Politics

I Hope Fraud Is Reigned In


Silicon Valley stakeholders are divided on how to read the significance of the guilty verdict handed down to Theranos founder Elizabeth Holmes for fraud.

Some still believe in her and say she was unfairly scrutinized for doing what a typical Silicon Valley entrepreneur would do: hype an opaque product, give Ted talks and try to be seen as the next Steve Jobs.

Others insist she operated outside of normal tech channels, relying on a diversity of rich investors to help raise the wealth and profile of her blood-testing startup.

Holmes was found guilty on Jan. 3 in a San Jose, California, court of four of 11 charges related to defrauding investors. Investors believed her when she said she had found a way to test blood with just a fingerprick. The so-called revolutionary blood-testing startup never produced a working product.

The valuation of Theranos skyrocketed to $9 billion in 2014 after the company raised more than $400 million. Forbes named Holmes the youngest and wealthiest self-made female billionaire. Wall Street Journal reporter John Carreyrou started investigating the validity of the company’s tests. Holmes asked the Journal’s owner, Theranos investor Rupert Murdoch – to halt the publication. That came back to haunt Holmes during the trial, the Guardian reported. The company collapsed in 2018.

Tim Draper, a family friend and venture capitalist who helped fund Theranos, said the outcome of the trial gives him concern “that the spirit of entrepreneurship in America is in jeopardy.”

“I still believe in what she was trying to do,” Draper said, according to a Financial Times report. “If this scrutiny happened to every entrepreneur as they tried to make this world a better place, we would have no automobile, no smartphone, no antibiotics and no automation, and our world would be less for it.”

But Bill Gurley, a top technology dealmaker best known for backing Uber, said Holmes and the Theranos collapse had little to do with Silicon Valley culture — something media outlets hadn’t covered enough. The media were “unwilling to highlight how far outside traditional Silicon Valley she operated”, Gurley said. “I hope fraud is reined in.”

Gurley is a general partner at Benchmark, a Silicon Valley venture capital firm.

Although Holmes could potentially face decades in prison for fraud, she is likely to appeal and is expected to receive a much more lenient sentence.

The verdict delivered by the jury in the Theranos case represented a landmark fraud decision in Silicon Valley, FT reported. Startup founders rarely face such public legal reckonings.

Here are five other alleged fraud cases involving startups courtesy of CBInsights:

Zenefits

Total Funding: $584M Select Investors: Khosla Ventures, Founders Fund, Fidelity

Insurance brokers in California must complete a mandatory 52-hour pre-certification course to legally sell insurance there. Zenefits’ brokers in California were encouraged to use software that artificially inflated the number of hours logged in the state’s health insurance broker pre-certification program, potentially disqualifying hundreds of brokers from selling Zenefits plans in California. Regulators also claimed that up to 80 percent of insurance plans sold in Washington state by Zenefits reps were sold illegally by unlicensed brokers.

The Securities and Exchange Commission fined former Zenefits CEO, Parker Conrad, $533,692 and the company itself was fined $450,000.

“In an interesting example of Silicon Valley’s willingness to forgive past misdeeds, Conrad recently raised $45M in Series A funding for his latest startup, Rippling, in a round led by Kleiner Perkins,” CBInsights reported.

Mozido

Total Funding: $314M Select Investors: MasterCard, Wellington Management

Mobile payments company Mozido was valued at $2.3 billion in 2014 based on its promise to supply financial products for “unbanked” people around the world including Africa. In 2018, the SEC indicted Mozido founder Michael Liberty on fraud charges, claiming that he used shell companies to divert funds to his personal accounts from 200 investors from which he raised $55 million. Liberty was also accused of using funds to support other business ventures and pay for interior decoration services.

Liberty was charged on 10 federal fraud counts that could have resulted in decades in prison but he was pardoned by former President Donald Trump. He still faces legal challenges, the Portland Press Herald reported in February 2021.

The Honest Company

Total Funding: $490M Select Investors: AllianceBernstein, Lightspeed Venture Partners, Glade Brook Capital Partners

Actress Jessica Alba founded The Honest Company in 2011 promising healthy, natural alternatives to heavily processed household goods such as cleansers and toiletries. The company’s branding and promotions claimed its goods were free of synthetic chemicals. Independent tests of its products, including its toothpaste, laundry detergents, and floor cleaners all contained synthetic chemicals, some known to be toxic.

The company denied the allegations, agreed to change the way it labeled products and paid $7.3 million to settle a class-action lawsuit.

Outcome Health

Total Funding: $500M Select Investors: CapitalG, Goldman Sachs Investment Partners, Pritzker Group Venture Capital

Rishi Shah and Shradha Agarwal founded healthcare information startup Outcome Health in 2006 at Northwestern University. They essentially monetized time spent waiting in doctors’ offices, offers pharmaceutical companies advertising airtime on TVs and tablets that they distributed to 40,000 clinics across the US. The screens were free to doctors.

The founders’ investment materials allegedly inflated the success of advertisers’ campaigns. They were accused of using “fraudulent and false information” to encourage more investment by selling advertising inventory for more screens than they owned. 

The company settled all pending lawsuits by its investors in 2018 and Shah and Agarwal stepped down.

LendingClub

Total Funding: $263M Select Investors: BlackRock, Norwest Venture Partners, Sands Capital

Founded in 2006, LendingClub became one of the largest online lenders in the US. in a financial sector ripe for disruption. However, founder Renaud Laplanche was forced to resign over the sale of about $22 million in near-prime loans sold to a single investor in a deal that violated his company’s own business practices. Laplanche did not admit guilt but settled with the SEC, was fined $200,00 and was barred from participating in the securities industry for three years.

Photo: Theranos CEO and founder Elizabeth Holmes speaks at the Fortune Global Forum, San Francisco, March 14, 2018. (AP Photo/Jeff Chiu, File)

Listen to GHOGH with Jamarlin Martin | Episode 74: Jamarlin Martin Jamarlin returns for a new season of the GHOGH podcast to discuss Bitcoin, bubbles, and Biden. He talks about the risk factors for Bitcoin as an investment asset including origin risk, speculative market structure, regulatory, and environment. Are broader financial markets in a massive speculative bubble?



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