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Safeway wasted $400 million with Theranos to retrofit grocery stores to offer blood tests. The project never materialized.
INTRODUCTION
We continue to learn about the federal criminal justice system through the developments in the white-collar fraud trial of Elizabeth Holmes. Holmes faces federal charges for defrauding patients and investors with lies about her revolutionary blood-testing technology.
*Pro-Tip: Remember to consult legal counsel for legal advice regarding any court case. Prison Professors, an Earning Freedom company, regularly helps clients locate and vet experienced white-collar defense counsel. We work alongside, not in place of defense counsel to help clients obtain better outcomes.
The prosecution continues to parade witnesses before the jury to establish that Holmes was directly involved in making knowing misrepresentations to the public, investors, business partners, doctors, and patients.
For its part, the defense continues to forcefully cross-examine each and every witness, as is every criminal defendant’s constitutional right under the Sixth Amendment. One leading strategy the defense has used so far is to distance Holmes from direct involvement in the day-to-day operations. This is a tall task, as the evidence mounts that she was in charge of Theranos at all relevant times in all the critical areas.
DISCUSSION
Prosecutors called Steven Burd, the longtime Chief Executive Officer of Safeway, to testify at the trial of Theranos founder Elizabeth Holmes.
Burd told the jury details of the failed partnership between Theranos and Safeway, the grocery-store chain. Burd was CEO of Safeway for about two decades before retiring in May 2013.
Safeway spent close to $400 million building health clinics in stores in order to put the blood-testing company’s devices inside its stores. Burd’s vision to offer customers a convenient stop for prescription drugs, blood tests, and groceries never materialized.
Even so, to prosecutors, the millions Safeway threw at this project shows they took Theranos’ representations very seriously and relied on them to their detriment.
Due Diligence
To the defense team, Safeway is a sophisticated investor that spent most of its investment money retrofitting stores. Indeed, Safeway was able to re-use the space planned for Theranos clinics, and in fact, another blood testing company now uses the space Safeway designated for Theranos.
Moreover, sophisticated investors rely on their own due diligence before investing, and Safeway did extensive due diligence on Theranos. Safeway spent hundreds of hours on due diligence. Only after consulting with renowned experts from respected medical institutions did Safeway decide to partner with Theranos.
At the trial, the jury saw an email from Burd in which he said that Safeway had spent hundreds of hours independently investigating Theranos and had been in daily communications with Holmes for at least a year. In the email, Burd claims to know so much about Theranos that he tells another business executive that Safeway could likely answer many of his questions about a potential partnership with Theranos.
Specifically, Burd stated that the Safeway executives in charge of the health and pharmacy divisions spoke to the lab directors at Johns Hopkins University and the University of California, San Francisco, about Theranos’ technology. Burd also brought Holmes to a dinner meeting with an oncologist, who indicated that if Theranos could do what Holmes claimed, it would be “a game-changer,” Burd testified.
Mistakes, Delays, And Broken Promises
But Burd told the jury that Theranos failed to deliver on many of its promises and did not meet agreed-upon deadlines. As a result, he grew increasingly frustrated.
Despite these frustrations, Burd stayed the course of trying to make things work. In one email to Holmes around January 2013, Burd wrote:
“This does not feel like a partnership.”
“I believe in you. I believe in your company. And I share your vision. I want so much to help you change the world,” Burd wrote in the email, which prosecutors displayed in court. “But I have never been more frustrated. I want to help, but you are making it difficult.”
But as a result of Theranos’ sloppiness, broken promises, and missed deadlines, the relationship between Safeway and Theranos slowly unraveled, Burd told the jury.
First of all, Theranos’ lab operations were sloppy. Burd said Safeway’s own lab reputation was at risk because of Theranos’ sloppiness. During an early trial run at Safeway’s corporate campus, blood samples were lost or stored at the wrong temperature, and many test results were wildly inaccurate.
Moreover, the agreed-upon launch date had been delayed for over a year with no real explanation from Theranos about the constant delays.
Burd testified that, at one point, Holmes mentioned secret negotiations with the Department of Defense as a justification for the delays with Safeway. Holmes told him that Theranos was negotiating to provide its services to military medivacs used on the battlefield. No such negotiations ever took place.
Safeway continued to do its part, and by 2012, two years after signing a deal with Theranos, Safeway had retrofitted over 950 in-store clinics to accommodate the Theranos machines. Safeway had also hired and trained 26 phlebotomists to work in the clinics.
Burd also learned that Theranos’ blood testing results took three to five days to return to patients, not the 20 to 30 minutes Holmes had touted. By contrast, Burd pointed out that Quest Diagnostics Inc., one of the country’s most extensive laboratory services companies and a Theranos rival, delivered most of its test results to patients the next day.
Burd’s testimony begs the question: did Burd and Safeway really not know that Theranos used venous blood draws instead of finger prick blood draws for most tests, or that Theranos ran most tests on conventional analyzers?
How a juror answers this question could be crucial to the final outcome in the case.
The defense will argue that if Burd knew Theranos did not rely on finger-stick blood samples, for example, then Holmes did not defraud Safeway. Breaking a contractual promise is one thing, but criminal fraud is another. Theranos may not have made good on its promise to develop technology that would revolutionize blood testing. But failure, as Holmes’ defense team said in opening statements, is not criminal.
Becoming Discouraged
In November 2012, Burd sent an email to Holmes with the subject: “Becoming Discouraged.”
He wrote: “As I am sure you know, I am not easily discouraged. In fact, I can only recall having been discouraged once in the last 62 years. That said, I am getting close to my second event.”
In court, he testified that his email was not hyperbole: “I am one of the most positive people you’ll ever meet. I don’t get discouraged.”
CONCLUSION
One thing that is evident from former Safeway CEO Steven Burd’s testimony so far is how badly the company wanted to believe the Theranos story. Safeway practically needed to believe that Elizabeth Holmes could do what she claimed she could do.
This can happen to many companies in business fraud cases because of the fear of missing out clouds people’s judgments. Even the most sophisticated and seasoned investors can become so overtaken by the promise of new technology or the fear that their competitors will get ahead of them that they choose to ignore and overlook mistakes, delays, and early red flags.
Burd’s testimony about Elizabeth Holmes’s role in the Safeway deal undermines the defense claims that Holmes was not in charge or that she relied on Balwani or was under Balwani’s control. She was the executive with whom Burd negotiated (and not her top deputy Sunny Balwani).
For more insights from former Safeway CEO Steven Burd’s recent trial testimony, including his testimony about early red flags, check out our next blog post, ELIZABETH HOLMES CRIMINAL FRAUD TRIAL UPDATE #12.
And follow the Prison Professors blog for regular updates on the Elizabeth Holmes criminal fraud trial as it reaches the halfway mark. We regularly publish on the criminal justice system in America, primarily federal white-collar crime.
