Elizabeth Holmes’ 11-year sentence explained by the tech bubble: NPR

Elizabeth Holmes was sentenced to 11 years in federal prison last week in San Jose, California, after a jury convicted her earlier this year of defrauding investors through her former blood testing company. Theranos.

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Elizabeth Holmes was sentenced to 11 years in federal prison last week in San Jose, California, after a jury convicted her earlier this year of defrauding investors through her former blood testing company. Theranos.

Nic Coury/AP

Elizabeth Holmes’ 11-year prison sentence would not have been possible without the zeal that the wealthy have for Silicon Valley startups.

When US District Judge Edward Davila ordered jail time for the former CEO last week, one thing was key: how much money the investors had lost because of his crimes.

That’s because federal sentencing guidelines, which judges use to determine appropriate punishments for people convicted of felonies, place more weight on the amount of money lost than anything else in fraud cases.

And Theranos, like so many vibrant startups, was awash with investment cash. It raised an estimated $945 million from the likes of media mogul Rupert Murdoch, Oracle founder Larry Ellison and former education secretary Betsy DeVos.

Yet Holmes was convicted of only a fraction of the nearly $1 billion in investments Theranos had raised.

Davila identified ten investors who were defrauded and gave this number: $121 million, which the judge said was how much the investors lost if offset by the amount Theranos stock would have been worth without Holmes’ deception.

To put it another way, Holmes received more than a decade in prison for about 10% of what Theranos collected.

“The numbers in Silicon Valley are so out of whack with reality that these driving sentences become huge,” said Jeff Cohen, a former federal prosecutor who now teaches at Boston College Law School. “If he ran a widget factory with the same conduct, he would have received much less.”

While other Silicon Valley executives have been accused of wrongdoing, Holmes is the first CEO of a major tech company to be prosecuted and sentenced to prison.

That means she’s the first in the industry to know that raising hundreds of millions of dollars will not only cause a startup’s valuation to skyrocket, but if convicted of fraud in federal court, could make a serious prison sentence all but inevitable – potentially a warning to other imploded tech firms now under scrutiny, such as Sam Bankman-Fried’s FTX cryptocurrency exchange.

According to former federal prosecutor Bill Portanova, federal sentencing guidelines consider the amount of money drained the most significant factor in punishing fraudsters because it allows authorities to target organized drug rings and large-scale institutional fraud.

“For Silicon Valley, if at the end of the day the music stops and there aren’t enough chairs for everyone, the guidelines indicate severe punishment,” said Portanova, who is now a defense attorney in Sacramento, California.

Former Theranos CEO Elizabeth Holmes in federal court in San Jose, Calif., Oct. 17.

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Former Theranos CEO Elizabeth Holmes in federal court in San Jose, Calif., Oct. 17.

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Holmes’ punishment comes amid signs of a tech sector becoming less frothy. Both Big Tech companies and startups are laying off staff, new $1 billion companies are getting harder to spot, and venture capital firms are warning of a tough road ahead. Has the tech bubble burst or is it about to burst? That determination, experts say, is easier to take in hindsight.

“Tech bubbles don’t burst the way a bubble bursts from chewing gum,” said David Kirsch, a management professor at the University of Maryland who has written a book on bubbles and crashes. “Investment bubbles tend to deflate slowly.”

A long prison sentence for “a gross lie”

Holmes made patients, pharmacies and savvy investors believe that Theranos could revolutionize the way blood tests detect disease when it could do nothing of the sort.

Why did he do it? It’s a question Davila also pondered from the bench before announcing his free-kick.

“What led Mrs. Holmes, unfortunately, to those decisions that she made?” Davila said. “Has there been a loss of moral compass here?” he said. “Was it hubris? What caused it? Was it the intoxication of fame that comes with being a young entrepreneur?”

Whatever prompted her, as soon as a jury convicted Holmes, she faced serious jail time.

Sentencing guidelines, after considering a multitude of factors, spit out a level of offense. Holmes’ level was 33, including 24 points from the amount of money he cheated.

And Davila, it could be argued, could have imposed an even harsher punishment. Based on his felony level, Holmes’ sentence range was between 11 and 14 years behind bars.

(For context: The US Probation Office recommended 9 years; prosecutors asked the judge that Holmes be jailed for 15 years. The maximum sentence under the law was 20 years. Holmes’ legal team demanded that he serve his sentence at home and avoid incarceration.)

Portanova said Holmes’ punishment came with a lot of money, but his actions — repeatedly professing that his technology could do what it couldn’t do — were egregious.

“She wasn’t just an ambitious saleswoman who took to skiing,” she said. “She spent a lot of time because she was a gross lie and she had ample opportunity to stop and she didn’t.”

Will ‘make it ’til you make it’ ever change in Silicon Valley?

In their statement to the judge before the sentencing hearing, prosecutors argued that Holmes’ jail time was needed to “discourage future startup fraud schemes” and to “rebuild the confidence investors need to have when funding the innovation”.

But will Holmes’s incarceration have that effect?

Some argue that the Theranos case could be the beginning of more aggressive surveillance of Silicon Valley by federal prosecutors.

“In Silicon Valley, there’s historically been a mentality of not following the rules, because that’s how it goes,” said Steven Davidoff Solomon of the UC Berkeley School of Law. “Holmes may be the first, but I suspect there will be more.”

Yet advertising a product and exaggerating are not crimes, but what is a crime is knowingly deceiving investors. Sometimes the line isn’t so clear, experts say.

Cohen of the Boston College of Law said the line between beautification and criminal fraud remains very blurry for the most part in the tech world, so there’s slim chance Holmes’ ruling will reverberate in a way that would drastically alter the culture of the industry. .

The “fake it till you make it” culture in Silicon Valley carries a certain amount of bloat, and here the jury said there was more: there was fraud,” Cohen said.

“But I think that’s a really hard line to discern,” he added. “And I’m not hopeful Silicon Valley will get the message.”

Kirsch, who studies tech entrepreneurs, was equally skeptical of a major shake-up in the world of venture capital-backed tech startups.

“The risk community is vulnerable to a bright new story. They have been. They always will be,” he said. “We’re kidding ourselves if we think the recipe will change because Elizabeth Holmes goes to prison.”

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