 5 investors with electronic funds transfers from $100,000 to $100,000,000.

Holmes settled with the SEC and is awaiting trial for the other charges.

More Proof The Fraud Pentagon is the New Standard

Think about ELizabeth Holmes, her competence or power to perform and arrogance or lack of conscience were there for all to see.  Some, or should I say most, missed it!

White collar criminals, like Holmes, cloak themselves in a fake wall of integrity to divert, distract, and deceive you into believing what they are putting forth.  The cloak is similar to kryptonite and blocks one’s ability to apply the right level of skepticism.

Competence expands on the element of opportunity to include an individual’s ability to override internal controls and to socially control the situation to his or her advantage, by selling it to others, coercing them, creating fear, or bullying them into doing something improper.

Arrogance or lack of conscience is an attitude of superiority and entitlement or greed on the part of a person who believes that corporate policies and procedures simply do not personally apply.

Unchecked, the five elements – pressure, opportunity, rationalization, competence, and arrogance – can provoke an individual to commit fraud just like Holmes.

Adept individuals, like Holmes, with widespread access to corporate information, a mindset of entitlement, and the confidence to pull it off compound the risk of fraud. Moreover, placing these individuals in a culturally lax environment with poor tone from the top and weak or poorly designed internal controls is a recipe for disaster. A company with such conditions could become the lead scandal in tomorrow’s news just like Theranos, Enron, WorldCom, Adelphia, HealthSouth, and others (name your favorite).

Each of these five drivers of fraud is present to some extent in companies at all times, but never more so than in the current pressure-filled corporate environment.  What’s wrong with telling the stakeholders we are just not ready or we missed the mark?  I guess they might think we are human?

Humorous mobile cloud computing conceptual image.

Blind Spots

Hindsight is always twenty-twenty and a laundry lists of blind spots are present if we look back at the indicators of fraud and deception at Theranos:

  1. Holmes and Balwani were supposedly very demanding leaders who allegedly retaliated against employees for raising concerns about the legitimacy of the testing or asking too many questions about the process.
  2. Anyone on the Walgreens due diligence team that asked questions or probed was allegedly removed.
  3. There was allegedly a lack of transparency and culture of fear within Theranos and employees were fearful of reporting concerns or questioning leadership.
  4. Employees were allegedly often bound by non-disclosure agreements and the company used legal intimidation as a means to quiet those who expressed concerns.
  5. Theranos operated under a cloak of secrecy for many years. The labs, devices and other equipment inside of the company headquarters were allegedly well secured not accessible to many employees.
  6. Reports of failed testing were reported to supervisors but the results were supposedly falsified or data points removed to reflect better results than actually achieved.
  7. There were allegedly reports of blood tests being administered on devices other than Theranos devices.
  8. The capabilities of the blood tests marketed by Theranos seemed impossible based on scientific evidence and were grossly misrepresented by Holmes.
  9. The Theranos board was very inexperienced and primarily composed of military personnel and former diplomats.

Avoiding Victimization

What can stakeholders do to avoid being victimized by future schemes like those perpetrated by Holmes and Balwani.  The following recommendations will help to avoid becoming a victim of these schemes:

  • Conduct the required level of due diligence on the product, company, and board.
  • Consult the professionals. Many medical experts and doctors advised that the capabilities marketed by Theranos were unreasonable and not scientifically possible.  It was simply too good to be true!
  • Assess the culture. A culture driven by fear and lack of transparency are red flags for unethical behavior and problems.
  • If it walks like a duck….Holmes was very convincing and persuasive but failed to fully disclose facts about the product, test results and process. She quickly scolded those who questioned her. Certainly not the sign of a good leader.
  • Don’t be fooled by a high-powered board who lacks experience and strategic management expertise.
  • Stay abreast of company developments and announcements: Walgreens, Theranos’ largest customer, severed ties with the company.


Federal prosecutors indicted Holmes and the company’s former president and COO, Balwani last summer, charging the pair with two counts of conspiracy to commit wire fraud and nine counts of wire fraud. The pair face twenty (20) years in prison and hundreds of thousands of dollars in fines if convicted.

The trial is likely to begin in August 2020, with jury selection beginning in late July 2020.

Stay tuned as we follow this case.

I welcome your thoughts and comments!


Jonathan Pic
Jonathan T. Marks, CPA, CFE



Paul Zikmund



The case is U.S. v. Holmes, 18-cr-00258, U.S. District Court, Northern District of California (San Jose)

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