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View from Washington: Theranos – Silicon Valley on a trial

Tech leaders are watching with legitimate concern the long-awaited fraud lawsuits over the failed blood sampling venture.

It feels like something from another time, and the wheels of American justice have grounded not only slow but Covid-slow. Nevertheless, more than three years after the two most senior executives of Theranos blood testing in Silicon Valley were indicted for a $700 million fraud, the first trial has begun.

The jury selection in the case against founder and CEO Elizabeth Holmes took place last week and hearings will begin after today’s holiday. It promises to be one of the most intensely analyzed tech lawsuits in many years, and not just because of the glaring magnitude of the scandal itself.

Two controversial aspects of Valley culture, based on the initial filings, will be key pillars in Holmes’ defense.

The first is the adoption of start-ups using the ‘Fake it till you make it’ strategy as a way to attract investors and customers.

The second will be “Me Too,” the running wound that has highlighted the frequent mistreatment of women in the workplace, with a number of high-profile tech companies currently — and in too many cases, it seems, rightly so — already in the spotlight.

Meanwhile, things don’t look very reassuring on the prosecution side.

Attorneys for the prosecution want to highlight Theranos’ recklessness towards the public. In particular, there is his record of erroneous blood tests due to not only the defects of his vaunted Edison tester but also poor lab practices where other testers were used in secret.

Healthcare is clearly a very sensitive sector in this regard. But again, an industrial culture that enables Theranos, if shown to be endemic, could have implications for other sectors, with social media being the most notable at the moment.

So while there’s currently little sympathy for Holmes or her co-defendant, former president of Theranos, Ramesh “Sunny” Balwani (who will be tried later for reasons we’ll get to), there’s growing concern that not just a massive alleged fraud be fully scrutinized, but also that the entire Valley culture is brought to justice, affecting the way technology as a whole conducts its business.

There’s a lot to unpack, so we’ll break down the main issues surrounding the Theranos trial into bite-sized chunks over the next few days. There is no other way to do this to understand potential engineering and technology implications.

But for now, a quick reminder of how it got to this point.

In 2003, Holmes dropped out of engineering school at Stanford University to develop a black box: a black box that could perform more than 200 blood tests using a blood sample taken with just a pinprick.

It was the definition of a “disruption,” and based on its sales acumen — including a wardrobe mimicking Steve Jobs — the company was a solid and strong investment winner. It had gone public in 2014 and had become a young female start-up billionaire, earning her all the column inches, conference slots, and reputation you’d expect.

As things progressed from that earlier idea, she gained money from media mogul Murdoch and former politicians Henry Kissinger and George Shultz.

The problem was that Edison was never more than a black box in every way. It did not work. In addition to mechanical and analytical issues, it was also questionable of samples that could meet the protection of Theranos.

But the money kept coming, the valuation kept coming, and the deals were made, including one with Walgreens, the US equivalent of Boots, for in-store testing.

Meanwhile, the internal corporate culture is said to have included frequent bullying and layoffs of staff who signal problems with Edison.

Over the course of 2015, Wall Street Journal reporter John Carreyou began publishing a series of stories about Theranos’ hardware issues, corporate culture, lab practices, and claims. A clash with regulators and partners ensued, ultimately leading to the current charges against Holmes and Balwani being filed in 2018 – and the company closing in September.

For those of you who want to delve deeper into the details of this sad tale, Carreyou’s book, “Bad Blood,” is the touchstone. He also just launched a podcast to follow the trial with new information, including alarming material about how the company tried to capitalize on the 2014 Ebola outbreak. For the essentials: go there. But in the next article, we’ll look at those broader implications and why they worry many of today’s technology leaders.