First witnesses in Elizabeth Holmes' fraud trial say Theranos manipulated lab data, inflated revenue projections

Elizabeth Holmes
In the first week of witness testimony in former Theranos CEO Elizabeth Holmes’ federal fraud trial, former employees of the blood-testing startup testified that the company regularly engaged in deceitful behavior both in the lab and in investor presentations. (DoD Photo by Glenn Fawcett)

The first two witnesses took the stand this week in former Theranos CEO Elizabeth Holmes’ federal fraud trial, both former employees of the disgraced blood-testing startup who mapped out the corners they say were regularly cut in the lab, the boardroom and beyond.

Witness testimony begins after the prosecution and defense traded opening statements last week. To start, the prosecution described Holmes as a bloodthirsty leader (pun very much intended) who knowingly lied to investors, partners and patients about the capabilities of Theranos’ benchtop blood-testing machine, all in pursuit of fame and fortune.

Holmes’ defense, meanwhile, sketched out their plans to paint her as a young, first-time CEO who, though relentlessly optimistic about her vision, was ill-equipped to deal with the many roadblocks that cropped up throughout Theranos’ life span. They’ve also suggested that her decision-making abilities were further stunted by the allegedly manipulative and controlling behavior of Holmes’ ex-boyfriend and former Theranos Chief Operating Officer Ramesh “Sunny” Balwani, who has issued a blanket denial of those claims.

At stake in the trial are 10 counts of wire fraud and two counts of conspiracy to commit wire fraud, each of which carries a fine of at least $250,000. Holmes faces a maximum possible sentence of 20 years in prison, as will Balwani when his trial begins for the same 12 counts next year, once Holmes’ is complete.

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First to take the stand: Danise Yam, who served as Theranos’ financial controller for over a decade. Though she was initially sworn in last Wednesday in the short time left in that day’s allotted time after opening statements, the bulk of her testimony came when the trial resumed Sept. 14.

In it, Yam testified that Theranos took in no annual revenue at all in 2012 or 2013, according to Forbes, and that she had projected revenues that maxed out at $132 million in 2016. That’s in stark contrast to materials given to investors estimating that the company would draw $140 million in revenue in 2014, for example, and a whopping $900 million the following year—numbers that Yam said she hadn’t come up with.

She also detailed total losses of $585 million between 2003 and 2015, noting that even as money became increasingly tight, Theranos continued to burn through millions per week and, in 2015, saw Holmes’ salary double to $400,000. In the 2015 tax return listing the company’s $585 million lifetime deficit, Theranos reported just $429,000 in revenue.

Despite those losses, Yam explained how Theranos continued to induce investors to buy 530 million shares of private stock between 2014 and 2015, during which the share price surged from 17 cents to $17, bringing in a total of more than $944 million.

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Next up was Erika Cheung, who worked as a Theranos lab associate for less than a year in 2013 and 2014, then turned federal whistleblower after witnessing and being asked to conduct what she described as fraudulent practices in the startup’s labs.

She recalled those practices to jurors on Tuesday and Wednesday. After joining the company fresh out of college and excited to work for a CEO hailed as a visionary, Cheung said she quickly became disillusioned. At one point, per the The New York Times, she underwent a blood test using its device and was told she had a vitamin D deficiency that no other test had identified.

Despite Holmes’ dream of running hundreds of blood tests on the Edison analyzers simultaneously, Cheung said that in reality, they were only ever able to run a maximum of 12 tests at once. Instead, she testified, most of their tests were run on other companies’ devices.

Her confidence in Theranos’ mission waned further when, during quality control tests, she regularly witnessed lab workers deleting up to two of six data points to remove outliers and make the results seem more positive.

When shown a chart suggesting that about one-quarter of the blood tests run on Theranos’ devices failed quality control, according to CNBC, Cheung pointed out that testing machines that are cleared by the FDA (unlike Theranos’) rarely fail those protocols.

“You’d have about the same luck flipping a coin as to whether your results were right or wrong,” she said. “It was concerning to see this degree of failure—this was not typical for a normal lab.”

In response, Holmes’ defense team claimed Cheung had only minimal interactions with the CEO and, as Cheung confirmed, never brought up these issues with Holmes directly. They also presented documents signing off on the results of those quality control tests for regulators, noting that Holmes wasn’t one of the signers.

That evidence echoes the defense’s claims in its opening statements that Holmes wasn’t privy to many of the regulatory issues within Theranos’ labs, which they say were instead the responsibility of the lab directors and Balwani, who was reportedly in charge of overseeing the facilities.

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Much like the failed startup at its core, Holmes’ trial has been plagued by issues. For one thing, it began more than a year after its scheduled kickoff date, thanks to a handful of delays caused by the defense team’s need for more time to review the evidence, then by the COVID-19 pandemic and finally, in March, by Holmes’ pregnancy.

Even now that it’s begun, however, the trial’s path has been far from smooth. After last Wednesday’s opening statements, the trial was scheduled to resume Friday but was forced to take a hiatus after a juror reported possible exposure to COVID. Then, once proceedings restarted on Tuesday, another juror had to be excused after learning that her employer wouldn’t compensate her throughout her participation in the trial, which is expected to stretch until January 2022.

Barring any further interruptions, the jurors will continue to hear from witnesses drawn from a list of hundreds. The star-studded roster includes past champions of Theranos like Henry Kissinger and Rupert Murdoch as well as healthcare leaders like Eric Topol, M.D., and former Cleveland Clinic CEO Toby Cosgrove, M.D., who were cautiously optimistic of the company’s proposed technology. Holmes, her parents and her brother could also be called to testify.

According to The Wall Street Journal, the likely next witness will be Daniel Edlin. The former Theranos project manager may be asked to shed some light on claims the company made about its technology to eventual partner Walgreens and the U.S. Department of Defense—with whom the company never had any revenue-generating contracts, Yam testified, contradicting the claims of a profitable partnership that Holmes allegedly made to investors.