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Theranos former lab associate Erika Cheung, a brave whistleblower, led the way as one of the first trial witnesses at Holmes’ fraud trial
INTRODUCTION
Theranos founder and CEO Elizabeth Holmes finally has the opportunity to confront and cross-examine the government’s witnesses. Holmes is battling accusations that she defrauded patients and investors by promising that her technology could test for dozens of health conditions using just a few drops of blood from a finger prick. The technology did not work as promised.
Holmes has pleaded not guilty to 10 counts of wire fraud and two counts of conspiracy to commit wire fraud. Her lawyers describe her as guilty of little more than running a failed business, not fraud.
DISCUSSION
The first witness was former Theranos Financial Controller, Danise Yam, to talk about managing finances at Theranos Inc. from 2006-2017. Yam testified that the blood-testing company accumulated losses of $585 million from 2003 to 2015.
THE FINANCIAL CONTROLLER
Yam said the company went years without having its financial statements audited, which she thought was unusual for a private company. A company of Theranos’ size and status would want an outside firm to audit its financial statements. “It gives credibility,” she said.
Yam testified that in early 2009 the company had problems making payroll and paying vendors, and she said that she had to “pick and choose” who to pay. Theranos got through that period by taking out a loan, personally backed by Sunny Balwani, Holmes’ former boyfriend and co-defendant.
Yam also testified about Theranos’ finances from 2009 to 2011, which showed the company had net losses of $11.5 million in 2009, $16.2 million in 2010, and $27.5 million in 2011.
During her testimony, Yam said that as the years went on, sometimes Theranos had no revenue at all, including in 2012. She revealed how tight cash flow was at a time when Theranos spent a few million dollars each week without revenues. Specifically, prosecutors asked Yam whether Theranos had any revenue-generating contracts with the Defense Department or the US military.
“No,” Yam replied.
These questions support prosecutors’ claims that Holmes lied to its Board, partners, and investors about Theranos’ finances. Through Yam’s testimony, prosecutors established that Theranos provided inflated revenue projections. Potential investors received a list of revenue projections, including $140 million in 2014 and $990 million in 2015.
Prosecutors asked Yam if she had “any idea where that number came from?” Yam replied that she did not, adding that she wasn’t involved in preparing those projections.
A WHISTLEBLOWER
For her role in the Theranos case, Erika Cheung is a poster child for whistleblowing and speaking truth to power.
Cheung was a critical witness for the prosecution, and she testified for three days.
Cheung testified that Theranos’ proprietary technology often did not work as advertised, if at all, and that the company cut corners to give the impression that its product was ready for wide-scale patient use. By the time Cheung arrived at Theranos to work as a lab associate, the company was already offering tests to the public at Walgreens pharmacies.
Specifically, in 2014, Cheung discovered that Theranos’ blood testing technology did not work as promised, and she resigned after concerns that Theranos’s processes were putting patient safety at risk. Asked why she left the company less than a year after she started, Cheung said she didn’t think the company’s technology was ready to process patient samples.
In 2015, Cheung wrote a letter to the Centers for Medicare and Medicaid Services stating that Theranos ignored standards for staff credentials, frequently used expired lab supplies, and its proprietary testing devices had “major stability, precision and accuracy problems.”
“I left Theranos because I was uncomfortable processing patient samples,” using the company’s technology, she testified.
Theranos told investors that its proprietary machines could run hundreds of tests with just a finger prick worth of blood. This was untrue. Cheung explained that Theranos could never handle more than 12 types of blood tests on its proprietary Edison machine and instead ran most tests on modified third-party machines.
Cheung also testified that Theranos provided misleading documents to patients and doctors. One document listed hundreds of tests for patients, who could choose between a venous blood draw and Theranos’s signature finger-prick sample. In reality, Theranos could only run four to nine tests using a finger-prick sample and the proprietary Theranos machine. Moreover, many tests could not be done even on a standard commercial analyzer without the traditional blood draw from the patient’s arm.
“Just because they’re less expensive doesn’t mean you should give someone false information about their health status,” said Cheung.
Another misleading practice at Theranos was promising a two-hour turnaround for patient test results, which often turned into two to three days.
Finally, Cheung testified in no uncertain terms that the company manipulated lab results data. She said that lab employees routinely manipulated the data when running quality control tests, in an attempt to keep the company’s proprietary devices “operating.”
Quality control tests help labs determine if machines can produce a known result on a given blood sample. During Cheung’s six months working in Theranos’ lab, she testified that quality-control tests routinely failed. To get around these failed tests, Theranos came up with its own protocol. Lab workers threw out two of the six data points produced during quality-control tests, randomly calling them “outliers.”
To close out her testimony about the systemic failures at Theranos’ lab, Cheung, prosecutors showed her an email from Daniel Young, a Theranos vice president in charge of Bio-Statistics. Young’s email claimed that they had fixed the quality-control issues Cheung raised.
“I disagreed with Mr. Young,” Cheung testified.
Since she left Theranos, Cheung has talked openly about how she faced retaliation from Theranos when they suspected she was talking to a Wall Street Journal reporter n 2015. One night, Cheung says she was working late at a job she took after leaving Theranos when she noticed that a man was sitting in the parking lot outside of her new workplace. The man gave Cheung a letter from Theranos’ law firm threatening a lawsuit for violating her nondisclosure agreement. At this point, Cheung also realized the company was following her: the letter included a temporary address where she just moved in with a friend.
Theranos took aggressive steps to try to intimidate Cheung from speaking up. Cheung’s experience appears consistent with the prosecution’s argument that Theranos had a culture of secrecy and used threats or intimidation with former employees to maintain the fraud.
CONCLUSION
Follow our blog for regular updates on the testimony and developments in the Holmes Silicon Valley fraud trial over the next several months.
In our next post, we cover the testimony of former Defense Secretary James Mattis, a Theranos Board member, and investor.
Click here for more information about the critical role whistleblowers like Erika Cheung play in exposing wrongdoing: Whistleblowers & Criminal Conduct.
