Promises,Deceit and White-Collar Criminality Within the Theranos Scandal

White-Collar and Corporate Crime

When Edwin Sutherland developed the term “white-collar crime” and began research investigating corporate crime, he had many people and industries in mind. High on this list was the pharmaceutical industry, an industry Sutherland viewed as rife with questionable practices (Sutherland, 1983). As a credit to some and criticism to others, Sutherland was able to bring the work of so-called “muckraking” journalists within academic criminology (Griffin & Spillane, 2016). Among the most well-known works of the era was 100,000,000 Guinea Pigs, written before the 1938 update to the Pure Food and Drug of 1906. The text argued that the American public were essentially guinea pigs for the food and pharmaceutical industry and unwittingly ingested an endless amount of unsafe or polluted products (Kallet & Schlink, 1933).

When Sutherland originally conceived of the term white-collar crime, he had several goals. Among these goals was a critique of criminological theory and the data-gathering methods of criminologists at that time. However, perhaps the point he primarily sought was to turn attention to not only the sheer scope of criminality among elites, but also to the grossly disproportionate amounts of money involved in white-collar crime versus street crime. As Sutherland (1940) noted, one single officer employed by one grocery chain managed to embezzle $600,000 in one single year. Comparatively, the top six public enemies (as listed by the FBI) only collected $130,000 through the robberies and burglaries that they had committed. As an extreme example of white-collar criminality, Sutherland recounted that Ivan Krueger had collected approximately $250 million through multiple fictitious companies he had incorporated.

Before Sutherland developed the concept of white-collar crime, he had already developed quite a positive reputation in the field of sociology, and he would choose his presidential address at the American Sociological Society to first speak on the topic. There are many reasons that his work was groundbreaking, but perhaps his greatest contribution to our understanding of crime was Sutherland’s willingness to push the boundaries of what was considered criminal behavior. To Sutherland, rather than business as usual, the various bad behaviors of business, which could only be pursued in lawsuits in his time, should be part of the criminal code. According to Sutherland, crime was not just in official arrest reports, but was frequently entrenched in the business sections of newspapers (Geis et al., 1995).

In the wake of Sutherland, the study of white-collar criminality expanded in many directions. While Sutherland had focused primarily on the inability of governments to rein in corporate behavior, other scholars would make broad indictments of various state organizations and argue that many of these state actors willingly conspired or through gross negligence, continually looked the other way when corporations engaged in bad behavior (Griffin & Spillane, 2016). Yet, some scholars have gone further, noting that the actions (or inactions) of corporations and governments have accounted for untold scores of harm and deaths (Michalowski & Kramer, 2006). As Bohm (1986) has argued, one of the greatest myths of criminal justice is that white-collar crimes are not violent crimes. Actions taken by elites and corporations routinely cause harm to people and it is only through omissions of law that society considers these behaviors primarily tortious actions rather than criminal wrongs.

One may wonder why it is that corporations so frequently engage in criminogenic behavior and are seemingly allowed to do so without greater regulation and/or consequences. To some degree, it may be that corporations, in a capitalistic society, continually try to convince citizens that a corporation is the best method to provide people with goods and services. Their ubiquity in capitalist societies only seems to buttress this point (Tombs & Whyte, 2015). Some criminologists may point to occasions of criminal behavior as a failure of the state to regulate corporate behavior, which Whyte (2014) referred to such occasions as “moments of rupture.” Instead, it can be argued that these occasions are a natural byproduct of a symbiotic relationship between capitalist states and corporations (Tombs, 2012; Whyte, 2014). As neoliberalism and globalism have permeated the world, corporations have become transnational and are seemingly beyond the grasp of states that are simultaneously unwilling and unable to properly regulate or prevent most types of corporate wrongdoing that come as collateral damage of corporations true motive—profit (Tombs & Whyte, 2020).

Beyond state governing philosophy, state policies can either create or aid in corporate malfeasance. As Finley (1993) has argued, policies that limit compensation in product liability lawsuits and other movements for tort reform, not only reduce the deterrent effect intended to dissuade corporations from producing faulty products, but can disproportionately harm different segments of society. Indeed, many of the most dangerous pharmaceutical products not only seem to be specifically marketed to women, but these products are doubly dangerous because they are specially marketed to women who are pregnant. Additionally, not only do developing companies see a limited amount of essential drugs for the treatment of ailments (Hartog, 1993), dangerous drugs are often peddled in developing countries (Van Der Geest, 1982). Furthermore, as Rawlinson (2017) noted, a “state-pharma nexus” often inhibits the ability of citizens to receive accurate information on pharmaceutical products. Regarding many vaccines, compulsory state policies not only force consumers to use these products, these policies also limit dissent and the spread of information regarding potential dangers.

With the growing complexity of technology, it has been argued that “accidents” can seem “normal” (Perrow, 1984). Yet, many aspects of corporate culture seem to exacerbate these problems. In some instances, motivations of profit can lead corporate officers and employees to engage in criminal behavior. One example of this was when a vice president and program manager at Revco developed a double-billing scheme to recoup reimbursements form the state Medicaid program. Granted, Revco had legitimate claims rejected and the scheme was an attempt to merely collect improperly denied befits that were owed to the corporation; however, the two corporate officers engaged in criminal actions rather than trying to work with state authorities to fix the problems that had caused the unwarranted rejection in claim. To these officers, engaging in criminal behavior seemed the more expedient option (Vaughan, 1983). Corporate structures can overemphasize performance while downgrading the flow of information within an organization. Even in the best of circumstances, these communication failures, whether malicious or not, can allow accidents to happen that can ultimately lead to the loss of life. Furthermore, businesses or industries can unnecessarily internalize that risk as either acceptable or at least in many instances, unavoidable. Such an ethos, combined with industry and/or company goals can lead to unproven and/or potential dangerous technology into the marketplace (Vaughan, 1990, 1996). Lastly, even if corporate officers and workers have the best of intentions, complicated corporate structures can lead to problematic divisions of labor that inhibit or discourage important communication that may lead to design flaws or inferior products (Lee & Ermann, 1999).

Faulty Pharmaceuticals and Other Related Industries

During the 1980s, two critiques were provided of the pharmaceutical industry. In their work Corporate Crime, Clinard and Yeager (1980), much like Sutherland had before, identified the pharmaceutical industry among the most criminogenic industries in American business. Among the criticisms they leveled against the industry were excessive promotion, false and misleading advertising, high production levels of products of inferior quality, improper research and inspection, and high markups in pricing. In a similar vein, John Braithwaite provided another critique of the pharmaceutical industry. Specifically, Braithwaite documented different crimes that he observed were perpetuated by the industry including bribery of regulators and legislators, negligence and fraud in clinical trials, unsafe manufacturing processes, antitrust and other practices meant to stifle competition, corporations that purposefully sold drugs to recreational users, and a host of criminal unethical testing practices in developing countries (Braithwaite, 1984). While Braithwaite, had argued for many years that the pharmaceutical industry (and others) should largely be regulated through informal social control and self-regulation (Ayres & Braithwaite, 1992; Braithwaite, 1993); more recently, after acknowledging that criminality was seemingly on the rise within the industry, he and two other colleagues argued stricter regulation was needed. As a remedy, Dukes et al. (2014) stated that regulatory authorities should more often consider using punitive criminal law measures against corporate crime.

For violations of pharmaceutical regulatory laws, the most common way to punish companies has been monetary fines. From a range of behaviors including misbranding pharmaceuticals, kickbacks to physicians, unapproved promotions, failure to disclose side-effects, and off-label promotions, the corporations Pfizer, GlaxoSmithKline, Johnson & Johnson, Eli Lilly, and Abbott, have all paid billion-dollar fines in the past 10 years (Groeger, 2014). One of the exceptions to this regulatory punishment was the felony conviction against Purdue Pharma and misdemeanor convictions of three corporate executives due to the marketing and promotion practices of OxyContin. The company and executives paid fines of over $600 million, but none of the three executives were incarcerated (Griffin & Miller, 2011). In the wake of the scandal, it seemed the only corrective government action would be new regulations that required greater postmarketing surveillance of pharmaceuticals (Griffin & Spillane, 2013).

Many people have argued that the current system rewards corporations for taking risks and that paying fines are simply a cost of business. For Purdue Pharma, $600 million was only a fraction of what the company earned on OxyContin (Griffin & Miller, 2011). Yet, there is some evidence that may be changing. Martin Shkreli, the former CEO of Turing Pharmaceuticals was convicted of securities fraud for mismanaging two investment funds. Shkreli had built up a fair degree of infamy with the American public. He had previously bought the rights to sell the drug Darapim in the United States. After making the purchase, Shkreli dramatically increased the price. In many public appearances, which included being called to give testimony before Congress, Shkreli portrayed a dismissive attitude and argued that the hike in prices was part of the capitalistic practices of the pharmaceutical industry so that he would have more capital to make new products (Chakradhar & Khamsi, 2017; Reich, 2018). Whether Shkreli’s criminal case is merely an isolated instance or perhaps portends a broader trend is anyone’s guess.

Within the United States, legislation has clearly been a system created reactively, usually, after a scandal or tragedy has occurred. Peoples’ views of the United States’ cosmetic, drug, food and medical device regulatory system has been decidedly mixed. The system and the lead agency responsible for enforcing the regulatory system, the Food and Drug Administration (FDA), has been praised by many for protecting American consumers while others have depicted a system that depends upon corporations providing data to a government agency as inherently problematic. Others have noted that the high cost of taking one of these aforementioned goods to market and an arduous FDA approval process prevents many desperate patients from receiving the most cutting edge forms of treatment (Hawthorne, 2005). The Pure Food and Drug Act of 1906 was passed due to two primary factors. The first was the patent medicine industry, a group of companies that sold elixirs that promised to cure nearly any ailment. These companies called the elixirs “patent medicines” to keep the contents secret: typically a mixture of cocaine, opiates, alcohol, and other substances (Fischelis, 1938; Young, 1960). The second factor was malfeasance in the meatpacking and other food industries of the time, perhaps most famously depicted in Upton Sinclair’s classic The Jungle (Kantor, 1976; Young, 1989). After the passage of the 1906 legislation, any drug or food product had to accurately label its ingredients (Hawthorne, 2005; Musto, 1999).

While the creation of the Pure Food and Drug Act was a welcomed first start, Sutherland (1940) noted it had taken 30 years and 140 pure food and drug bills to finally create any federal drug regulatory system. To many people, however, the legislation was only a half-measure. The legislation only required transparency and had no meaningful regulatory power beyond requiring accurate labels on products. To get companies to comply with the law, federal regulators had to sue in federal court rather than file a criminal or regulatory complaint. In 1930, the United States Bureau of Chemistry and the newly created FDA would be tasked with enforcing the Pure Food and Drug Act (Hawthorne, 2005; Wax, 1995). A mere 8 years later, the FDA would have a dramatic expansion to their power. During a 4 week-long period during 1937, a medicine called Elixir Sulfanilamide was briefly on the pharmaceutical market. Of the 353 patients who took the medication, 105 died (34 were children) (Ballentine, 1981; Wax, 1995). Further, more survivors would have died had they not discontinued use due to the unpleasant side-effect of gastrointestinal problems. Later, some of the survivors suffered renal failure (Wax, 1995). This scandal and the already existing desire to exert greater regulatory control led to the passage of the Food, Drug and Cosmetic Act of 1938. The legislation established the new drug application (NDA) process through which any manufacturer of drugs needed to obtain FDA approval before anyone distributed a drug through interstate commerce. To be approved, it needed to be demonstrated that a product was safe for human consumption. Furthermore, the FDA was granted criminal enforcement powers in addition to their existing civil enforcement provisions (Cavers, 1939).

In 1962, the Kefauver-Harris Amendments to the Food Drug and Cosmetic Act were enacted. These amendments went a step beyond the previous legislation and required that not only must it be shown that a drug was safe for consumption, but that the drug was also effective for the promised treatment (Hawthorne, 2005). Once again, the legislation was a reaction to tragedy, although not primarily an American one. In 1960, Richardson-Merrell filed an NDA with the FDA for a drug called thalidomide. The company was already marketing the drug in Europe and other countries to pregnant women to alleviate morning sickness. Dr. Frances Kelsey, a pharmacologist and physician was the reviewer for the NDA. She was not satisfied with the studies Richardson-Merrell had conducted and did not believe the firm had established that thalidomide was safe for human consumption. Instead of addressing Kelsey’s critiques, the firm sought to pressure FDA administrators and tried to depict Kelsey as obstinate and unduly interfering. Before these tactics could work, Kelsey had read studies linking thalidomide to peripheral neuritis. After reading these studies, Kelsey required Richardson-Merrell to demonstrate that thalidomide was safe for use by pregnant women. While Richardson-Merrell had been prepared to complain to the head of the FDA, it was soon apparent that it was futile, and the firm pulled their NDA. Not only had reports of a link between thalidomide and peripheral neuritis increased, a full-blown scandal occurred when it was widely reported that thalidomide use could cause birth defects when ingested by pregnant women. Since thalidomide had not been approved in the United States, only a few children were born with these conditions, but in other countries, it was documented that more than 8,000 children suffered birth defects, the most common being phocomelia (Knightley et al., 1979).

Richardson-Merrell did not face any criminal liability for the untold harm they created by releasing thalidomide, but the company did settle numerous lawsuits and while it is unknown how much money the scandal actually cost the company, it has been estimated the company lost several million dollars. Had the company achieved their goal of releasing to thalidomide to the American market, it has been speculated that the expected harm could have cost the firm $3 billion (Knightley et al., 1979). Richardson-Merrill was not so fortunate for their actions regarding another drug, Mer 29. Marketed under the trade name, Triparanol, the company marketed the drug as a method to lower cholesterol levels in patients. Not only did the drug not worked as advertised, the drug caused hair loss, cataracts, and severe forms of dermatitis. In addition to $200 million Richardson-Merrell paid to settle nearly 500 lawsuits, in 1964, three executives of the firm pleaded no contest to two counts of charges of providing false, fictious and fraudulent statements. The company was fined $80,000 and the three executives were given six-months of probation (Knightley et al., 1979; Rheingold, 1968).

The 1938 legislation included some oversight of pharmaceutical devices. At that time, a variety of crude devices were offered for a variety of maladies. Manufacturers of these devices had to comply with similar labeling and warranty requirements of drugs. Yet, despite the efforts of some legislators to include such provisions in the legislation, the FDA did not have preemptive oversight over these types of technology and certainly did not have the same NDA process as drugs. The agency could not simply order a product removed from the marketplace, but instead had to work in conjunction with the Department of Justice and the court system to take corrective action (Munsey, 1995). Once again, it would take tragedy before the agency would receive the needed oversight.

During the 1960s, the Dalkon Corporation developed a contraceptive intrauterine device (IUD) that was later acquired by A.H. Robins Company. The device was known as the Dalkon Shield. From 1971 to 1975, the firm sold 4.5 million units in 80 countries. Not only did the Dalkon Shield not prevent as many pregnancies as other IUDs on the market (despite Robins claiming greater effectiveness) the Dalkon Shield had a high tendency to cause pelvic inflammatory disease (PID). By the time the Dalkon Shield was removed from the market, “10s of 1000s” of women developed PID. For many women, being fitted with a Dalkon Shield greatly diminished or eliminated their ability to get pregnant. Furthermore, within the United States, at least 18 women died from complications of being fitted with the Dalkon Shield (Mintz, 1985). The harm caused by A.H. Robins was only part of a much larger problem. A federal survey conducted in 1970 found that during the 1960s, at least 10,000 injuries and 731 deaths could be attributed to medical devices (Foote, 1978). Both the Johnson and Nixon administrations had proposed medical device safety acts and greater regulations of these devices. Additionally, greater regulation of medical devices had been debated but were not enacted in the aforementioned 1936 and 1968 legislation. Eventually, in 1976, the Medical Device Amendments were passed. This legislation provided the FDA with the premarket approval application (PMA) process (Munsey, 1995).

Although some people might associate the pharmaceutical industry and its American regulatory apparatus as dealing primarily dealing with drugs, it has always had a much broader context. The original 1906 legislation was as much about regulating impure food products as pharmaceuticals. In 1938, cosmetic products and medical devices were also placed under the regulatory of the FDA. While the 1976 Medical Device Amendments were primarily enacted to strengthen penalties against manufacturers and to strengthen FDA regulatory authority, the amendments also gave the agency the authority to regulate in vitro diagnostic tests. A laboratory developed test (LDT) is one type of in vitro diagnostic test (FDA, 2018). LDTs were added to FDA regulatory oversight because of the increasing frequency of diagnostic testing in medicine, but also due to a lack of standards for these tests. The FDA first noticed a problem existed when it sought to publish glucose testing performance standards and determined that no industry standards existed to determine if any adverse events in testing had occurred (Boguslaski, 1985). To date, the FDA does not require premarket review of LDTs in a similar manner to NDAs for new drugs or medical devices; yet, the agency has acknowledged the problems with faulty LDTs, which has led to failures to diagnose medical problems and a myriad of ways that patients can be misdiagnosed. The agency held a workshop in 2010 to discuss changes in policy for the enforcement of LDTs and went so far drafting a proposal for future oversight in 2014. However, to date, the agency has not enacted any new enforceable policies for LDTs (FDA, 2018).

Case studies are a common methodology in studies of corporate crime (Kauzlarich & Matthews, 2006). This type of methodology is often employed to document the harm done to consumers and/or employees of corporations (Griffin & Spillane, 2016). Yet, some critiques of case studies have emerged which argue that case studies can take seemingly isolated incidents out of context (Tombs, 2012; Whyte, 2014). While these arguments certainly have merit, in the current study of Theranos, a case study is important for two different reasons. First, in a country obsessed with wealth, any billionaire accused of wrongdoing would draw attention, but Holmes seemed to add extra elements to the story. She was not simply adding an application to a cellphone or tablet. She was not presenting a new or better way so that people could interact with friends or buy more stuff. Holmes claimed she wanted to change the world and make it better place. A study of the rise and fall of her company has several important implications for the study of white-collar crime. Second, Theranos was a biotechnology company that sought to revolutionize the LBT industry. Given that many other changes in legislation and regulatory authority were the result of an individual company’s malfeasance, discussing how a single company’s high-profile misdeeds could potentially lead to new regulations is an important exercise since corporate malfeasance by individual companies have so often been the impetus for changes in law.

Theranos

In the fall of 2002, Elizabeth Holmes entered Stanford University as a president’s scholar. She majored in chemical engineering and completed two courses with Channing Robertson, a superstar in the field who is perhaps most well-known for providing damaging testimony of the tobacco industry that aided in billions of dollars in legal settlements. Holmes, as a freshmen, would work in Robertson’s labs and that following summer, Holmes completed a summer internship at the Genome Institute of Singapore (Auletta, 2014; Carreyrou, 2018). Beginning in November of 2002, Severe Acute Respiratory Syndrome (SARS) germinated in southern China and would eventually spread to 29 countries and five continents. The epidemic produced 8,098 cases with 774 deaths. Asia was especially hard-hit, and seven Asian countries or regions were among the top ten most severely suffering countries/regions (Lam et al., 2003). Within this backdrop, Holmes witnessed some of the suffering of SARS and was disappointed that syringes and nasal swabs were the only way to test laboratory specimens. Furthermore, Holmes did not understand why so much blood needed to be taken from each patient nor could she understand why blood tests could not be completed through finger pricks rather than intravenously (Auletta, 2014; Carreyrou, 2018).

Seeking to improve on the conditions of medical testing, Holmes took two actions. The first was to write a patent application for a medical device that she believed could revolutionize the industry. The design was for a patch that consisted of microneedles (so that blood could be drawn painlessly) and a computer chip that would analyze the results. Furthermore, it was hoped that the patch would be able to wirelessly transmit the results to a laboratory or physician. Holmes’ second action was to withdraw from Stanford (in her sophomore year at the age of 19) and form her own corporation to realize these goals. Initially, the company was called “Real Time Cures.” Later, it was changed to “Theranos,” an amalgam of the words “therapy” and “diagnosis” (Carreyrou, 2018).

Within the first year of establishing Theranos, the company began to receive attention. In her first year, Holmes raised $6.9 million. The article described the development of the patch, as well as Holmes’ goals: to change the manner in which medical procedures would be conducted (Carreyrou, 2018). By 2010, a media report noted that Theranos had filed a report with the United States Securities and Exchange Commission (SEC) in which the company had raised $45 million of an expected $100 million. According to the media report, the company developed “real-time monitoring systems” that helped patients and physicians make “informed medical decisions” by developing handheld medical devices. These devices were reported to be able to monitor patients’ blood via wireless connection (Klein, 2010). Toward the end of 2013, Holmes’ and Theranos’ celebrity status began to prosper. In October, The Wall Street Journal published a feature on Holmes, which began the development of the exceedingly high media profile of Holmes and the company she founded. The article began a series of often repeated and commonly stated quips about Holmes: she hoped to transform medicine and diagnostics, her office space was formerly owned by Facebook and Hewlett-Packard, Theranos medical testing would be faster and cheaper than existing technology, Theranos technology would only need small samples of blood from finger pricks rather than through intravenous needle, Theranos medical technology was highly accurate, and Holmes might very well end up being the next Steve Jobs or Bill Gates (Rago, 2013).

Throughout 2014, it was reported that Holmes had raised $400 million and Theranos had a value of $9 billion (Parloff, 2014). In that same year, Holmes was profiled on CNN as one of 27 new billionaires (Rooney, 2014). By the end of 2015, The New York Times Style Magazine included Holmes in an article that profiled “five visionary tech entrepreneurs who are changing the world” (Arrillaga-Andreessen, 2015). Elizabeth Holmes seemed to be everywhere, and many people believed she would change the world (Carreyrou, 2018). Eventually, Theranos would raise more than $700 million from investors (Ramsey, 2018a).

Yet, the reputations of Holmes and Theranos crashed just as quickly as they had risen. Although initial media reports had been predominantly positive of Holmes and Theranos, questions in the stories were already appearing. When Holmes would describe Theranos technology, she often used vague phrases. She would essentially say that Theranos had trade secrets and used “the same fundamental chemical methods,” but “leveraging software” allowed them to do a better and cheaper job than competitors. These claims baffled many people. For instance, Richard Bender, the CEO of Quest Diagnostics, one of the premier firms in laboratory testing, noted there were no peer-reviewed studies and no speculative answer as to how Theranos was conducting its tests. Holmes and Theranos refuted such challenges, arguing these questions were nothing more than criticisms from the envious. Theranos also disseminated various laboratory reports which the company believed buttressed their claims of success (Parloff, 2014). However, what really put the company on the defensive was a series of stories by reporter John Carreyrou of The Wall Street Journal (Primeaux, 2019). In the first of a series of stories about Theranos (based on conversations with former employees of Theranos, as well as physicians and patients who had dealt with the company) Carreyrou posited that the website of Theranos wildly exaggerated the number of tests that could be done with proprietary technology and that tests conducted using their own tests were often inaccurate. For the most part, Theranos used third-party vendor technology (most often Siemens) to conduct their accurate lab results (Carreyrou, 2015).

In the wake of the bad press, various agencies and regulators began investigations of Theranos. In September of 2015, the FDA ruled that Theranos was using unapproved medical devices and could no longer use them until approval was acquired (Parloff, 2015). In July 2016, Theranos was banned from running a laboratory for two years after the Centers for Medicare and Medicaid Services revoked its certification (Wattles & Kelly, 2018). During 2016 and 2017, Theranos settled multiple lawsuits with former partners and investors, as well as the state of Arizona (Ramsey, 2017). In March of 2018, the SEC charged Theranos, Holmes, and former company president, Ramesh Balwani, with multiple counts of fraud. Holmes (but not Balwani) settled with the SEC, paid a $500,000 fine, returned 18.9 million shares of Theranos, and agreed not to be a director or officer of a publicly traded company for 10 years (Ramsey, 2018a). In June of 2018, Holmes and Balwani were charged in federal court with two counts of conspiracy to commit wire fraud and nine counts of wire fraud. If found guilty, they could face up to 20 years in prison (Wattles & Kelly, 2018). In the same month as the indictment in federal court, Holmes stepped down as CEO of Theranos (Ramsey, 2018b). Three months later, it was announced that Theranos would dissolve, and its assets would be used to settle outstanding lawsuits and creditors of the corporation (Anapol, 2018). Today, the Fortress Investment Group LLC owns all former patents and intellectual property of Theranos (McKenna, 2018).

Faulty Theranos Products

If Theranos had been able to develop and manufacture the patch as Holmes had imagined in her initial patent application, it undoubtedly would have needed FDA approval. Yet, despite her aspirations and the seeming endorsement by Robertson, such an invention seems a long way from reality. Shaunak Roy, Holmes’ first employee, likened the idea to science fiction and any serious investigation of the device by Theranos was quickly abandoned (Carreyrou, 2018). Indeed, before Tyler Schultz, grandson of former statesman George Schultz, was employed at Theranos in the company’s protein engineering laboratory, he attended a meeting between Holmes and the elder Schultz. Hearing Holmes speak, the younger Schultz also described Holmes’ ideas as science fiction (Primeaux, 2019).

Although the patch would still be mentioned in promotional materials and some media stories, any serious pursuit of such technology was quickly abandoned. The company moved on to other types of products Theranos hoped would be affordable diagnostic devices that would allow home monitoring of people’s blood. The first prototype was a device that blended the fields of microfluidics and biochemistry. Drops of blood were placed into a cartridge (about the size of a thick credit card) that was then inserted into a larger machine called a reader. Various pumps would push the blood through channels that were coated with antibodies and a filter would separate a sample’s solid elements so that plasma could contract with the antibodies to produce a chemical reaction that could be measured (Carreyrou, 2018).

Unlike Holmes’ initial idea of a patch with microneedles, using a small device utilizing microfluidics is a more realistic idea. Currently, there are dozens of companies that are attempting to pioneer microfluidic devices that can produce reliable results from small samples of blood. The problem that most of these companies must overcome is that some laboratory tests can be accomplished with small samples of blood and others cannot. The idea that such a device could be pioneered, according to many scientists, is possible, but the number of tests such a device could run on a small sample of blood will be finite and certainly less than Holmes and Theranos claimed (Kraus, 2019). Indeed, some of these devices already exist. As Paradis (2016) noted, a small handheld device called an I-STAT can conduct 25 tests on what he described as “very small amounts of blood.” At the time Paradis wrote, he stated the device had been in existence for more than 20 years.

If completed, it was hoped that the cartridges and readers developed by Theranos would be placed in people’s homes so that patients could test their blood regularly and a cellular antenna would transmit the results to a Theranos server and then later to a patient’s physician (Carreyrou, 2018). The idea that Theranos devices could seemingly track a patient’s blood was a story Holmes was eager to tell. In one media account, after describing her vegan diet, Holmes noted that after meals she would often test her blood as well as other employees. She claimed that she could observe people’s differences in diet by testing their blood (Parloff, 2014). While novel in design, the complexity of the prototype design could never be solved and Holmes’ repeated insistence that the device be small greatly complicated the engineering of the product. Despite some interesting presentations of the device to investors, the newly developed device was only implemented outside the laboratory through a pilot project with Pfizer. The project tested the blood of terminal cancer patients but was not used to inform any medical or treatment decisions. Pfizer did not pursue the devices or Theranos any further after being underwhelmed by the results (Carreyrou, 2018).

The only proprietary device that Theranos developed that would ever be used commercially was a device Holmes would name the “Edison.” As tests on the aforementioned microfluidic device carried on without success, an employee of the company, Tony Nugent, had an idea. After purchasing a glue-dispensing robot, Nugent designed and built a handheld blood testing device with a similar design. The device was clunky, noisy, and difficult to use (Carreyrou, 2018). Tyler Schultz recounted that the Edison was about the size of a home bread maker. Schultz had taken a course in his undergraduate studies that covered topics such as microfluidics and nanotechnology. When Schultz first saw the Edison, he had high expectations, but he was quickly disappointed. Schultz described the Edison as “just a pipette in a box.” Not only was the device underwhelming to look at, it frequently broke and underperformed. The technology was so underdeveloped that it required low technology fixes that comprised ideal laboratory conditions for LDTs. Rudimentary fixes to get the machines to work frequently resulted in contaminated laboratory samples. Furthermore, repeated tests would produce widely varying results. In one experiment, team members tested their own blood for the presence of syphilis. Schultz noted “an alarming number” of those samples tested positive for syphilis, a result he did not believe was correct (Primeaux, 2019). During a one-month period, quality control checks of the devices would fail around a third of the time. For one test the Edison was supposed to perform, failure rates were at 87% (Carreyrou, 2018).

Beyond reports inside of Theranos, researchers found that tests from the company were 1.6 times more often outside the normal range than other direct-to-consumer laboratory tests (Kidd et al., 2016). As would be widely reported, the only accurate tests results Theranos ever seemed to conduct were on commercially available machines (Paradis, 2016). However, this was ostensibly a different story than how Theranos portrayed. One of the ways in which Theranos had frequently justified their secretive practices and use of unapproved technology was that they claimed their tests were proprietary LDTs. Theranos claimed many other companies conducted these types of experiments without the full FDA approval process. While such a claim is debatable, Theranos was not simply developing new protocols, they were attempting to develop new technology that used smaller amounts of blood than other existing technology. Using any such technology, especially for commercial tests, should have some demonstrated efficacy (Carreyrou, 2018; Paradis, 2016).

While the FDA would never get the chance to evaluate the laboratory machines of Theranos or rule on whether Theranos needed agency approval for LDTs, the device the company used to collect small samples of blood, a nanotainer, did not escape FDA oversight (Burns & Michel, 2015). Indeed, Holmes was very open about promoting nanotainers and multiple promotional pictures showed her holding one of the tiny collection devices between her index finger and thumb. Less public was that in one presentation at Theranos’ corporate headquarters, a nanotainer exploded during a demonstration of the device. After promotional pictures were viewed by the FDA, the agency sent a warning letter to Theranos and stated that the device was an unapproved medical device (Carreyrou, 2018). In subsequent discussions with the FDA, Theranos tried to claim that the nanotainer was a Class I device, but the FDA ruled that the nanotainer was a Class II device (Burns & Michel, 2015). Class I devices are categorized as low-risk devices and examples are bandages and handheld surgical instruments. Class II devices are considered intermediate-risk devices and include computed tomography (CT) scanners and infusion pumps (Jin, 2014). A Class II designation requires that manufacturers of such devices provide special labels, demonstrate performance standards for the devices, and conduct postmarket surveillance of the product—none of which Theranos had done (Burns & Michel, 2015). The only FDA approval for which the nanotainer received clearance was for tests for herpes (Paradis, 2016).

Industry Ethos

From using unapproved technology to misreporting laboratory results, the behavior of Theranos seems to certainly mirror the behavior of pharmaceutical companies of the past and present. Additionally, to secure more funds and research, Balwani arranged to use Theranos technology in both Mexico and Thailand, countries with less stringent regulatory practices than the United States. Although the endeavors in Mexico seemed to go through the proper regulatory channels, what kind of regulatory approval was secured in Thailand was unclear to employees. While Theranos certainly strove to be among the leading biotech (and by extension healthcare) companies in the United States if not the world, their behavior was also guided by the location they chose—Silicon Valley. Holmes did not have any substantial industry employment history to draw upon, but she greatly admired many of the titans of Silicon Valley, in particular, Steve Jobs. Balwani had worked for both Lotus and Microsoft as a software engineer (Carreyrou, 2018). Within Silicon Valley there is often the mantra “fake it till you make it.” Certainly, ethical companies exist within the cradle of technology, but stories of the bad behavior of many technological entrepreneurs are legendary. Many of the most famous technology companies had a history of overpromising. The successful companies made billions. Others faded into obscurity. This type of culture is among many of the factors that led to the dot.com bubble bursting in the first decade of the 21st century (Griffith, 2016). One of the reasons that venture capitalists and other investors are willing to take these risks is that the profits can be great and the legal standards of when overpromising constitutes fraud are often elusive and subject to interpretation (Suchman & Cahill, 1996).

There are many reasons that Silicon Valley and computing companies seemed inappropriate role models for Elizabeth Holmes and Theranos. Among the earliest investors and mentors of Holmes was Larry Ellis, co-founder and former CEO of Oracle Corporation (Carreyrou, 2018). Ellis is one of the most well-known showmen in Silicon Valley. If he is not firing executives who challenged his authority, he is promising the world to people. In some cases, he delivers; in others, he may eventually deliver (Southwick, 2003). One example of this was in January 2007, when Oracle released 51 updates to fix security flaws in their database products. As Berce and Bannister (2001) argued, software companies continually release unfinished products that require multiple updates to work properly or as intended, a practice Berce and Bannister believe would be unacceptable in other industries. Such a position is debatable, especially considering that product recalls commonly occur in the pharmaceutical and automobile industries. However, it has already been noted that any pharmaceutical product must go through the proper approval process and automobile safety standards have increased significantly over the years, so much so that economists have debated whether safer cars may actually lead more drivers to drive recklessly (Sobel & Nesbit, 2007).

Theranos appeared to commonly eschew the strict regulatory standards that are supposed to guide a biotechnology company. In particular, there seemed to be a disconnect between management and the opinions of Theranos engineers and technical staff. The latter believed that the proprietary technology of Theranos constituted protypes and should not be considered finished products (Carreyrou, 2018). Insider accounts within Theranos depict not only was technology not finished, but rarely worked properly and/or consistently. Furthermore, adding to the problems within the working environment was a culture of secrecy at Theranos. This culture was often justified as a method to protect proprietary technology. Many areas within Theranos corporate property were either barricaded or locked away from employees. In some instances, employees who had worked at the company for years were unable to see Theranos equipment (Primeaux, 2019). However, one of the reasons for the secrecy was to hide from federal regulators how Theranos was using its own technology (Carreyrou, 2018). Ultimately, multiple deficiencies in laboratory procedures were found during federal inspections of two laboratories in California and one laboratory in Arizona. The implications of these inspections were thousands of voided laboratory tests and laboratory closures (Pflanzer, 2017; Weaver & Carreyrou, 2017).

One of the frequent praises that Theranos received and a common pitch the company made to investors was the number of patents Theranos had secured (more than 200) (Carreyrou, 2018). Yet, while securing a patent seems prestigious, that is not always the case. According to Moore (2005), the United States Patent and Trademark Office receives 350,000 applications for patents every year and approximately 180,000 of those applications are approved. While some might simply marvel at the high degree of human ingenuity in the United States, Moore found that in a given year, there were approximately 3,000 patent lawsuits seeking enforcement on approximately 4,500 patents. Thus, while there seems to be a high number of patents granted, few of these patent applications come into fruition as finished products. Many of the patents that are granted are worthless.

The Scope of Financial Crimes

Among Sutherland’s frequent targets were the so-called “robber barons” of the 1800s—people like Cornelius Vanderbilt, A.B. Stickney, and J.P. Morgan (Sutherland, 1940). Studies of modern criminals who seek to gain wealth in an illicit manner is a trend that continues, and one recent example of a financial criminal is Bernard Madoff. He was proclaimed as a financial wizard and operated an exclusive invitation-only hedge fund that was actually a Ponzi scheme (Hurt, 2009; Ionescu, 2010). While Theranos may have exaggerated its own competency, to date, there is no evidence that any of the $700 million in operating capital was embezzled; however, how the company obtained that operating capital is a different story and at issue in Holmes’ and Balwani’s upcoming criminal trials.

Theranos was always a privately-owned company. Investors were either friends, family members, or people who Holmes or other employees recruited to invest in the company. While no one has alleged that she was inspired by Madoff to recruit members, in a way, her strategy was similar. Rather than touting the exclusivity of Theranos, Holmes and her representatives would highlight the many endorsers or advisers of the company. Along with her former undergraduate adviser, Channing Robertson, investors, advisers and Theranos board members at one time included: Larry Ellison, George Schultz, Avie Tevanian, Donald Lucas, Sam Nunn, Bill Frist, Dick Kovacevich, Henry Kissinger, James Mattis, David Boies, Rupert Murdoch, Jim Kennedy, members of the Walton family, Bob Craft, Carlos Slim, and John Elkann. Further, Holmes became friends with Chelsea Clinton and threw a fundraiser for the presidential election of Hillary Clinton. Bill Clinton included Holmes as a guest of honor at the Clinton Global Initiative. Holmes would meet the Obamas as well. Among the representations that Holmes invariably made was that she had some powerful people who both believed and supported her (Carreyrou, 2018).

When attempting to secure funding, Holmes or members of the company would mention either existing partnerships the company had formed or people with whom Theranos was exploring partnerships or contracts. In one pitch to investors, the company claimed to have six deals or partnerships with five different companies and from these arrangements, would secure between $120 million and $300 million within 18 months. Such promises were frequently mentioned in the allegations of lawsuits filed against Theranos and Holmes. Furthermore, Theranos and Holmes always seemed to claim that their technology was sound and working—not a collection of devices that might work in the future. Partner Fund Management LP, which committed $96.1 million to Theranos, claimed the investment group relied upon the claim of Theranos that 98% of blood tests could be done using Theranos technology with blood samples taken from finger-stick blood taking (McKenna, 2018). In one report, it was alleged that Theranos used a shell company to purchase many of the third-party machines the company used for its accurate testing. Furthermore, at issue was a Theranos budget projection, given to Partner Fund Management, in 2014, that Theranos would make a $1 billion by 2015 (Weaver, 2017).

Given the lack of clear answers and the frequent secrecy of Theranos and Holmes, many potential investors declined to invest in the company. For the two companies that did, Safeway and Walgreens, entering into a partnership with Theranos was not without opposition. In both companies, there were executives who questioned the technology of Theranos. Additionally, requests to tour laboratory facilities were declined as were requests for demonstrations of the technology. Such demonstrations seemed to end after a former executive of Theranos instructed Holmes that sham simulations to investors could constitute fraud. For his input, the executive was dismissed from the company, and rumors later circulated that it was because of his own wrongdoing. While the CEOs of Safeway and Walgreens seemed to pay some attention to the concerns of employees who had doubts of Theranos, both chief executives seemed to make the partnerships with Theranos for two reasons: a belief in Holmes and the fear that competitors might step in if the companies declined (Carreyrou, 2018).

Perhaps the greatest example of the leap of faith that many investors were willing to take was a failure to properly investigate the financial well-being of Theranos. As McKenna (2018) reported, when the Fortress Investment Group was considering providing a $100 million dollar loan to Theranos, as part of the process, Fortress required that Theranos provide an audit of their financial records. This would probably seem customary to most corporations, but it was not to Theranos. As it would turn out, the last audit of Theranos had occurred in 2009 and was never completed. Indeed, none of the previous investors had seemed to inquire if the company used an outside accountant or accounting service.

Harms Caused by Theranos

Theranos had conducted some advisory studies, such as the pilot study with Pfizer, but no patient decisions or diagnoses were made from that endeavor. In a similar arrangement, a deal was made for Theranos to conduct tests of leftover samples from Army personnel, a deal Holmes and General Mattis had pursued. Yet, Mattis would retire from the Army in 2013 and the tests never commenced. Beginning in 2012, Theranos took over the blood testing at an employee health clinic at Safeway’s corporate campus. Only blood was taken at the facility, both from fingertips and intravenously from employee’s arms. Among tests that used Theranos equipment, results were problematic. One employee was shown to have sure signs of prostate cancer, but other reputable tests yielded no such result. Perhaps the greatest harm done was in the Theranos-Walgreens testing centers which at its peak, included 46 locations. Among the lab-testing errors were several false pregnancy scares. The test results for one 16-year old girl in Arizona showed potassium levels so high the results suggested she was at risk for a heart attack. Another patient’s results demonstrated high-levels of thyroid-stimulating hormones. In another case, a woman who had ringing in her ears was informed that her suffering a stroke was imminent. She would pay $3,000 out of pocket to learn this was false. Another patient postponed a trip to Ireland after getting a false report of vein thrombosis (Carreyrou, 2018). Many of these patients not only received improper tests, but Theranos often waited months to alert patients to false or compromised tests and was frequently evasive with its patients. In Arizona, this was exacerbated by Theranos successfully lobbying for changes in legislation that allowed blood testing without a physician present. Thus, Theranos was often the only direct point of contact between patients and their laboratory results. Patients would only be able to get a reliable medical diagnosis if they took their laboratory results to a physician (Weaver, 2016).

All told, these reports may seem minor. Yet, people did suffer; and at the very least, they experienced some degree of emotional distress. While speculative, in the midst of all these false positives, it is plausible that there were also false negatives; however, documenting these cases would be difficult--if not impossible. At the very least, it seems that Theranos failed in its duty to give proper consent to medical patients given most patients would probably assume that LDTs were conducted using reliable technology. While most states have regulations of informed consent and characterize it as negligence, in Schoendorff v. Society of New York Hospitals, Supreme Court Justice Benjamin Cardozo famously, and perhaps hyperbolically, compared lack of informed consult as akin to assault (Paterick et al., 2008). Perhaps what is most troubling and could have potentially been tragic, is that Holmes and Balwani had considered whether Theranos should conduct HIV testing. Luckily, company employees were able to prevent that plan from coming into fruition (Carreyrou, 2018).

Discussion

The story of Elizabeth Holmes and Theranos is far from over. Indeed, although Holmes and Balwani have already been indicted, prosecutors have not ruled out broadening the scope of the investigation or potentially indicting additional defendants (Rosenblatt, 2018). The case could take years to settle and no satisfactory resolution may ever come. Yet, the Theranos scandal has already provided numerous examples, some of them novel, for the study of white-collar crime. Pharmaceutical legislation has almost been entirely created by a range of faulty drugs and other related products. The faulty testing equipment of Theranos provides another example and the company’s insistence that they were only engaging in new or different LDTs may spawn a new area or regulation. Perhaps there are existing products that the FDA may take a stronger look at with Theranos in mind. The pharmaceutical industry has long been known as an industry rife with criminogenic behavior. Although it is difficult to ascertain if federal regulators will change their oversight, there is some evidence that at least investors are more skeptical of claims of success. Separate from Theranos, there are many other companies seeking to run laboratory tests on small samples of blood taken from finger pricks rather than intravenously. In pitches to investors, among the first questions they receive is how their company operates differently from Theranos. Furthermore, investors seem to have learned about the complexity of scientific problems Theranos had claimed to solve (Kraus, 2019; Weintraub, 2018).

Theranos is an interesting and perhaps novel example of how a biotechnology company with the operating principles of a Silicon Valley software company were wedded together with dangerous results. While it does not seem that Theranos was a shell company or a complete scam, a host of investors lost over $700 million. To what degree they were misled, or willing participants may never be fully understood. Holmes and Theranos largely sought investors through the dreams of Holmes and the people who she had already charmed. In personal pitch meetings and promotional materials, Theranos seemed to always be selling the potential of the company, but continually claimed their technology already worked. While Partner Fund Management produced a specific claim, how much Theranos actually promised during their presentation or at least when they were making pitches to people are less clear. As previously mentioned, Holmes would often use vague phrases when promoting her company. It always seemed a little unclear how much proprietary technology the company actually had and to what degree this equipment was performing.

The true extent, the true extent of Holmes’ and Balwani’s criminality may lay in their minds. Did either person truly believe that given enough time, Theranos could develop the technology to do as they promised? Holmes and Balwani seemed to make a variety of promises that ran the gamut from hard to keep to pure fantasy. With much of the money spent and the prospect that neither person will give a full accounting of their actions, we may ultimately be left to guess their true degree of criminality. However, it seems that many of the promises they made could amount to fraud, but somewhat mitigating these claims is what duty investors had to properly investigate the company. Theranos did provide some tours of a laboratory to the media, such as one attended by former Vice President Joseph Biden, but these were highly controlled events. In the case of Biden’s tour, the laboratory he toured was fraudulent and not even working. Among the promises that Theranos made was a plethora of technological breakthroughs and the promised potential for many more. Holmes and Theranos promised repeatedly that they would change the world and make it a better place. If Theranos was unwilling to demonstrate the technology or give tours of their laboratories some documentation could have been provided that the company actually had some form of FDA approval for their technology. In fact, the company had neither and as the Walgreens and Safeway partnerships indicated, many investors were willing to take a risk because of the potential reward.

After Theranos was receiving both media backlash and various regulatory bodies started investigating the company, Holmes seemed to change tactics and at least on the surface, seemed to start running the company more like a credible biotech company. One of the biggest criticisms of Holmes’ approach to running the company was that she seemed to seek out the most well-known rather than the best qualified people. Among the superstar advisers she had secured, only her former undergraduate adviser Channing Robertson and former Senator Bill Frist had the necessary scientific credibility to advise the company and both seemed to only be involved in any advisory capacity. In 2014, Holmes added Bill Foege, a former director of the Centers for Disease Control and Prevention to the Theranos board. In 2016, Dr. Fabrizio Bonanni, who had previously served as an executive at Amgen Inc. and Baxter International, joined the board of Theranos. Bonanni would serve in the long absent and overlooked role in making sure that Theranos complied with the multitude of laws and regulations that Theranos had seemingly ignored. Furthermore, Theranos would hire other executives to take over the financial operations of the company (McKenna, 2018).

Had Theranos employed these types of people from the beginning or at least early in the life of the company, their fortunes may have turned out differently. Yet, when one former executive had advised Holmes that fraudulent presentations to investors was not allowed, she responded by firing that executive. Whether these new hires were indeed an act of good faith or a last-ditch measure to keep a company operating has yet to be determined. This leads to one of the biggest questions regarding Theranos—how exactly was the company allowed to operate? Any person who claimed to be a physician, without proper training and licensure, could be convicted of crime(s) and possibly incarcerated. Elizabeth Holmes, who dropped out of college after her freshman year and Ramesh Balwani, a software engineer, lacked any formalized training in the technologies they were hoping to pioneer. While Silicon Valley seems to perpetuate the myth that educational attainment does not matter, a claim many researchers have debunked (see Wai & Rindermann, 2017), Holmes and Balwani were operating a business that took years of education to understand. To some degree, their lack of expertise in the subject matter may have fed into their ambition—they lacked the knowledge to understand how outlandish their promises may have been and how difficult it was to engineer the products they wanted. Yet, it was commonly documented that Holmes and Balwani would dismiss employees’ concerns about Theranos technology and operations and berate employees for expressing these problems (Carreyrou, 2018; Primeaux, 2019).

As the Theranos saga continues, some issues may become clearer and some unknowns will likely remain. Furthermore, there are many issues for scholars to further investigate. Among the many issues Theranos involves are wealth, race, gender, and privilege. Recent reports have already addressed some of these issues. While Elizabeth Holmes is reported to have a highly capable defense team representing her in criminal proceedings, Holmes’ attorneys in an Arizona civil case resigned because Holmes had not paid them. As a result, many people have speculated about Holmes’ finances (Rosenblatt, 2020a). Furthermore, what Holmes and Balwani kept secret from many people, that they had engaged in a long-term romantic relationship, may have already affected legal proceedings. A judge severed the two defendants’ criminal trials only citing that there was “good cause” to do so (Rosenblatt, 2020b). With both defendants seemingly wanting to go to trial, the separate legal proceedings could provide an interesting legal experiment.