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No matter what the jury’s decision in Elizabeth Holmes’ federal criminal trial this year, the fall of Theranos has become a massively expensive proposition for the Stanford University dropout.
With nine lawyers representing her on two fronts, her legal bills are mounting. In addition to a possible 20-year prison sentence, she’s facing up to $2.75 million in fines and possible restitution to investors the government says lost $700 million. And the federal government has said that if she’s found guilty, it will go after any ill-gotten money or assets she may have.
Since her indictment on 11 criminal fraud counts in June 2018, Holmes — who has pleaded not guilty — has been fighting in federal court in San Jose to go before a jury with as strong a case as possible and walk out of court into freedom instead of a prison cell.
With her trial scheduled to start in August, Holmes now has seven lawyers representing her, several currently battling federal prosecutors over access to federal agency records. In an Arizona civil case against Holmes and her defunct Palo Alto blood-testing startup, she is represented by two lawyers. Three others quit last fall after they said she hadn’t paid them for more than a year and probably never would.
“One of the biggest things you’re looking at are legal fees here,” said Peter Johnson, a law school lecturer at UCLA.
Theranos had been paying the millions-a-month legal bills of Holmes and former company president Sunny Balwani, Vanity Fair reported, citing two former company executives. But the company has since bled out.
A few months after Holmes and Balwani were charged with fraud, the company dissolved, handing all assets and intellectual property over to an investment firm and saying its remaining $5 million in cash would go to unsecured creditors. But lawyers may have received money upfront to represent Holmes before Theranos went belly up, said David Ball, a Santa Clara University law professor.
Holmes, a Stanford University dropout who founded Theranos in 2003, claimed her startup’s machines could conduct a wide range of medical tests on just a few drops of blood from a finger prick. Federal prosecutors allege she and Balwani schemed to defraud investors, doctors and “many hundreds” of patients by making false claims about what their blood-analysis machines could do. “The tests performed on Theranos technology were likely to contain inaccurate and unreliable results,” the Department of Justice said in announcing the charges.
“There’s the sense that this is a fraud that put people in physical danger because Theranos was pretending to have a technology that it didn’t really have,” said Stanford Law School professor David Sklansky. “That distinguishes it from most fraud cases where we’re talking about people losing money. It could affect if there’s a fine. It could affect the size of a fine. It certainly could affect the length of any prison sentence.”
Holmes and her lawyers declined to speak with this news organization.
Further costs will come Holmes’ way if she’s found guilty, Ball said. “There are huge losses that are alleged here so I think there’s going to be a big restitution amount,” he said.
In the federal criminal indictment, prosecutors are seeking a forfeiture order that — if Holmes is convicted — would allow the government to seize any money or other assets acquired through illegal activity.
But what money and assets Holmes may have is unclear. Forbes in 2015 put her net worth at $4.5 billion, based on an estimated $9 billion valuation for Theranos and her ownership of half the company’s stock. But the SEC has said Holmes never sold any stock, and that between 2013 and 2015 she received a salary of $200,000 to $390,000 per year. In a March 2018 settlement with the SEC, Holmes agreed to pay a $500,000 fine within a year.
Reports suggest that although Holmes spent company funds on business travel in private jets, threw millions into designing, renovating and renting Theranos’ Palo Alto headquarters, and lived in a leased Los Altos Hills mansion paid for by the company, she led an austere personal life dedicated to her startup.
Federal investigators almost certainly have already been searching for any money and assets Holmes may have, Stanford’s Sklansky said.
The government may have convened a secret grand jury to subpoena witnesses and documents related to Holmes’ and Theranos’ bank accounts and electronic communications concerning financial transactions, said Johnson of UCLA. Accounts and assets could have been seized even before Holmes was charged in case the court orders forfeiture, Johnson added.
Investigators typically look for money and assets squirreled away overseas, turned into easy-to-hide valuables such as jewelry, or diverted into investment accounts in others’ names, said Elizabeth Monty, a forensic accounting specialist and co-owner of an Arizona fraud investigation firm.
For investigators, bank and investment accounts typically represent low-hanging fruit, she said. “What we would do initially is start from whatever bank accounts the company has and then we would look for transfers out of those accounts,” Monty said. Authorities would also check the passport of an investigation subject to see if they had visited foreign countries, particularly those with secretive banking practices, she said.
Any future moves Holmes might make to resurrect her career and finances may be limited by the SEC settlement, which bans her from serving as an officer or director of a public company for 10 years. But ultimately, if she is convicted, the goal of the justice system is not to leave those found guilty of crimes in ruins, Sklansky said.
“There have been famously wealthy people who have been convicted of crimes and who have managed to serve their sentence, pay their fines and still move forward with a fair amount of wealth,” Sklansky said. “It’s hard to generalize about how ruinous a legal case winds up being for a particular defendant. There’s no rule in the legal system that if you start off rich you should be able to be rich when you leave your case.”
Holmes’s education, connections and work experience would likely help her get back on her feet if she is convicted, Sklansky said. “Anybody who enters the criminal process from a position of advantage has all kinds of advantages that most criminal defendants don’t have in terms of recovering from the process and any punishment that they suffer,” Sklansky said.
Still, said Johnson, the publicity surrounding Holmes’ rise and fall could hamper any efforts to make money again.
Reputation-management expert Ronn Torossian, CEO of public relations firm 5WPR, believes that no matter what the jury decides in federal court in San Jose, the court of public opinion has already made up its mind about Holmes. “I can’t believe Elizabeth Holmes will get another shot with investors,” he said. “I can’t believe Elizabeth Holmes will be given another shot to run a company with anyone else involved in it.”
Her one hope, Torossian said, might be to invent something significant. “Maybe, maybe, maybe she could recover a bit of her brand,” he said. “But I doubt it.”
