(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

 

WASHINGTON - Defunct blood-testing startup Theranos is now a cautionary legal tale. A federal U.S. jury on Monday convicted founder Elizabeth Holmes of defrauding investors. If that verdict stands, the possibility of years in prison sends a strong message that even in Silicon Valley, there’s a limit to how flagrantly you can fake it until you make it.

The jury’s finding marks a rare instance of accountability for a technology executive. Holmes had been hailed as a female version of Apple co-founder Steve Jobs, as she touted a machine that could perform more than 240 clinical tests using a single finger-prick of blood. Theranos was valued at up to $10 billion in 2015 and a cult of personality around her duly formed.

Her charisma, however, failed to sway jurors. During the four-month trial, she took the witness stand to argue that she had always believed the technology would work, and blamed a former Theranos executive whom she accused of emotional abuse.

Investors could gain some solace from the verdict. Witnesses included a money manager for the family office of former Education Secretary Betsy DeVos, which put $100 million into the startup. The four-count conviction included conspiracy to commit wire fraud against Theranos investors. Holmes had indicated the company was expected to generate $1 billion in revenue in 2015 when she knew the accurate figure was a few hundred thousand dollars, according to prosecutors.

Holmes is expected to appeal, as she faces significant prison time if the verdict stands. Each count carries a maximum sentence of 20 years, though they are usually served concurrently. Holmes did catch a break on charges related to defrauding patients, of which she was found not guilty, and the jury could not reach agreement on three other counts.

The verdict should serve as a warning for other over-hyped startups, particularly those caught up in the blank-check craze. Prosecutors and jurors are likely to take a harsher view of cases involving special-purpose acquisition companies that tap public markets, luring in mom-and-pop investors. Trevor Milton, founder of electric-truck firm Nikola, is facing similar charges as Holmes. There is a difference between over-enthusiastic marketing and outright lies, and now courts have shown they can tell them apart.

 

CONTEXT NEWS

- A U.S. federal jury on Jan. 3 found Elizabeth Holmes, founder of defunct blood-testing startup Theranos, guilty of four counts of fraud and conspiracy related to investors. She was found not guilty of four counts related to defrauding patients, while the jury could not reach a conclusion on three other counts. Each charge carries a maximum prison sentence of 20 years.

- During the trial that began in September, Holmes said she made some mistakes but that she always believed in the products being developed by Theranos. During her testimony, she also accused former Theranos chief operating officer Sunny Balwani, with whom she had a sexual relationship, of emotional abuse. His trial on similar charges begins in 2022.

(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

(Editing by Pete Sweeney and Katrina Hamlin) ((For previous columns by the author, Reuters customers can click on CHON/ SIGN UP FOR BREAKINGVIEWS EMAIL ALERTS https://bit.ly/BVsubscribe | gina.chon@thomsonreuters.com; Reuters Messaging: gina.chon.thomsonreuters.com@reuters.net))