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 Safeway: Holmes’ Criminal Fraud Trial Update #12 

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Michael Santos

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Safeway ignored red flags and wasted $400 million to retrofit hundreds of grocery stores for a failed Theranos blood-testing partnership.

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.

Prosecutors continue to present witnesses before the jury to establish Holmes’ direct involvement in making knowing misrepresentations to the public, investors, business partners, doctors, and patients about her company. 

As a reminder, the defense can only cross-examine and object as the prosecution presents its case. Once the prosecution finishes presenting its evidence over the next few weeks, the defense may ask the Court for a directed verdict, a mistrial, or both. We will discuss these procedural maneuvers in upcoming blog posts as the prosecution gets closer to completing its presentation. 

The defense will then get a chance to present witnesses and has already submitted a lengthy list of potential witnesses to the Court. Elizabeth Holmes herself will have an opportunity to testify should she choose. Of course, she does not have to. Taking the stand in your own defense is a high wire act for any criminal defendant. 

We will continue to monitor the news for any indication as to whether Holmes herself will testify or not.

DISCUSSION

Steven Burd, the longtime Chief Executive Officer of Safeway, testified over the course of multiple days at the trial. Burd explained to the jury essential details about the failed Theranos/Safeway partnership during his tenure as CEO. Burd was the CEO of Safeway for about 20 years before retiring in May 2013.

Safeway spent close to $400 million total, including the expenses to build health clinics to put Theranos’ devices inside its stores. 

Burd’s vision was that customers would see Safeway as a convenient stop for prescription drugs, blood tests, and groceries, but his vision never came to fruition. 

Still, to prosecutors, the hundreds of millions of dollars that Safeway threw at the Theranos partnership is indicative of how seriously Safeway took Theranos’ representations. Safeway is a victim of Holmes’ fraud; they relied on her misrepresentations and suffered massive losses. 

The defense claims that Safeway relied on its own investigations and due diligence and that Holmes did nothing wrong except run a failed business. 

Red Flags

Burd now admits that during the negotiations between Theranos and Safeway, he noticed (or should have noticed) at least one early warning sign about Theranos’ failed technology.

It took place at a meeting in March 2011 of the Safeway Board of Directors. Safeway executives wanted a show and tell for members of the Board, so they could see in action the Theranos technology in which the company was investing.

Holmes brought the Theranos proprietary blood-testing device to this meeting, and director Michael Shannon volunteered to have his finger pricked using Theranos’ signature blood-drawing method. If everything was working correctly, the test results should have been available during the board meeting. Shannon’s test was for a prostate-specific antigen, or PSA screening, a standard test to detect prostate cancer.

Burd told the jury that the Theranos machine “made a bunch of noise” but never came up with a result. He said that Holmes “said something that made us think we would get it later,” though he could not specify for the jury precisely what Holmes said at the time. The Board members never did get the result, Burd testified.

Today, Burd understands that he missed red flags. The fact that the Theranos Board demonstration failed or Theranos’ failure to provide the test result later should have caused Safeway to follow up.

Burd now understands that his grand vision with the Theranos partnership was built on lies. 

In the end, Theranos’ technology did not support Burd’s vision that shoppers could get quick and painless blood draws via a finger prick, then shop for groceries, and finally pick up lab results on the way out. 

Safeway’s potential profits from the Theranos partnership were significant for a company like Safeway. No wonder then that giving up on the vision was hard.

“I wanted to build a network for this new lab company that would give me another stream of income,” Burd testified. 

“This notion of getting results and prescriptions filled before leaving the store, we knew that would be appealing to customers,” he added.

Each blood test performed on Theranos’ devices would add $10 in profits to Safeway’s bottom line. As the CEO of a supermarket chain operating on razor-thin profit margins, Burd was looking forward to this profit boost. The company expected that it could potentially double pharmacy sales over five years. 

As we now know, by 2015, the partnership started to unravel, and Theranos dissolved in 2018.

Burd’s testimony is crucial to prosecutors’ argument that Holmes knowingly misrepresented Theranos’s technology. 

Holmes Was Capable And In Charge

In his testimony, Burd described how charmed and impressed he was by Holmes’ intelligence and ability to command a room. He dealt directly with Holmes — never with any Theranos lawyer and not much with Sunny Balwani, Holmes’ top deputy. It was Holmes who supplied Burd with presentations and updates about Theranos’ technology in advance of Board meetings.

“What was unusual about it is that we never saw an attorney,” Burd testified, adding that Holmes was leading the effort “completely on her own.” 

*Note: Burd found the fact that Holmes led an effort of this magnitude without a team of lawyers or others from the management team unusual. Consider whether Holmes’ dogged hands-on control and failure to include others was also a red flag that something was amiss. 

In any event, Burd personally negotiated the 2010 agreement to install Theranos devices in Safeway stores with Holmes. The agreement included Safeway investing at least $10 million for convertible notes that would convert to equity in Theranos.

Burd had decades of experience running a supermarket chain, turning around troubled companies, and completing private-equity deals when he met Holmes in 2010. With her charm and smarts, she persuaded him to invest close to $400 million in Theranos. Burd described Holmes as one of the most impressive entrepreneurs he had ever met, confident, decisive, and warm. His testimony undercuts the defense argument that Holmes relied on operational information she received from her top deputy, Sunny Balwani so that any false statements would be his fault, not hers. 

Burd testified that Holmes appeared to him to be unquestionably in charge at Theranos. He said that when he spoke with Holmes and Balwani together, she answered questions confidently and didn’t consult with him. “Holmes was always decisive, a good listener, and never dictatorial,” he said.

“Not all CEOs are alike. She would rise to the top of the pile in terms of vision, in terms of command of the information,” said Burd.

Intense Secrecy

Holmes did not tell him she was in a romantic relationship with Balwani, which made him wonder what else she might be hiding from him. Burd also said that Holmes’s intense secrecy about Theranos was at times perplexing. Should this have also raised red flags for Burd and Safeway? Hard to say.

From Burd’s perspective, he never heard about the performance problems and failures of the Theranos technology. Notably, other than discussing problems stemming from the stacking of Theranos machines producing too much heat, Burd testified that he heard nothing from Holmes about any technological problems. 

“I was never told there was a technology problem with the box itself,” Burd said under cross-examination, referring to the Theranos devices.

He testified that by the time he stepped down in 2013, Safeway had not installed any Theranos machines. The project was a failure.

CONCLUSION

Former Safeway CEO Steven Burd admits he overlooked red flags that now seem pretty obvious. The Theranos technology failed during a simple demonstration to the Board of Directors. Holmes lied about her romantic relationship with Balwani and was intensely secretive.

The potential profits looked so good that Safeway continued to pursue a deal with Theranos for years even as the company repeatedly pushed out their partnership launch date for no apparent reason.

When he met with Holmes in 2010, Burd had decades of experience running a supermarket chain, turning around troubled companies, and completing private-equity deals. He was seasoned. Yet, with her charm and wit, Holmes persuaded him to spend over $350 million to form a partnership with Theranos. 

Burd was smitten. Burd described Holmes as “one of the most impressive entrepreneurs he had ever met, confident, decisive, and warm.”

In the end, his testimony undercuts the idea that Holmes relied on operational information she received from her top deputy, Sunny Balwani so that any false statements would be his fault, not hers.

For additional reading regarding the red flags in the Theranos saga, click here 4 Red Flags Signaled Theranos Downfall:

The idea was sound, but the secrecy, lies, and toxic culture at diagnostics startup Theranos meant it was held up by a scaffolding of fraud.” MIT Sloan School of Management

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.

Prison Professors, an Earning Freedom company, works alongside (not in place of) civil and criminal defense counsel to help clients proactively navigate through investigations and prosecutions. Our team also helps clients prepare mitigation and compliance strategies.

If you have any questions or are uncertain about any of the issues discussed in this post, schedule a call with our risk mitigation team to receive additional guidance.

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