Theranos

When I look out my office window in Palo Alto, California, I can stare at the next potentially big fraud: Theranos. As I watched the construction of the company’s impressive new headquarters in 2014, I thought Theranos would become another iconic Silicon Valley firm. I had no idea that the shiny glass and steel facade was possibly hiding a labyrinth of secrets, lies and half-truths.

In 2003, Elizabeth Holmes, then 19, dropped out of Stanford University to begin Theranos and develop an innovative blood-testing device that she said would give quicker results using just one drop of a patient’s blood.

On Oct. 15, 2015, Holmes, Theranos’ chairman and CEO, appeared on the CNBC program, “Mad Money,” with Jim Cramer to defend her company from a scathing Wall Street Journal article published that day. (See Theranos CEO fires back at WSJ: I was shocked, by Abigail Stevenson, CNBC, Oct. 15, 2015.)

The WSJ article, citing multiple sources of current and former employees, claimed that the $9 billion company was in fact a huge fraud based on unproven science, stellar marketing, impressive connections, the media’s love affair with Holmes’ origin story and a team of cutthroat lawyers willing to do anything to keep the company veiled in secrecy. (See Hot Startup Theranos Has Struggled With Its Blood-Test Technology, by John Carreyrou, The Wall Street Journal, originally published on Oct. 15, 2015, and updated on October 16.)

Although Holmes had been a previous guest on “Mad Money,” this interview was quite different. Instead of lauding her vision of working to change the world, Cramer pressed her to defend her company and herself against the WSJ’s accusations. In many fraud examinations, the first interview with an accused fraudster can be one of the most telling. Confrontation can elicit a fight-or-flight response. Holmes decided to fight. However, the media reported additional details of various investigations by regulators and law enforcement agencies that clearly contradicted her statements in this and other interviews. (See Theranos Retreats From Blood Tests, by John Carreyrou and Christopher Weaver, The Wall Street Journal, Oct. 6, 2016.)

At the time of her “Mad Money” interview, Holmes had a seemingly unending list of accomplishments and accolades. She had been on the covers of Forbes and Fortune magazines. Forbes named her the youngest female self-made billionaire, with a net worth estimated at $4.5 billion.

Time magazine named her one of the Top 100 influential persons in 2015, and she often appeared on stage with world leaders, such as former President Bill Clinton. She was heralded as a brilliant scientist and visionary although she was a Stanford University dropout and didn’t have any formal medical experience or training. (See How Elizabeth Holmes’s house of cards came tumbling down, by Nick Bilton, Vanity Fair, October 2016.)

Although the Theranos saga is far from over — the company is fighting multiple lawsuits and regulatory actions — I’ll limit my analysis to the “Mad Money” interview. It provides us with valuable insights into how we can apply our interviewing skills as fraud examiners not only to the standard-type fraud examinations we deal with daily but also to unusual high-profile “personality cases” like Theranos.

So, could it really be that Holmes, whom the media had been comparing to Steve Jobs and Bill Gates, was the ringleader of a fraud as suggested in the WSJ article? Let’s take a look into the nine minutes, 31 seconds interview and highlight some of the obvious red flags. (Watch the entire video yourself to find even more.)

Trying to set the tone as a victim

Most of the time when we interview suspected fraudsters we want to ask open-ended questions. This allows us to sit back, listen and gather information, which we can later use for further questions and steps in our examination. But sometimes you’re simply looking for either confirmation or denial of certain allegations.

Presenting your interviewee with a statement of fact and asking them a yes/no question can be enlightening. In this live exchange — in which Cramer interviewed Holmes via a video connection — he dives straight into the allegations of the WSJ article:

Cramer: “Elizabeth, what do you think is going on here?” (An open-ended question.) 
Holmes: “This is what happens when you work to change things, and first they think you’re crazy, then they fight you and all of a sudden you change the world …”

She begins her response by classically framing herself and Theranos as victims in a larger plot involving multiple external parties and stakeholders. This is red flag No. 1.

Holmes’ response lasted more than a minute, and she used words and phrases such as “I’m shocked,” “can’t believe it,” “unfounded” etc. to talk about the lack of credibility in the sources the WSJ used in its reporting.

Providing classic non-answers (that sound like answers)

Cramer’s next question is a follow-up to her first answer:

Cramer: “Did The Wall Street Journal know everything you said before they printed the article?”
Holmes: “Uh, uh, of course. Absolutely.”

Red flag No. 2. Whenever someone avoids answering a straightforward question with either “yes” or “no,” we need to be suspicious. As our interviewing training teaches us, most people have a hard time looking you straight in the eye and lying. Even though this response might look like she’s saying yes, she isn’t. She’s pausing and then agreeing with an unspoken assumption of yes.

Selling a story

Next question:

Cramer: “Why not sit down with them months ago and explain your side of the story?” 
Holmes: “Sure, yeah, I mean ... The Journal actually had a member of their editorial board write the very first piece on Theranos and that person, Joe Rago, came out to our labs, saw our systems and really got insight into our work. That was about a year ago. I published my op-ed …”

Holmes then continues rambling for approximately another minute.

Red flag No. 3. She gave a lot of information in her long and laborious response. However, again, she never answered the initial question: Why did she avoid sitting down with WSJ reporters during a five-month period?

Also, she begins using more speech modifiers, small words such as “of course,” “sure” and the “uhms ...” in her responses, which indicates someone trying to buy time to develop a story in her mind. In prior interviews before the WSJ article, her speech is smooth with almost no speech modifiers. (See an example.)

Avoiding the question

After Holmes’ long-winded responses, a visibly confused and frustrated Cramer asks, “Theranos also hasn’t disclosed publicly that it does the vast majority of its tests with traditional machines bought from companies like Siemens AG, true or false?”

Holmes: “So this is taking completely out of context, um, starting when we launched our services in 2013 we put on our website that we do venous testing, so blood draws from the arm the traditional way. Starting in 2015 we announced and it was published in a San Francisco paper, in Fortune, I talked about it in an interview I did with Forbes that we made a decision, to expand our test menu … [continues rambling on and on and then concludes] And so yes, now we have a huge number of tests that are available through our lab, but instead of charging $10,000 for them, we’re charging $2.99.” 
Cramer: “Okay.”
Holmes: “And this is listed on the Walgreens website, we’ve put it in our own press and it’s been out there.”

Red flag No. 4. When you ask a specific question and even include the binary answers you’re looking for — “true or false?” — but the interviewee spends several minutes explaining something else, you know you’ve found an area so painful to your interviewee that they can’t even verbalize a response.

If Holmes was telling the truth, she should’ve started off answering “false” and then explained why. But instead she rambles on about something else and then answers a completely different, unasked question: “Yes, we have a huge number of tests that are available through our lab. …” Then she adds, for good measure, a note about the value of her services: “… But instead of charging $10,000 for them, we are charging $2.99.” What? Lastly, she mentions, “This is listed on the Walgreens website” — and it’s unclear to what she’s referring.

Cramer, like a good investigative reporter, keeps digging into the facts.

Cramer: “Well, how many tests can your device Edison do? The Wall Street Journal says it can only do 15 out of 240?”

Now, if Holmes wasn’t avoiding the truth you’d probably expect Holmes to respond with a number. That’s not what she gives.

Holmes: “Yes, so we had communicated to The Wall Street Journal that we had submitted over 130 pre-submissions to FDA with tests running on our proprietary devices, um, and have been taking those through the FDA submission process.”

Again, she rambles on and then finishes with: “So that every single thing that runs on our platform is getting to the point that it’s going to be FDA cleared.”

Red flag No. 5. Confusion instead of clarity. If you’re more confused after you ask a question than before, the interviewee certainly hasn’t answered what you were asking.

Just don’t sue me, and everything will be fine

Unlike previous big frauds I’ve analyzed for this column in which the examined organizations’ CEOs resigned, Holmes is still at the helm of Theranos and was in control of a reported $200 million at the end of 2016, according to Theranos Offers Shares for Promise Not to Sue, by Christopher Weaver and John Carreyrou, The Wall Street Journal, March 23.

Apparently, you can still invest in Theranos if you trust in Holmes and her vision. You just must promise not to sue her.

Steve C. Morang, CFE, CIA, CRMA, is a senior manager at a Northern California-based CPA firm and president of the ACFE’s San Francisco Chapter. His email address is: steve.morang@yahoo.com.