Jessica A. Roth is a professor at Cardozo Law School, where she teaches and writes in the areas of criminal law, evidence, and ethics and co-directs the Jacob Burns Center for Ethics in the Practice of Law. Previously she was a federal prosecutor in the United States Attorney’s Office for the Southern District of New York. The opinions expressed in this commentary are her own.
After three months of testimony and seven days of deliberations, the jurors in the trial of Elizabeth Holmes found her guilty on four charges of defrauding investors. But she was acquitted of four other charges related to the alleged scheme to defraud patients, and the jury failed to reach a verdict on three more wire fraud charges related to investors.
Nevertheless, the verdict is a stark rebuke of the defense, which attempted to portray Holmes as a visionary leader who fell victim to subordinates who misled her and investors who misunderstood her.
Trial strategists will debate for months the wisdom of the tactical choices made by Holmes’ defense team, including her decision to take the stand, her allegations of abuse, and her concession, for example, that she altered a document shown to investors to include the logos of pharmaceutical companies that had not endorsed Theranos’ products.
While those decisions by the defense are certainly worthy of debate, there are several key takeaways from the verdict.
Motivations are not a defense
First, good intentions are not a shield from criminal liability.
Holmes’ lawyers argued that she set out to change the world of biotechnology and that all her conduct was aimed at realizing that goal. According to this line of reasoning, any misrepresentations that occurred along the way were not unlawful because Holmes’ overriding purpose was not to harm anyone, but to keep Theranos going so that it could deliver the revolutionary results she promised. But this argument misses the crucial point that one cannot legally deceive investors even as a means to a laudable end.
The law books are filled with criminal cases involving businesses that started out as legitimate — consider Enron or WorldCom — but turned fraudulent when executives were unwilling to acknowledge changed circumstances and hoped that they could tread water long enough to turn things around. (Even Bernie Madoff claimed that he intended no harm when he started what became the world’s largest Ponzi scheme and thought he would eventually be able to dig his way out.) Thus, having pure intentions at the outset, and multiple motivations throughout, is not a defense.
It’s never investors’ fault
Second, investors’ lack of due diligence is immaterial. The evidence introduced at trial suggested that several of the investors named as victims failed to independently scrutinize many of Theranos’ assertions, and in some cases rushed their decisions because of a fear of missing out. Experienced biotech investors, meanwhile, have cited numerous red flags as reasons they declined to do business with Theranos, such as the absence on the company’s board of any directors with relevant experience in the field.
Those who chose to invest may have egg on their faces, but their negligence does not absolve Holmes of fraud. Executives may not take advantage of gullible investors, even those that are supposedly sophisticated. Moreover, the onus is not on investors to ferret out the half-truths in executives’ representations.
Wrong is wrong
Third, “everybody does it” is not a defense either.
The Holmes trial has been portrayed by some as a referendum on Silicon Valley’s “fake it ’til you make it” ethos, with questions raised about why Holmes (as a rare female founder) has been allegedly singled out for prosecution. (Never mind that former Theranos COO Ramesh “Sunny” Balwani also has been charged.) As I have previously argued, it is unlikely that the charges against Holmes reflect business as usual in Silicon Valley. Holmes elided the distinction between reality and optimistic projections in a particularly egregious manner.
But even if Holmes’ actions were typical, that would not render them lawful. Some of the parents charged in the college admissions scandal undoubtedly believed that they were merely keeping up with other affluent families, but they too were convicted of felonies. At the end of the day, wrong is wrong, even if others are engaged in similar misconduct.
None of these takeaways break new ground. The Holmes verdict is consistent with well-established legal principles that have been applied in fraud cases for decades. But sometimes a high-profile trial can usefully reaffirm and publicize such principles. Given the Department of Justice’s recent statements announcing its renewed focus on individual accountability for corporate crime, perhaps the Holmes verdict comes at just the right time to do precisely that.
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