Theranos trial spotlights missed red flag

Some investors admit overlooking them, ignoring details on blood-testing firm

SAN JOSE, Calif. — In 2014, Dan Mosley, a lawyer and power broker among wealthy families, asked entrepreneur Elizabeth Holmes for audited financial statements of Theranos, her blood testing startup. Theranos never produced any, but Mosley invested $6 million in the company anyway — and wrote Holmes a gushing thank-you email for the opportunity.

Bryan Tolbert, an investor at Hall Group, said his firm invested $5 million in Theranos in 2013, even though it did not have a detailed grasp of the startup’s technologies or its work with pharmaceutical companies and the military.

And Lisa Peterson, who handles investments for Michigan’s wealthy DeVos family, said she did not visit any of Theranos’ testing centers in Walgreens stores, call any Walgreens executives or hire any outside experts in science, regulations or legal matters to verify the startup’s claims. In 2014, the DeVos family invested $100 million in the company.

The details of bad investments like Theranos are rarely displayed so prominently to the public. But they have been laid bare in recent weeks at the trial of Holmes, 37, who faces a dozen counts of wire fraud and conspiracy to commit wire fraud. She has pleaded innocent. She and Theranos fell from grace — with investor money evaporating and the company shutting down in 2018 — after claims about its blood-testing technology were shown to be false.

Now in its ninth week, Holmes’ trial has offered an especially clear picture of the many ways sophisticated investors can be swept up in the hype of a hot startup, ignoring red flags that look obvious in hindsight.

With so many new investors flocking to startups, due diligence is sometimes so minimal that it is used as a punchline, investors said. An overheated market “definitely creates an environment for people to make more inflated claims” and may even tempt them to lie, said Shirish Nadkarni, a longtime entrepreneur, investor and author.

During its lifetime, Theranos exemplified that dynamic. The company raised $945 million from famous venture capitalists including Tim Draper, Donald Lucas and Dixon Doll; wealthy heirs to the founders of Amway, Walmart and Cox Communications; and powerful tech and media moguls such as Larry Ellison and Rupert Murdoch.

And as investors have testified at Holmes’ trial, a central tension has emerged around due diligence. Could these investors have avoided disaster if they had simply done better research on Theranos? Or were they doomed because their research was based on lies?

Prosecutors have presented a growing list of examples supporting the latter argument. For example, Theranos added pharmaceutical company logos to validation reports indicating the pharmaceutical firms had endorsed its technology when they hadn’t, according to evidence and testimony. Theranos also claimed in late 2014 that it would bring in $140 million in revenue that year when it had none, according to evidence and testimony. The startup also faked demos of its blood-testing machines to investors, witnesses have testified.

In response, Holmes’ lawyers have needled Theranos’ investors for their oversights, aiming to convince the jury that the investors were the ones at fault for not digging into Holmes’ claims.

Still, testimony from pharmaceutical company executives who interacted with Theranos showed it was possible to see through at least some of Holmes’ grandiose claims.

Constance Cullen, a former director at Schering Plough, said this week that she was responsible for evaluating Theranos’ technology in 2009. She said she came away “dissatisfied” with Holmes’ answers to her technical questions, calling them “cagey” and indirect.

Shane Weber, a director at Pfizer, looked into Theranos in 2008 and concluded that the company’s responses to his technical questions were “oblique, deflective or evasive,” according to a memo used as evidence. He recommended Pfizer cease working with Theranos.

But investors were less probing. Holmes’ persona as a visionary, bolstered by magazine cover stories and personal eccentricities, created a sense that backing Theranos was an exclusive and elite opportunity.