Levine spends a good chunk of this engaging with Felix Salmon's Slate article about how many startups could be charged with wire fraud.
But I think Salmon overstates his case and oversimplifies wire fraud and I'm a little surprised Levine, a lawyer, doesn't catch him on this.
Salmon says wire fraud is among the easiest crimes to prove: everything is done by wire now, so "you show the lie, you show the wire, boom". But it's actually not enough to show a "lie" and then a "wire". Check out a federal court's model jury instructions for wire fraud. The burden on the prosecutor is higher than showing simple dishonesty; they have to prove "intent to defraud", which means that the accused had to have lied deliberately in order to cheat victims. There are, even in the jury instructions themselves, multiple mitigating factors for "intent to defraud". And, aside from that, there's a legal difference between that and wildly extrapolating from realistic revenue forecasts to irrationally high outcomes you merely hope could happen if everything breaks your way.
I think you can make the case that Balwani and Holmes got indicted because their dishonesty was unusually brazen and directly connected to the business they were in. They lied about what they were doing in the (then) present tense. They didn't make simply make unrealistic forecasts or put the rosiest possible color on how their engineering work was going; they fabricated entire medical procedures.
Not only did they endanger patient lives by using unready and flawed technology, they were brazen enough to lie about it in writing (in pitch decks) and on national TV (CBS This Morning and others).
By putting blatantly false claims, like “Theranos Edison devices are deployed in the backs of Humvees in Afghanistan” and “Theranos technology has been validated by Johns Hopkins”, in writing, they have made it quite easy for prosecutors to meet any mens rea bar.
That said, it’s true that historically prosecutors have used wire fraud charges as an open ended tool. In “The Chickenshit Club”, the author describes in detail how various white collar crime task forces employed US Postal Service inspectors to help build wire fraud cases. It may not be as easy as Felix Salmon is saying, but the idea that any fraud that involves a wire constitutes “wire fraud” is not that far off from federal prosecutors’ historical playbook.
I think tptacek’s point is that it has to be fraud to be wire fraud. Making a false statement isn’t necessarily fraud, and involving a wire doesn’t change that.
As someone with intimate first-hand knowledge of this part of the process, let me show how "Thomas" is off-base.
First off, there's usually a massive wrestling match between prosecution and defense as to what the jury instructions will actually have and not have. There's a reason they call them "model"; they're not compulsorily relayed verbatim, and in fact, even the models vary by court circuit (often with substantial distinctions).
Model instructions are also written by judges, and read like stereo instructions. A typical juror does not understand them, everybody knows this, and the judges who occasionally revise the model jury instructions are totally fine and dandy with this fact.
"intent to defraud", if it is defined at all in a given set of jury instructions, is defined circularly, and doesn't rule in or rule out edge cases. "Beyond a reasonable doubt" is deliberately kept vague, and nearly every judge will expressly forbid defendants' defining it as a percentage of certainty (e.g. 95% sure, 99% sure). The famous technicolor thermometer in the OJ trial expressing different levels of doubt is also typically banned by judges.
You have to sympathize with the jurors: they're trying to do a good job with the information they're given, and the system they have to work with is somewhere on the spectrum between being out of touch and giving the jury the finger. (BTW, most federal trial judges make more each day than the ENTIRE jury).
I've gotten to the point of deep suspicion of anybody who points to jury instructions as an exemplar of anything other than how seriously messed up the system is.
On top of that almost cases don't go to trial. To defend against a high profile federal prosecution takes seven figures. And even before you get to the actual indictment stage you may have sealed your fate by lying to the FBI. I and many others have said that no one should ever talk to the FBI but somehow it happens again and again with people that should have very sophisticated counsel.
The bottom line is that if the federal government decides to go after you, you are in for a very bad time. There is a heck of lot of fairly broad discretion placed in the hands of FBI field office directors and US attorneys (political appointees) to ruin lives.
My point wasn't that the jury instructions themselves make wire fraud hard to prove; it's that they illustrate that Salmon's summary of the predicates for wire fraud were incorrect.
Actually, Salmon's summary of the predicates for wire fraud is spot-on. The data support this, and my anecdata support this. Seeing is believing.
The jury instructions serve no purpose other than to frustrate jurors, and frustrated jurors (especially those that survive the venire) tend to convict. Sometimes the ends justify the means, and sometimes not.
I'd like to see your source for "multiple mitigating factors for 'intent to defraud'", because other than a good-faith instruction, which is optional and the judge and prosecutor will fight to keep out, there aren't any in any model jury instruction I've read (and I've read many of them, multiple times). I really hope you have one, because in case I need to file a 2255, a missed jury instruction might help.
It is simply not the case that "lie + wire = wire fraud". Salmon's summary is obviously not spot-on.
You still don't seem to be following my point regarding jury instructions. My argument isn't that they protect defendants because juries receive them; it's simply that they offer a concise summary of the predicates for felony crimes. A jury's receipt of any given instruction is immaterial.
My corresponding jury instruction omitted that a loss had to be caused, or explained, really explained, what "materially" actually meant, or how important it was.
If you decided to tell a little fib at the corner store and told the cashier you were Barack Obama as you bought a gallon of milk, that would count as wire fraud according to these jury instructions. Not comprehensive -> Not concise.
The example you just provided reinforces rather than rebuts my argument; it says that model jury instructions don't go far enough in explaining how high the bar is to connect a "lie" with fraud in a wire fraud charge. That you think this cite weakens my argument reinforces my belief that we're simply talking past each other.
My original comment wasn't about jury instructions. It was about the fact that wire fraud isn't simply "a lie plus a wire".
The argument I rebutted was that Salmon's quote (lie + wire = conviction) was incorrect.
If you get the jury to vote "guilty", then you have proven guilt, even if you have done so using zero logic or critical thinking skills, or provided them with falsehoods and misinformation. That's Salmon's point, and it's true.
In theory, and according to the law, wire fraud is not simply a lie plus a wire. In practice, that's exactly what wire fraud is. There shouldn't be a gulf between the two, but thanks to our lawmakers, judges, and US attorneys, there is.
Even that isn't true, as you should know, having taken a felony conviction to an appeals court. But it also has nothing to do with my argument. Since we're now several round trips into talking past each other, I'm going to abandon the thread here.
> Salmon says wire fraud is among the easiest crimes to prove: everything is done by wire now, so "you show the lie, you show the wire, boom". But it's actually not enough to show a "lie" and then a "wire". Check
> And, aside from that, there's a legal difference between that and wildly extrapolating from realistic revenue forecasts to irrationally high outcomes you merely hope could happen if everything breaks your way.
I have to say, I came away from the article with a very different impression than you. I definitely got the impression from Matt that just being unrealistic about revenue numbers etc is not enough to prove wire fraud. Hell, he even compares Theranos to other startups quite directly.
I agree.
If you say "We currently have 100k active users, based on our models those customers will have a lifetime value of £1,000 each and we expect to triple our user base this year"
There is one thing in that sentence which is a current fact which is the number of active users. Investors might disagree with the way you measure it but whichever way you do measure it better produce that number for real.
Everything else is based on your models, expectations, and hopes. It's not a crime to be a crazy optimist but you're not entitled to your own facts.
On the matter of intent: once someone starts saying things that are factually incorrect and relevant, and that they know are factually incorrect and relevant (as opposed to speculation about how things might feasibly work out), then they have demonstrated intent, as they intentionally said something that they knew to be false about something that they knew to be relevant.
Just finished Bad Blood. Hopefully they both get felony prison time, and there is precedence for it. I don't see how it's any different than a pharmacist diluting drugs. After diluting blood samples, they purposely doctored the statistics to reduce the deviation.
great. elizabeth holmes is being immortalized by jennifer lawrence. i’m really in two minds about the practice of making films about people of the likes of Holmes.
You shouldn't skip it - it's an excellent book that I believe in the long term will become a Silicon Valley staple similar to what Barbarian at the Gate is for Wall Street
It's also a breezy read - I tore through it in a couple of sittings.
The third-party lab machines Theranos was secretly using will often dilute samples during their general operation. This is a known factor engineered into their design and accounted for in their certification/regulation. Theranos was secretly diluting blood samples even more, well beyond what the machines they were using were originally meant for. What they were doing was legally, ethically, and scientifically completely distinct. Prison time is definitely deserved.
I guess im not fullybinformed on their actions, but of course the 3rd party machines automate the dilution process and in some cases dilution is done manually. Obviously working with the equipment outside of spec is wrong.
Because Theranos used very small samples of blood, when they got diluted, the error margins on the measurements increased a lot because it was hard to get the ratio of blood to dilution fluid consistent when samples are small.
Yeah, but they diluted them knowing the deviations were wild, then purposely tossed outliers to rein it in. It's statistical fraud 101. The premise is that you can't get enough blood (or quality of blood, as in the potassium test) from finger pricks to do the tests they claimed; period. They knew that soon after the start, and perpetrated the fraud for years.
I disagree with this sentiment. After reading Bad Blood as well, I must say that nobody at the company deserves much punishment. It's Theranos's investors and Theranos's business partners that are mostly at fault. They didn't do their due diligence and simply assumed (hoped) that the technology worked. They were too concerned about missing out on the "big one", which clouded their judgement.
No patients were harmed. The only losers in this are the investors that invested in Theranos. Given that they blindly trusted the pitch, without verifying that the technology worked, that makes them very bad and unskilled investors.
Unskilled investors losing a lot of money is, in fact, a very good thing for the Silicon Valley ecosystem. It's how bad influencers are flushed out of the system.
> After reading Bad Blood as well ... No patients were harmed.
You apparently didn't read it very well. Patients went to ERs, had drug dosages changed, invasive tests and procedures performed as a result of these results.
> It's Theranos's investors and Theranos's business partners that are mostly at fault. They didn't do their due diligence
And it's probably the FDA's fault, too, right? You know, since they should have known that a locked and partly covered side door to a lab is where the Theranos equipment really was, and that the lab they were inspecting had been carefully prepared and "sanitized" for their benefit, and Theranos hoped that if this wasn't uncovered they'd be certified based on the "prepared" lab. Balwani and Holmes forbidding anyone from using the real lab, or going through that door when inspectors were on-site was... "just hoping that it would work", not actively deceptive and fraudulent, right? What due diligence might have helped discover that?
FDA is not omniscient. No regulator is. It’s hard to catch someone intelligent and cunning in a lie every time. The industry relies on a combination of individual integrity (i.e. not wanting to hurt people, which works fine in 80% of cases) and regulation being a deterrent against fraud (for the minority that would release snake oil to make a quick buck).
I am glad Holmes and Balwani are facing the music. I would have preferred to see more than just Holmes and Balwani face charges though. There’s no way you pass an inspection from CMS and FDA when you have a “pay no attention to the man behind the curtain” part of the building without others being in on it.
In the wake of Theranos I have heard serious criticism of CMS & FDA to this effect (we need more regulations because clearly they're not getting the job done.)
Patients received incorrect blood test results and it's impossible to argue Theranos didn't know that this was a risk of what they were doing. In Bad Blood there were anecdotes of people being sent straight to the hospital because of worrying results.
Beyond the psychological harm in the reported false positive cases why are you confident that no patients were harmed in even worse ways (i.e. false negatives, not catching a condition early)?
This isn't the first time I've seen this sentiment on HN, unfortunately. Some people seem to think it's just part of life to make false claims to investors, especially if you really, really believe you can succeed once you have enough cash.
Assuming you don't know something to be definitely false, and you really really hope it works, is that the same as lying? I'm seriously asking in the context of your comment. People raise investor money all the time on the promise of hope. Does that make these people criminals? (Obviously if you 100% know it to be false, it's a lie, but the context of your comment is not definitely knowing it's false, but instead really really hoping it works)
Agreed. This isn't like a typical silicon valley startup which is hoping that their business becomes profitable once it reaches scale. This is our product does not work to the specifics required by the federal government but we sold it to consumers anyways.
Well I'm not a lawyer, but it seems to me that if you want to raise money on "promise of hope" as you said (which I'd imagine could be the majority of startups), you just need to represent yourself that way. The way I see it, it breaks into 3 camps:
#1: Saying you can do something you know you can't do
#2: Saying you can do something you think or hope you can do
#3: Saying you can do something you know you can do
While there is a human behavior difference between #1 and #2, you're still misleading your investors, right? Like I said, IANAL, so I can't say whether or not it constitutes fraud, but it is still dishonest IMO.
That's not the point. The point is reckless endangerment of patient and there are laws for these kind of thing. You break it and you pay for it.
It's like saying robbing a bank and no one got killed for it. They got the money back. Just let the robber go.
If they can get away with bilking investors while putting a defective medical device on to market you mind as well have a unregulated medical device market. FDA and John Carreyrou got them.
> Unskilled investors losing a lot of money is, in fact, a very good thing for the Silicon Valley ecosystem. It's how bad influencers are flushed out of the system.
The end does not justified the mean.
Just cause Thanos saved the universe by killing half of all living thing doesn't make it good.
If you intentionally commit fraud, saying that the victims should have known better and patients did not get hurt is not much of a defense. Fraud is fraud no matter the consequences.
Investors are not expected to need to see through blatant fraud. Many laws and regulations exist for the precise purpose of preventing fraud because it's not supposed to be one of the expected risks of investing. The expected risk of investing is that the business might lose value or fail in the marketplace, not that the entire operation is a scam.
> Unskilled investors losing a lot of money is, in fact, a very good thing for the Silicon Valley ecosystem.
This is blaming the victims. The article says that Theranos lied to investors. How can you invest in anything if lying is allowed without consequences?
> It's how bad influencers are flushed out of the system.
Justice punishing wrong behaviour is what flushes out the system. People walking away with money collected from lies and fraud does not.
The patients are indeed potentially hurt more than anybody in this fraud, and it makes it much more egregious than the more ordinary silicon-valley <fake it till you make it> fraud (& I've been angry about since before it was popular to hate on Theranos).
However, in ending with "the venture capitalists are just fine", the article also completely misses another class of people who are also hurt by these types of fraud -- all the other more worthy honest startups that went unfunded or under-funded when Theranos sucked $700 million out of the investment ecosystem.
All of the other bogus companies mentioned ( Hampton Creek; Zenefits; Lending Club; Skully; ScoreBig; Rothenberg Ventures; Faraday Future; Hyperloop One...), and many others not only suck the life out of the system, they destroy the ability of other honest startups to make it.
The VCs legitimately risk failure; it's the nature of VC.
But they aren't supposed to be risking fraud, which is perhaps why they don't catch it as much as they should in Due Diligence. Seems they need to do better Due Diligence, checking not only whether everything matches their expectations, but also whether it actually is what it is represented to be.
I agree. While its hard to get too upset about millionaires getting ripped off, the Theranos fraud also represents a large diversion of resources that could've gone into productive work. Even an honest failure probably wouldve produced some usable research and experience for its staff.
I believe that is a risk that's priced into venture investing already.
Not to defend the fraudsters here, but a certain amount of high-risk investments are going to end up failing because of fraud and investors knowingly bear those risks (and/or pay a money manager to smoke out and avoid those risks).
True, some aspect of the fraud is likely priced in by investors at the individual investment level.
But, do they price in the damage to the overall startup ecosystem, which makes a more difficult landscape for everyone to succeed, them included?
E.g., an overall broader perception of fraud, smoke, and mirrors will make it harder for them to raise their next funds, and general skepticism of the startup environment, reduces the liklihood of success of all the ventures. This environment is either a virtuous circle that'll lift all boats (to mix metaphors), or the opposite...
> it is hard to distinguish among the CEO who promises the impossible because she is committing fraud, the CEO who promises the impossible because she is deluded, and the CEO who promises the impossible and then goes and does it.
It seems you're suggesting otherwise, except I disagree with you and agree with the article, at least to the extent that it applies to VCs and other high-risk investors: they don't have the ability to have enough technical depth to detech technical fraud, so they have no choice but to price in that risk.
> This environment is either a virtuous circle that'll lift all boats (to mix metaphors), or the opposite
Just the wording makes me think this is a false dichotomy. Why can't it be neither? The environment is complex, and it's conceivable that it would lift/sink only some boats or that it's not circular.
> Hard to distinguish between fraud, delusion, and currently impossible that will get done.
I agree that it's hard for the VCs to distinguish. I've also seen plenty of situations where the VCs out of their technical depth and make preventable bad calls in both directions (investing in bad tech and passing on very feasible tech). I'm just saying that it would be good for the VCs and the entire ecosystem for them to put more resources into much better vetting of technology.
> This environment is either a virtuous circle that'll lift all boats (to mix metaphors), or the opposite
I'm not saying that it's an absolute with all vectors pointing in the same direction. Even strongly positive or negative environments will contain outliers, counter-trend examples, etc. Even on the massive crashing days on the stock exchange, there are always a few stocks that make good gains.
What I'm pointing to (perhaps badly) is the feedback loops between on one side, predominantly sound investment, growing startups bringing good new tech to market, and solid returns, and on the other side, delusional investment, scarcity of good new tech, and poor returns. The former will bring in more startup founders and investors, and the latter will become a dying ecosystem.
A major problem with our industry is that in addition to the visionaries, dreamers, and hard workers, there is a lot of money which is also a magnet for scammers and a variety of toxic personalities. The better we sort the latter from the former, the better off we will all be.
> The former will bring in more startup founders and investors, and the latter will become a dying ecosystem.
OK. I think I see what you're saying, that, on the whole, it's likely to be one or the other. I'd still argue that it could be neutral/stable, but I don't have any counter-argument to why that would be likely on a meaningful time scale, considering the duration of most VC funds.
> A major problem with our industry is that in addition to the visionaries, dreamers, and hard workers, there is a lot of money which is also a magnet for scammers and a variety of toxic personalities. The better we sort the latter from the former, the better off we will all be.
I'm not disagreeing that it would be good for everyone involved. I just don't see the path to get there. Merely wishing VCs would do a better job, without some kind of specific mechanism and associated incentive for them to do that better job, isn't enough.
Yup, there could be a balanced middle ground, not sure how big.
How to get the VCs to do better tech vetting? Definitely an issue. I would have thought that the downside of losing would be sufficient motivation to invest in really solid tech vetting, but it seems like they treat it more of a cost center. Perhaps seeing $700 million go "poof" in this instance will provide some motivation in the future?
Not only that, but how would they? Do they keep experts on staff (and risk that expertise going stale, if it's reliable in the first place)? Do they bring in outside consultants/contractors (and risk espionage)? Do they interrogate employees (conflict of interest and perverse incentives galore)?
I'd argue that this is a fundamental problem with traditional VC, in that, in general, they have no expertise in the ventures, and their financial incentives and neither well aligned with those ventures nor with their investors (limited partners).
> invest in really solid tech vetting, but it seems like they treat it more of a cost center
To be fair, though, it is, both for them and the target company, assuming that there's no fraud (or delusion?) involved.
> Perhaps seeing $700 million go "poof" in this instance will provide some motivation in the future?
You do bring up an interesting point about the sheer magnitude of this loss. By comparison, pets.com was only $300 million.
Although it provides some motivation, in that it may exceed what was priced in, is it enough to change the way the industry behaves?
Definitely not holding my breath for change, that's for sure!
Interesting points about the difficulties of in-house staff. Although my first instinct would be to expand it, you're right about ti getting stale, and also that structure was one I've seen make mistakes (maybe because they were stale). Tough nut to crack indeed..
The book "Bad Blood" covers this a bit. From what I gather the only thing they ever managed was a bit miniaturization of several existing standalone products and a way to integrate those products into a single package. When Elizabeth Holmes presented the tech at an AACC conference (https://www.youtube.com/watch?v=n6JRG733ReQ&t=3882s) experts in the field were pretty underwhelmed.
Based on excerpts from the book almost nothing they had actually functioned in a production type environment. Even their miniaturization created new issues that they couldn't resolve.
The loan that Theranos took out from Fortress last year is secured by the company’s assets and IP (https://techcrunch.com/2017/12/23/theranos-gets-100-million-...). Fortress is no slouch, but I wonder if their acquisition by SoftBank has changed their model to more of a VC risk taking appetite instead of traditional Wall Street firms.
Further, the late Ian Gibbons was the “real” inventor on many of these patents. At the end of his life, he despaired to find out that because Elizabeth Holmes insisted on being listed as an inventor on all of Theranos patents, that was potential grounds for cancelling the patents altogether should someone challenge the patents in court.
No, only part of the interview. At some point she forgets she has to do it. And then when asked what one has to do to become successful, she remembers it again.
I'm a man with a very very deep voice and some hoarseness as well. So many people ask me if it's all an act but it's not. When adolescence came in was like POW you have a baritone voice now.
But I think Salmon overstates his case and oversimplifies wire fraud and I'm a little surprised Levine, a lawyer, doesn't catch him on this.
Salmon says wire fraud is among the easiest crimes to prove: everything is done by wire now, so "you show the lie, you show the wire, boom". But it's actually not enough to show a "lie" and then a "wire". Check out a federal court's model jury instructions for wire fraud. The burden on the prosecutor is higher than showing simple dishonesty; they have to prove "intent to defraud", which means that the accused had to have lied deliberately in order to cheat victims. There are, even in the jury instructions themselves, multiple mitigating factors for "intent to defraud". And, aside from that, there's a legal difference between that and wildly extrapolating from realistic revenue forecasts to irrationally high outcomes you merely hope could happen if everything breaks your way.
I think you can make the case that Balwani and Holmes got indicted because their dishonesty was unusually brazen and directly connected to the business they were in. They lied about what they were doing in the (then) present tense. They didn't make simply make unrealistic forecasts or put the rosiest possible color on how their engineering work was going; they fabricated entire medical procedures.