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Elizabeth Holmes' Theranos fraud trial begins: Defense claims all she did was fail – and that's not a crime

Her attorney argues she made mistakes ... like trusting her former partner and COO Sunny Balwani

Attorneys representing Theranos founder Elizabeth Holmes and the US Justice Department presented their opening arguments on Wednesday in a federal court in San Jose, outlining how they intend either to clear or convict Holmes of conspiracy and fraud charges.

Holmes, 37, alongside her former partner and COO Ramesh "Sunny" Balwani, 56, have been indicted on two counts of conspiracy to commit wire fraud and nine counts of wire fraud for their role in the 2018 collapse of blood testing startup Theranos.

The feds allege that Holmes and Balwani – the latter scheduled to be tried separately early next year – defrauded doctors, patients, and investors by making false statements about the capabilities of Theranos' rapid blood testing technology and by withholding information about the technology's shortcomings.

The company was founded in 2003 and raised more than $700m from investors. By 2014, it was valued at $9bn, which made Holmes, as owner of half the company's shares, a brief multi-billionaire. The following year, then Wall Street Journal reporter John Carreyrou published a report critical of the company's finances and technology.

Things then went downhill. In 2018, the SEC filed and settled civil charges against Holmes and Balwani and the Justice Department filed the criminal charges that the current trial aims to resolve. By September 2018, Theranos had shut down.

Prosecutor Robert Leach, Assistant US District Attorney, presented the government's opening salvo. As recounted by Law360 senior reporter Dorothy Atkins, Leach said that by 2009, Theranos was running out of money to pay its employees and Holmes decided to lie to Safeway and Walgreens to get them to buy into her company's blood testing tech prior to FDA approval.

The government's claims are laid out in more detail in its indictment [PDF], which says that Theranos told its investors it was using its own technology to test blood when it was actually using costly devices made by third-parties, like the Siemens Advia 1800 Clinical Chemistry System.

Lance Wade, one of Holmes's attorneys from Williams & Connolly, presented the defense opening statement. "Elizabeth Holmes did not go to work every day to lie, cheat and steal," he said, according to Atkins. "The government would have you believe that her company – that her entire life – is a fraud. That is wrong. That is not true."

"Elizabeth Holmes worked herself to the bone for 15 years trying to make lab testing cheaper and more accessible. She poured her heart and soul into that effort. In the end, Theranos failed and Ms Holmes walked away with nothing, but failure is not a crime."

Court filings made public just before the trial began indicated Holmes's defense team intends to claim that Balwani abused her and influenced her mental state. Wade's remarks reflected that strategy.

"You'll hear certain aspects of that relationship had an impact on Ms. Holmes," Wade said, adding that "trusting and relying on Balwani as her primary advisor was one of her mistakes."

In other words, Holmes's defense involves throwing Balwani under the bus.

Wade also tried to cast doubt upon the doctors and patients scheduled to testify about bad Theranos test results, noting that these represent 0.00025 per cent of the eight million test results performed by the company and inviting jurors to consider how that compares to typical lab error rates.

But as Atkins points out, the jury doesn't have access to the full range of Theranos data that might illuminate test failure rates because, "Theranos' counsel at WilmerHale lost the key to unlock the database that held all Theranos test results."

With the completion of the opening statements, the government called its first witness, Denise Yam, who served for 11 years as Theranos' corporate controller. She testified about how Theranos was low on funds in 2009 and how the company's accounting firm KPMG didn't audit the company from 2009 to 2015, noting that small, private companies usually want yearly audits to bolster their credibility.

Shortly thereafter, Judge Edward Davila adjourned the court. The trial is expected to take 13 weeks. If convicted, Holmes faces up to 20 years in prison and a fine of $250,000 per fraud count. ®

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