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It was around the time the defense attorney referred to “deferred income” that I started to feel really bad for the jury members in the Elizabeth Holmes wire fraud trial.
Tuesday’s testimony focused on the nuances of accounting, how quality control works in laboratories, and far too many Excel spreadsheets. I understand – you have to show the financial data to show that Theranos was in a tight financial spot. And you have to show how the labs failed in order to establish that they failed and that Holmes knew it. But go too fast and you risk confusing people.
The first witness in the case, Theranos Corporate Controller Danise Yam (also called So Han Spivey), gave crucial testimony in championing the government’s cause. Basically, every scam is about the same thing: getting money. If Elizabeth Holmes committed wire fraud, as the government claims, it would have been for the purpose of getting more money.
To this end, District Attorney Robert Leach asked Yam to go through a series of Excel spreadsheets, often attached to emails. Yam testified that there were two major cash flow crises: one in 2009, and another in 2013, when the cash flow “started to get a little tight, not until 2009”, but enough that Yam was sending updates to Holmes and Balwani. on a weekly basis.
In 2013, Theranos was burning around $ 2 million per week.
In the 2012 financial statements, there is no line for income because there was none. There aren’t any in 2013 either. It’s not, in and of itself, particularly damning, but it paints a picture of a company losing money on the ropes; by 2012, Theranos had lost $ 161 million in her lifetime, and she lost an additional $ 92 million in 2013.
During his work at Theranos, Yam consulted with Aranca, an analyst firm, to assess stock options for Holmes and other employees. To do this, she consulted Holmes, as Holmes had “the best information” about financial projections to give Aranca. In an email from Yam to Holmes, Yam asks to use the numbers she has already used. Holmes responds, estimating that 2015 revenue will be around $ 100 million.
It was all fine and sort of boring, until another document was presented a Yam had never seen before.
This document, Leach said, had been given to investors. It was showing revenue projections of $ 140 million in 2015 and $ 990 million in 2016. Not only did Yam not provide numbers for that, she didn’t know where those other numbers were coming from.
See, it’s weird. Let’s say you are giving lower numbers to the people who price your stock options. This means that your options will be worth more if the higher numbers – the ones you gave your investors – are correct! On the flip side, let’s say the higher numbers you gave your investors are wrong and the lower numbers you used to value your stocks are right. Looks like you might have lied to investors to get their money back.
The gap here does not establish intention – the government must show that Holmes knowingly lied – but it doesn’t look good. This is probably why the defense attorney rose to speak about deferred income.
Lance Wade, Holmes’ lawyer, didn’t exactly to define deferred revenue, which is the global accounting term for advance payments for goods or services that have not yet been delivered. (If the goods or services are not delivered, a business may have to return that money; deferred income shows up as a liability on the balance sheet until the job is completed.) In response to Wade’s questions, Yam says that ‘She provided Sunny Balwani – Holmes’ co-accused, tried separately – with the annual estimate of Theranos’ deferred income: $ 169 million.
So Theranos’ situation wasn’t as bad as it looked, Wade argued: the money came from deals with Safeway and Walgreens and other companies – Theranos just couldn’t score it as income in his books.
Okay, but what about mismatched projections? Like, I’m no math genius, but $ 100 million, the 2015 projection given for the price of stock options, and $ 140 million, the 2015 projection given to investors, are different numbers.
I haven’t heard anything satisfactory to explain this. Rather, Wade argued that different accounting practices can lead to different results – citing another part of the document that Aranca’s consultants had prepared for Theranos as evidence. You see, one way of valuing Theranos meant it was worth $ 1.9 billion; another way meant it was worth $ 9.5 billion. However, it’s not quite the same as using different numbers when addressing different audiences!
After Yam’s resignation, former Theranos lab associate Erika Cheung spoke. She had joined Theranos directly after UC Berkeley and was first “starstruck” by Holmes.
The secrecy began immediately, in job interviews where neither Holmes nor Balwani would say exactly what Theranos did. Cheung was given a nondisclosure agreement on its first day. Then Holmes’ brother Christian made it clear that Theranos employees cannot list the company on their LinkedIn, nor describe their responsibilities.
Cheung was only at Theranos six months before he left.
Prior to that, however, Cheung worked on validation, a series of experiments that were conducted to ensure the results were accurate and precise. Samples of Cheung’s own blood were analyzed as part of the validation testing. Although traditional methods have shown her to be within the normal range for vitamin D, Theranos’ machines have always shown her to be deficient.
Cheung also discussed a similar type of test that is used to calibrate equipment in daily quality control. As part of the process, you take a sample with results you already know and run it through the machine. If the machine results don’t match the sample, you troubleshoot to see where things went wrong.
But Cheung’s testimony called into question the quality of the quality control. She had emailed an internal hotline because despite troubleshooting her machine, she was unable to get it to work properly for the vitamin D test. This chain traced back to Balwani and Holmes.
The issue was resolved, but not in a way Cheung was comfortable with. You see, the vitamin D reading came from six data points, and in order for the machine to pass QC, two “outliers” had to be rejected. That’s when we broke up for the day.
Cheung did a better job than defense or prosecution attorneys at clearly explaining technical concepts, but even so, it was a lot to throw at people in one day, above all after the quarrels over accounting.
Given the presumption of innocence and the standard of reasonable doubt, the confusion works in Holmes’ favor. If the jurors get lost, it’s easier for Holmes to win – because if they or they can’t keep it all in order, so it may seem reasonable that she couldn’t have done that either.
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