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Ninth Circuit Affirms Fraud Conviction of Theranos’ Founder
Opinion Dismisses Challenges to Judgment, Affirms Order Awarding Over $454 Million in Restitution to Well-Known Investors, Including Rupert Murdoch, Walgreens, Betsy DeVos-Linked Entity
By Kimber Cooley, associate editor
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ELIZABETH HOLMES felon |
The Ninth U.S. Circuit Court of Appeals yesterday upheld the criminal conviction of Elizabeth Holmes, who was found guilty on numerous fraud charges relating to grandiose promises about Theranos Inc.—the biotechnology company the defendant founded in 2003 when she was 19 years old—and affirmed an award of over $454 million in restitution to 14 defrauded investors.
After a jury found the former chief executive officer guilty of one count of conspiracy and three counts of wire fraud, Senior District Court Judge Edward J. Davila sentenced Holmes in 2023 to more than 11 years in prison for defrauding investors with false statements about Theranos’ blood-testing technology, claiming that it could run fast, accurate, and affordable tests with just a drop of blood from the prick of a finger in contrast to traditional blood draws.
In reality, Theranos’ blood-testing device failed to deliver faster and more accurate testing results than conventional methods and claims that pharmaceutical companies had validated the technology turned out to be lies. Big-name investors—including Rupert Murdoch, who sank $125 million into the company, and former Secretary of Education Betsy Devos, whose family company invested $100 million—were persuaded to back Holmes’ vision.
Trial Testimony
Former employees of the now-defunct company testified at trial that the so-called Edison device consistently failed quality control checks and averred that Holmes relied on third-party devices to conduct patient tests to make up for the deficiency. Investors testified that they were led to believe that Theranos ran its tests solely on Theranos-manufactured products.
Testimony indicated that the company would invite investors and other important “guests” to observe technological demonstrations. During the demonstrations, the guests were told that a Theranos device was running a sample of their blood when in fact no such test was being conducted or, if it was, it was being run on a third-party device.
Evidence was also presented that Holmes shared false financial projections with investors, indicating profit projections of $200 million or more, when she knew that the company was running out of money.
She challenged her conviction based on claims that Davila committed several legal errors during her trial, such as allowing former Theranos employees, who testified as lay witnesses, to offer improper expert testimony and admitting a report prepared by the Center for Medicare and Medicaid Services, which she claims was irrelevant to the charges. In an opinion, authored by Circuit Judge Jacqueline H. Nguyen and joined in by Circuit Judge Ryan D. Nelson and Senior Circuit Judge Mary M. Schroeder, the court was unpersuaded by Holmes’ contentions, finding that any errors were harmless.
The court similarly rejected Holmes’ challenge to the restitution award based on a contention that the amount should have been based on the diminution in value of the shares after the fraud came to light rather than the money invested.
Restitution Award
Following a hearing, Davila ordered Holmes to make restitution to the investors, including an award of $125 million to Murdoch and one for $100 million to RDV Corporation, an entity affiliated with the DeVos family. He found that the investors were “victims” under the Mandatory Victims Restitution Act of 1996 (“MVRA”), codified at 18 U.S.C. § 3663A.
Subdivision (b) provides that “[t]he order of restitution shall require” that the defendant, “in the case of an offense resulting in damage to or loss or destruction of property,” be ordered to return the property or, if that is impracticable or inadequate, to pay the greater of “the value of the property on the date of the damage, loss, or destruction” or “the value of the property on the date of sentencing” minus “the value…of any part of the property that is returned.”
Reasoning that the “property” that each victim “lost” was the money that each invested in exchange for ownership shares in Theranos, Daila rejected the proposition that the residual value of Theranos shares qualified as “returned” property under the act.
Holmes was held jointly and severally liable for the restitution with Theranos’ former President and Chief Operating Officer Ramesh “Sunny” Balwani, who was separately convicted of engaging in the fraudulent scheme and sentenced to 13 years in prison. They both challenge the restitution order on appeal.
The defendants cited the 2005 U.S. Supreme Court decision in Dura Pharmaceuticals, Inc. v. Broudo as supporting their challenge to the restitution order. In the Dura Pharmaceuticals case, the court rejected the proposition that a plaintiff could establish a claim of fraud by showing payment of an inflated price for a security in reliance on the market, reasoning that merely purchasing securities at a fraudulently inflated price does not establish economic loss because “at the moment the transaction takes place…the inflated purchase payment is offset by ownership of a share that …possesses equivalent value.”
Nguyen wrote: “We do not read Dura Pharmaceuticals to support the proposition that the victims here suffered no loss under the MVRA. Defendants’ reliance on Dura Pharmaceuticals conflates the concept of economic loss with property loss, and the MVRA speaks in terms of the latter….Under the plain text of the MVRA, the victims need not necessarily have suffered an economic loss in order to have suffered a loss of property.”
Pointing to the 2014 U.S. Supreme Court case of Robers v. United States, a case involving fraudulent loan applications to banks, she explained that “[t]he Court determined that ‘the property the banks lost’ under the MVRA was ‘the money they lent to’ the defendant, not the economic loss the banks suffered when they ultimately sold the houses at foreclosure sales for less than the banks were owed.” Turning to the defendants’ argument that they are entitled to credit for the residual value of a victim’s investment under the MVRA, she remarked that this contention has “more merit,” commenting:
“The district court reasoned that because the lost ‘property’ was the money invested, no money was returned, and the residual value of the investment would not justify a reduction in the restitution award. But Robers clearly stated that the MVRA ‘provides room for credits against an offender’s restitution obligation to prevent double recovery to the victim.’ ”
Nguyen continued:
“[A]lthough the district court properly identified the money invested as the lost property, it should have also considered possible credits against Defendants’ restitution obligation—given that the victims still owned their Theranos shares—by accounting for the residual value of the shares after the fraud came to light….
“But we find that any error by the district court was harmless because the….court found that the victims were ‘[un]able to liquidate their shares’ after the fraud came to light….In other words, for restitution purposes, the victims were never able to recover any amount of residual value that the stock may have retained.”
She declared that “[w]e therefore affirm the district court’s restitution order in its entirety.”
Balwani’s convictions were also upheld in full yesterday.
The case is U.S. v. Holmes, 22-10312.
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