John Carreyrou, the acclaimed author and Pulitzer-prize winning journalist whose investigative reporting blew the lid off the Theranos scandal in 2015, explained to third-party risk professionals at Compliance Week’s TPRM Virtual Summit on Friday that the mistakes made by the bankrupt blood-testing company’s business partners were entirely preventable—had they done their proper due diligence.
Both Walgreens and Safeway fell hard for Theranos and its charismatic CEO, Elizabeth Holmes, learning some tough, expensive lessons about third-party risk management through their reckless dealings with the company. For starters, executive leaders at both companies fell in love (hard, fast, and blindly) with the “revolutionary” vision of Theranos.
“These were old line businesses trying to reinvent themselves. The business climate was terrible to begin with [in 2010], but they were also at a tragic crossroads where they needed to find new lines of business,” explained Carreyrou, who first uncovered fraud through his reporting with The Wall Street Journal and expanded upon it in his best-selling book, “Bad Blood: Secrets and Lies in a Silicon Valley Startup.”
Not only did leaders at Walgreens and Safeway allow their businesses’ vulnerability to fuel their infatuation with a strong vision—they also became smitten with “the messenger” as well.
“Here came this young woman in her mid-to-late 20s. She may have been young, but she [was] incredibly smart and incredibly charismatic,” said Carreyrou of Holmes. “She had already started dressing like (Steve) Jobs and using code words of Silicon Valley, like disrupt.”
In Safeway’s case, CEO Steve Burd established a close rapport with Holmes, who refused to communicate with anyone else at the supermarket chain but him. Burd blindly forgave the young entrepreneur for every delay, every excuse, and every avoidance of any raised issue—much to the frustration of his colleagues. When Burd was forced out of the company in 2013, the partnership with Theranos fell apart.
On the Walgreens side, Holmes had enchanted two top leaders–Chief Financial Officer Wade Miquelon and VP of Health Innovation Dr. Jay Rosan. They, too, were so taken with Theranos’s founder and her story that they refused to heed the warnings of an independent expert the company had hired to vet the Theranos technology. What’s more, Walgreens leaders’ judgment was further compromised by FOMO: a fear of missing out. The drugstore chain did not want CVS to swoop in and take the partnership from them.
Besides not letting one’s heart get carried away without one’s head, what is Carreyrou’s advice to companies contemplating an exciting new partnership?
Kick the tires and look under the hood.
Carreyrou cited Byron Trott, founder, chairman and CEO of private equity firm BDT Capital Partners, as a shining example of what to do when contemplating a hot ticket partnership.
“Trott talked for several months in fall 2014 about investing a lot of money in Theranos, but before [BDT Capital] did, Trott insisted Elizabeth show them the audited financials. She was evasive, she dragged her feet, and the reality was the last time the Theranos books had been audited was 2008,” Carreyrou said.
When Holmes had nothing to show Trott, he chose not to invest—even as other big-time investors leaned in.
“He was the only investor who asked for audited financial results of a company that was, at that point, 10 years old,” Carreyrou said.
Holmes’s upcoming criminal trial
Carreyrou believes that when Holmes left Stanford to start Theranos at the age of 19, her intentions were mostly good.
“I think she never abandoned the belief that she would carry out this vision and implement it. I think along the way she began to feel it was OK to cut corners and tell small lies for the sake of achieving the greater vision,” Carreyrou mused. He believes Holmes justified her misconduct to herself by rationalizing it was all for the greater good. Moreover, Carreyrou suspects she believed it was all part of the Silicon Valley culture of “fake it ‘til you make it” that people like Steve Jobs popularized and, through his legacy, legitimized.
Nonetheless, these kinds of rationalizations will not fly in criminal court. Holmes’s criminal trial on two counts of conspiracy and nine counts of wire fraud is set to begin in March 2021, and news broke late last week that Holmes is exploring the idea of a “mental disease or defect” defense in court.
Specifically, according to Carreyrou, Holmes’s legal team is “considering a battered woman defense. If they do go down this route, they’re going to allege [former Theranos chief operating officer] Sunny [Balwani] was a psychologically, or perhaps physically, abusive boyfriend and that he exercised this coercive control of Elizabeth during the decade-plus they were together—that she was so under his toxic influence that it got to the point where she couldn’t distinguish between right and wrong.”
Does Carreyrou buy this theoretical “mental disease” defense?
“I don’t believe that’s what happened for one second,” he said. “I believe that Sunny was certainly a bad influence, and that they perpetuated this fraud together in a partnership of equals, but I now have five years of text messages between them that prosecutors subpoenaed, and it shows they were always on the same wavelength. They would consult each other a dozen times a day about matters, big and small, and there is no suggestion that Sunny and only Sunny is the ringleader. If anything, at times he expresses caution and misgivings, and she never does. So personally, I don’t believe the defense’s theory, and I think it’s going to be really hard to get a jury to buy it.”