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Elizabeth Holmes and the Theranos Scandal

Research · June 2020

DOI: 10.13140/RG.2.2.29685.81124

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 Table of Contents

1. Introduction ............................................................................................................... 1

2. Background ............................................................................................................... 2

3. Legal Issues............................................................................................................... 3

4. Social Issues .............................................................................................................. 5

5. Ethical Issues ............................................................................................................ 7

6. Professional Issues .................................................................................................... 9

7. Conclusion .............................................................................................................. 11

7.1. Recommendations ................................................................................................... 12

Table of Figures

Figure 1 Founder of Theranos (Elizabeth Holmes) (Belludi, 2018) ................................... 1

 Professional Issues, Ethics and Computer Law CS5052NI

Abstract

This assignment is all about writing report about the theranos scandal. We are supposed to
do the case study of theranos from beginning to the downfall. So we did lots of research, read
reports and articles available in the internet. So I have written the background of this scandal
which includes what is theranos, its background and about its founder. Then, I have talked
about legal issues filed on theranos. Legal issues are about the lawsuits and charges against
theranos. Then social, ethical and professional issues are discussed in this report. Social issues
are about the different impacts of theranos in the society and people. The ethical issues are
those activities which have caused hamper in society’s moral principles. The professional
issues are such issues of the company which describe the professionalism of the company
founders and the company in overall as well. So by describing all these, this coursework is
wrapped with conclusion of Theranos Company in my point of view.

Dipak Kandel 18029578

 Professional Issues, Ethics and Computer Law CS5052NI

1. Introduction

Theranos is a health technology startup by Elizabeth Holmes in 2003. Theranos was a

private medical technology company. Initially, it was promoted as an innovative technology
company, claiming that it needed very little blood and was able to perform blood tests very
quickly with a compact automatic device named edision developed by the company. Theranos
raised more than $ 700 million from different investors making the company a unicorn.
Theranos served as a turning point in the blood test market for investors and media. Theranos
claimed that this technology is innovative, it only requires about extremely less amount of the
blood volume normally required for testing, and is much cheaper than conventional ancient
test methods. (Leiva, 2019)

Founder of Theranos, Elizabeth

Anne Holmes was born in
Washington D.C. Holmes went to St.
John's School in Houston. She was
interested in computer programming
in high school.

Elizabeth started her first business

by selling computer programs called
compilers. Holmes studied chemical
engineering at Stanford
University and worked as a Figure 1 Founder of Theranos (Elizabeth Holmes) (Belludi, 2018)

student researcher and laboratory assistant. After completing high school, Holmes took a blood
sample with a syringe in a laboratory to test for severe acute respiratory disease. In 2003, she
filed the first patent for a patch for portable drug management. In March 2004, she left Stanford
University's Faculty of Engineering and used her tuition fee as the first capital to start
Theranos. (Belludi, 2018)

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2. Background

Company started by a 19 year’s old Stanford dropout was turned to a scam of whooping
billions of dollars. Here we can assume that the founder Elizabeth was a genius in persuading
and convincing people to believe her idea. So that she able to raise such huge amount of
investments from different investors and venture capitals even without having actual product.
Theranos raised 6.9 million dollars as seed fund making the company valued at $30 million in
2004 which is the same year founder dropped out of her college. Then the company kept getting
funds again and again which resulted in making the company valued at $1 billion in 2010. So
after such large valuation of the company, it was introduced to world via different news and
media. Then again company got funding and it was valued for $9 billion resulting founder
Elizabeth become a billionaire. After that she got more and more attention and so do the
company. Questions were started to raise on how the technology works. But neither investors
nor employees knew about it. (Ramsey, 2019)

It was found that no employee could talk about inner secrets of the company due to the
non-disclosure agreement signed while getting in the company. The investors were also told
similar that it was a company secret which should not be disclosed. So Elizabeth had signed
non-disclosure agreement to everyone connected to the company so that the secrets never come
out. Yes it is okay to keep company secrets but the secrets were quite against laws, ethics,
professionalism and society. It was found that the technology developed by the company was
not working. All the tests that were supposed to be done by their technology were being done
by other test kits and machines from other companies. Also the few tests done by Edison: the
technology build by theranos were also found to be in accurate and faulty. (Seth Fiegerman,
2019)

So here it comes, a news based on interviews with ex-employees of the company was out
by a wall street journal article. News said that the technology Elizabeth was saying to all
investors and customers was turned out to be a lie. It was opposite to what Elizabeth has
claimed. So it turned the whole company and its founders’ scammers and theranos a billion
dollar scam.

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3. Legal Issues

 The Civil Case (From Investors)

This issues was raised by people including investment banker Robert Colman and other
peoples who had invested in theranos. This issue accuses the theranos company for lying about
the technology they are developing. Company has claimed that the device made by the named
‘Edison’ was capable of doing around 200 tests from just few drops of blood. This claim was
turned out to be false as Edison was not able to do even 50 tests accurately. So in the name of
company secret, company never disclosed the fact to investors, so investors keep investing
millions of dollars in fake claim of the technology developed by theranos. So it is the legal
issue for theranos from investors. (Aakriti Bhalla, 2020)

 Civil Fraud Allegation (From Security and Exchange Commission)

This issue was raised by the security and exchange commission (SEC) which is an
independent agency of the USA. This agency looks over the investors protecting them and
maintaining fair processes in the financial markets. So this issue is charged in order to protect
all investors who had invested on theranos by the influence as well as false claim of so called
test machine capable of doing 200 tests. So as it is duty as well as responsibility of security
and exchange commission to protect the financial market and investors, this fraud allegation is
filed. (Leiva, 2019)

 9 Wire Frauds and 2 conspiracy to commit wire fraud (From Federal Grand Jury)

Federal Grand Juries are groups of people who conduct legal activities and determining in
which criminal accident, the criminal charges should be applied. This issue was raises as the
company founder Elizabeth Holmes and COO Balwani were “engaged in a multi-million dollar
scheme to defraud investors and a separate scheme to defraud doctors and patients”. Therefore
Federal Grand Jury filed 9 frauds and 2 conspiracy to commit wire fraud against theranos.
(Tun, 2019)

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 Immediate jeopardy to patient health and safety (From Centre for Medicare &
Medicaid Services and Walgreens)

CMS found that the lab of theranos do not comply with the performance standards and
certificate requirements of the CMS. So Walgreens: a pharmacy store chain in United States
announced to stop doing its tests inside Theranos wellness centres. This issue made theranos
to get out of blood-testing business for two years and had to pay dollar thirty thousand. So this
issue was settled by theranos by paying fines and getting out of blood-testing business. (Gooch,
2018)

 Final decisions against theranos (From Court)

So despite all above issues against theranos, the final court decisions are to be made. The
government is about to charge two new wire fraud cases against theranos as theranos had
charged patients for their blood test which gave faulty and in-accurate results. So due to all
these wire frauds, court can fine up to 20 years in prison for both Elizabeth Holmes and Ramesh
balwani who was former partner of Elizabeth in this scam and $250,000 as fine and the
compensation for all the loses could be charged. For now, court hearing is suspended due to
COVID-19 so it is expected that final decision will be made in February, 2021. (Taylor Dunn,
2020)

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4. Social Issues

 The root lie

Even though, the CEO Elizabeth Holmes and COO Sunny balwani knew that their blood
testing technology was not capable of doing all 200 tests, they hide this fact to their investors,
board members, clients and media. That’s why they keep getting more and more funding and
company valuation by keeping the dark side of the company always a secret in the name of
company secrets. So this issue became social issue as theranos influenced whole society giving
keeping secrets to investors and giving false hope of evolution in Medical industry to the world.
(Lee, 2018)

 Fake demonstrations about technology developed

In order to get their technology named minilabs available to public use, Theranos claimed
that technology worked and made it look like it work. Theranos put their equipment in the
frontline but ran blood tests in other third party machines from other companies. So this
become social issue as it made people and laboratories to use theranos machine believing it
works and gives accurate result. (Naughton, 2018)

 Inaccurate test results of patients

Edison device developed by theranos was used in many laboratories allowing patients to
have their blood tested using this device. So many people used it as it was comparatively
cheaper and faster as claimed. But the result, Edison was giving was faulty of which patients
were un-aware. So it showed people having disease as disease free and healthy ones believe
they have disease in their body because of the faulty results. So it became a social issue caused
by theranos. (Carreyrou, 2018)

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 Misleading demonstrations and information to investors

When investors used to visit theranos, theranos used to take their blood samples and run
tests within the company premise which made investors believe that the blood is being tested
in the devices of theranos. So investors could easily believe that company and its product are
really working. But behind the curtain, the blood sample was tested using third party machines.
So investors easily believed in the company and pumped more than 700 million dollars to the
company. It became social issue, as company impacted all the investors and made them afraid
to invest in other genuine medical technology startups too. (Carreyrou, 2018)

 Influence of Elizabeth Holmes

Since founder Elizabeth was such a young female to achieve such huge success. Many
media houses, news ported wrote about her success and vision to change the world. People had
started to call her next Steve jobs and Theranos as apple of medical industry. So this all fame
had caused many people to get inspired and follow her path. But all this trust was broken as all
the scandal and scams become public. So it is a social issue as Elizabeth who was inspiration
of many people and her company was found to be fraud and making people fool all these years.
(Petersen, 2015)

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5. Ethical Issues

 Utilitarianism

Utilitarianism theory states that any consequence which give more advantage to more
people or which produce greatest good to greatest number is correct. But quite opposite of
utilitarianism, many things were happened inside the company. Company always thought of
oneself i.e. getting more funding, more valuation, media coverage and fame but never thought
of investors investing in the company, board members, employee’s career, patients using their
faulty technologies and life and death situation which could be caused by in-accurate results.
So Theranos never looked to bring more advantage to more people, instead tried more benefit
to the CEO and COO only. So ethical issue arise in the company for going opposite to
utilitarianism. (Driver, 2014)

 Deontology

Deontology theory states that the actions should be right or wrong under the set of rules
rather than consequences of the action. So according to deontology, theranos should not had
lied to investors, customers and media, as lying is wrong action itself. Theranos hide company
secrets even to its board member, here it again goes against deontology theory as hiding secrets
to the board members/investors is not the company rule. Board members should know the
company secrets but quite opposite to it, the facts are being hidden to board members and
investors in Theranos Company. So ethical issue based upon deontology theory also arises in
the company. (Hooker, 2012)

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 Virtue Theory

Virtue theory emphasizes on the moral characters of the person rather than his duties or
rules to follow or consequences of his actions. For Theranos, going according to virtue theory
would have led to do what a medical company should do for the welfare of people in the
society. Company should have done right things in right way but quite opposite to it, company
didn’t focused in right or wrong. They just keep hiding company facts to the public and even
investors which don’t shows virtuousness. Instead of apologizing their mistake when article
was published, company went to filed case against the publisher. So company’s character
seemed to be not good due to such actions. Therefore going against virtue theory is an ethical
issue of the company. (Tomilinson, 2012)

 Violation of Stakeholders right

Stakeholders are the collective owners of the company. So one of the fundamental right of
stakeholders is to know accurate and detailed information about company’s working and
functionality. Stakeholders have right to seek and get any information of the company and its
management at any given time. But this right is violated in the case of company theranos. In
the name of company secrets, Elizabeth is hiding secrets such as how Edison, minilab works.
So stakeholders are believing what she says. She convinces stakeholders to believe that
company’s technology can do 200 tests with single drop of blood which is very opposite to the
reality. So stakeholders in theranos are deprived of their rights to know information about the
company. So this is an ethical issue as the real owners’ right are violated inside the company.
(Kotak Securities, 2005)

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6. Professional Issues

 False Advertisements

Although the product developed by theranos was faulty and inaccurate. Many
advertisements were made, marketing was done which made people believe in their product
and the results. So professionally, it is an issue to do advertisement of product that is not
useable by public. It is misleading and it has increase belief in a false claim done by theranos.
So it did opposite to the societies’ and human’s well-being. So it become a professional issue.
(Miller, 2016)

 Toxic working environment

From the ex-employees working in Theranos, it was found that company’s corporate
culture was extremely unfair. The office space was made in such a way that people cannot talk
to each other. Employees of different departments were not allowed to communicate. No-one
in the company was allowed to talk about the faulty technology being used. If someone tried
to talk to CEO about problems in the machines, either he would be ignored or would be fired
without any warning. So it is a professional issue as no reason was given to employee before
their termination and company used to force employees to resign by simply ignoring them and
stop listening to any requests eventually giving no value to employee. (Carreyrou, 2018)

 Privacy Issues

While working in the company, each individual used to be watched all the time giving no
chance to work freely. Even each mail written by employees used to be watched secretly by
Elizabeth. So, employees of Theranos could never enjoy freedom of speech and privacy inside
the company. People who quit the company were followed by the legal team of theranos which
threatened ex-employees to file lawsuits. So it was morally as well as professionally wrong
with employees so it is a professional issue inside theranos. (Rothke, 2018)

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 Elizabeth lying to Media

Even being a CEO of Theranos, Elizabeth was not honest to media and interviews. She was
not ready to accept the dark secrets of the company after the claims were made by wall street
journal article. She keep hiding the facts of the company and even filed case against the article
being published. So it is not professionally correct to sell the product by lying. Therefore
Elizabeth not being honest to interviews and media is a professional issue. (Leah Ginsberg,
2009)

 Cheat with Walgreens

A contract was signed to launch blood testing services of theranos in Walgreens by the 1st
February of 2013 but theranos did missed the deadline. It shows lack of punctuality and
professionalism in the company. Then deadline was postponed so service were supposed to be
launched by September. But still the minilab (the device which was said to be deployed in
Walgreens) was not ready. So cheating Walgreens, Elizabeth and COO Ramesh Balwani
decided to launch with older device called Edison. So not operating as according to contract,
theranos cheated the Walgreens. So it is a professional issue to cheat and not to obey the
contract between companies by a company. (Carreyrou, 2018)

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7. Conclusion

After studying the complete story of theranos from start to downfall, I come to the
conclusion that this scandal is result of over confidence and boast of Elizabeth Holmes. First
of all, she should have started with gaining knowledge base on particular field of medicine on
which she was about to enter. She started Theranos out of no prior knowledge and former
education about medicine. She should have started with small kits to do blood tests. Then the
scandal got its base when investors poured lots of funding without having any physical product
and research on the field. If investors had asked for product or at least prototype before
investment, this wouldn’t have been happened. Then the mistake is again repeated when
company fired people who would talk about faulty theranos product. Instead of firing, those
employees should have been appointed to make the product better. So there are many such
cases inside the company, which summed up to bring the company to a billion dollar scam.
There were many chances to reduce the mistakes and make the company great. But due to bad
management and individualism of Elizabeth Holmes, company got into back of bars causing
loss of investors in millions.

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7.1. Recommendations

As a public and well-wisher of any company, I want to give some recommendations to

theranos which could have minimized their lawsuits and charges from the scandal.

 Elizabeth failed to develop the technology to do 200 plus tests, but few dozen tests
were being done from their technology. So instead of working on 200 tests, they
should have focused on making those few dozen tests to give 100% accuracy. So
that they could talk to investment with plan to add more and more tests in the same
machine.
 The company turned into scam because of the way Elizabeth has taken when their
technology failed to do all the tests, so instead of lying to investors and faking that
the technology can do all tests, she should have stopped doing marketing for faulty
product and started making small developing and marketing small products having
high accuracy.
 Instead of firing employees who talk about the faults in product developed,
company should have talked and worked with those employees to reduce
deficiencies in the machine. So that no one will resign from company and
eventually product will be improved and this scandal would have never disclosed
to public.
 Instead of backing off to the media who published news about their dark secret,
company should have apologized their mistake and should have promised investors
to return their money. So that they wouldn’t file case against company.

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