Theranos v. United States, Case No. 2: Andrew C. Balwani and Elizabeth W. Holmes

Elizabeth Holmes, the co-founder and former CEO of blood testing firm Theranos, is once again putting her personal prestige, reputation and stock in the balance. Ms. Holmes and Theranos are to be tried before the District Court for the Northern District of California. This trial follows a $976 million fine levied against the company for allegedly defrauding investors, insurance companies and patients. Following the announcement of the criminal settlement with the US Department of Justice, Theranos announced that Ms. Holmes would not be entering into a plea. Theranos COO Ramesh Balwani also has pleaded not guilty.

The court has made one of three questions when a defendant enters a plea that supersedes the US Attorney’s Office. This is especially important when there is no criminal indictment, since the court can decide to sentence the defendant before the indictment is filed. Although Ms. Holmes and Mr. Balwani are not charged with criminal conspiracy, they are charged with securities fraud in addition to the underlying false statements. Prosecutors are looking to receive from either Ms. Holmes or Mr. Balwani a total of six and a half years in prison. If they are convicted, each may not receive such a lengthy sentence because one of the securities fraud charges carries an 8 year maximum sentence. Additionally, federal sentencing guidelines recommend a sentence of no more than three years in prison and, as with others convicted of the same offense, a shorter sentence is appropriate.

Although Ms. Holmes has been in prison on for nearly five years for her alleged financial crimes, if she decides to testify in the fraud trial, she will be very rarely, if ever, allowed to do so. In general, defendants in civil cases who have prior non-cooperation with government attorneys during criminal prosecutions are prohibited from providing testimony against them or their co-defendants. A spouse, for example, is prohibited from testifying against a spouse who committed a similar crime, unless the other party was party to the crime and there is an agreed-upon joint sanction. Although Ms. Holmes and Mr. Balwani are not individuals who will have requested immunity during their criminal proceedings, the fact that the criminal proceedings are over and the civil proceedings are moving forward may preclude Ms. Holmes from testifying against her former co-defendants without risking releasing their prior discussions with the government. It is probable that Ms. Holmes will not testify in this case, even if she is granted immunity.

The Holmes-Balwani case is unique in that any decision not to testify in a case would not be permanent. Mr. Balwani can theoretically choose to testify, even in civil proceedings, and Ms. Holmes has limited choices. She can choose to participate in witness interviews and take the stand in a criminal trial, in which case she cannot testify in civil proceedings. For Ms. Holmes, her options are to not testify in either the civil or criminal trial and await the date of the final judgment (guilty or not guilty), or either to testify in the civil trial or in the criminal trial in which she would be required to testify. After considering any of the scenarios, it is unlikely that she will testify in either the civil or criminal trial, unless there is a last-minute request for immunity.

In the last few years, several high-profile fraud cases have involved defendants in the technology sector, including several executives at the heart of Tesla. The issue with these cases is that the fraud occurred after the parties were outside the discovery phase in their litigation, and the transcripts of these depositions would become evidence. Similarly, in the T-Mobile-Sprint case, every depositions the parties were both scheduled for in the discovery phase of litigation should be a potential source of evidence for their ultimate decisions. Regardless of the relevant information, the issue for Mr. Balwani and Ms. Holmes are different. In the late 1990s, when Theranos was a private firm, Ms. Holmes continued her controversial relationship with board members throughout the corporate formation process despite less than stellar performance, a significant divergence from the widely-held belief that the relationship was originally a purely professional partnership. In addition, there are a number of emotional attachments Ms. Holmes has with her former mentor and father figure (her mother died when she was a young child), George Holmes. But, because the companies she was involved with prior to Theranos were not even on the radar of federal prosecutors or the Securities and Exchange Commission, or had not been brought to their attention, none of those personal attachments would have anything to do with the government’s legal decision not to prosecute her.

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