As many experts expected, the fraud trial of Elizabeth Holmes began to heat up on Wednesday with testimony from whistleblower Erika Cheung.
Cheung, already well-known in innovation and technology circles because of her wildly popular TED Talk on her Theranos experience, took the stand on Wednesday in what was a palpable stepping up of a reasonably sedate but also occasionally bizarre trial so far.
The issue the court needs to address, not only with the Cheung testimony, but that of any other witnesses the prosecution may seek to bring, is how many degrees of separation exist between the actions or inactions being described at trial and Elizabeth Holmes herself.
While many people tend to think of this as the Theranos trial, it’s not. It’s actually and legally the trial of Elizabeth Holmes. To hold any startup founder legally responsible for everything their company did or failed to do is simply not a bar that a United States District Court is going to set. That is why lawyers for Holmes are trying to draw a line in the sand this week. One way they are attempting to do this is by framing testimony about what Theranos as a company did as being far removed from Elizabeth Holmes herself.
Where the judge allows this to go and how much leeway the prosecution is afforded, will be critically important for the rest of this case and for the January trial of co-defendant Sunny Balwani.
What is interesting from Wednesday is that in cross-examining Cheung, one of Holmes’ counsels read through the qualifications of the scientists and laboratory directors employed at Theranos. This was obviously done in an attempt to minimize the weight and validity of less-senior employee Erika Cheung’s testimony. But this strategy lays the foundation for what should be an important part of the Holmes defense – the experience and qualification of her board members and investors.
It’s one thing for a “self-described ‘starry-eyed’ 22-year-old scientist” to be fooled by Elizabeth Holmes, yet another thing entirely for the prosecution to prove that the adults in the room were fooled. But if there was ever a “they absolutely should have known” moment in startup history, l’affaire Theranos presents it. If senior scientists, managers, investors, and directors knew what Holmes knew, then the deception becomes a company deception, not a personal one. During Cheung’s six hours on the stand on Wednesday, she shared that she and fellow whistleblower Tyler Shultz met with Theranos Board member George Shultz. As we remember, Shultz was former Secretary of State, but also reputed to be a very active, hands-on board member at Theranos.
Shultz, who died early this year at 100, was remembered for a life of service marred by the Theranos scandal. In a very kind and certainly charitable perspective on Shultz’s involvement with Theranos, back in February, The Critic observed: “Perhaps the defining story of Shultz’s life was a scandal which overtook his later years: the Theranos fraud. His involvement with the company attested to his willingness to trust even those who were unworthy of being trusted.”
It is going to be very difficult for prosecutors to argue that a 19-year-old Stanford dropout set out to defraud some of the most savvy investors, advisors, and board members in the world and actually succeeded. Painting Holmes, as the media has often done, as an evil Jobs-ian character in relentlessly-black turtlenecks is an easy œuvre, but it takes as its logical corollary that a large number of (almost all) men with great track records of success and extremely high net worth were all deceived. Yet this is all inextricably intertwined with what the prosecution needs to do here in proving their case, perhaps further proving the thesis that they set their bar far too high here. Again, unless they can show that Holmes herself was the fraudster, not the overall company, the prosecution will fail.
As we move from Cheung to Tyler Shultz to George Shultz, we are creating degrees of separation between them and Elizabeth Holmes, not actually bringing her more closely into the center of the case.
No one should lose focus on the fact that this trial is not about Theranos as a failed startup. It is specifically about whether Elizabeth Holmes defrauded investors out of hundreds of millions of dollars and deceived hundreds of patients and doctors. The more separation Holmes’ counsel can place between her and what happened, the better it will ultimately be for her.
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Aron Solomon, JD, is the Head of Strategy and Chief Legal Analyst for Esquire Digital. He has taught entrepreneurship at McGill University and the University of Pennsylvania, and was elected to Fastcase 50, recognizing the top 50 legal innovators in the world. Aron has been featured in CBS News, TechCrunch, The Hill, BuzzFeed, Fortune, Venture Beat, The Independent, Yahoo!, ABA Journal, Law.com, The Boston Globe, and many other leading publications.
