Elizabeth Holmes and the Culture of Corruption

  • Prosecuting Holmes: Lending a patina of legitimacy…
  • … to an illegitimate system
  • SBF, HBS and MBAs
  • All this BS artistry raises a troubling question
  • When “too big to jail” is official policy
  • Hope for a system THAT corrupt?

[Ed. note: Welcome to a special post-Thanksgiving edition of The 5. U.S. markets are open for only a half-day; seldom does anything consequential happen. So we figure we’d step back a bit and dig deep into some news that broke a week ago today. Enjoy…]

In the spring of 2020… when we were feeling reflective as “15 days to flatten the COVID-19 curve” had turned into two months and counting… we labeled Elizabeth Holmes “the poster child for the demented decade gone by.”

Little did we suspect that Sam Bankman-Fried of FTX fame would later say, “Hold my beer.” But we digress…

Holmes, the founder of Theranos Inc., was sentenced a week ago today to just over 11 years in federal prison. Yes, her lawyers plan to appeal.

By now, you probably know the broad outlines of the story: Holmes, a Stanford dropout, came out of nowhere to develop a blood-testing machine that was supposed to detect dozens of diseases with just a finger-prick. She reeled in not only celebrity investors like Rupert Murdoch and Henry Kissinger… but renowned Silicon Valley venture-capital types like Marc Andreessen.

Alas, the machine didn’t work as advertised. Not even close. Prosecutors said her investors were out $804 million.

From the first time we discussed Holmes and Theranos six years ago, we wondered how she convinced so many supposedly knowledgeable people to throw money her way. And was it really “fraud” as you and I would understand the term?

It seemed there were three possibilities…

  1. She was lying through her teeth and she knew it
  2. She believed her own BS
  3. She partially believed her own BS and then it snowballed from there.

From the beginning, we suspected the answer was No. 3.

Elizabeth Holmes

Holmes in her Jobs-ian black turtleneck, the face of the demented 2010s
[Photo by Flickr user Max Morse for TechCrunch, posted at Wikimedia Commons]

And while we didn’t have the bandwidth to pay much attention to the trial… all the coverage of her sentencing suggests we were right.

But how could she only partially believe her own BS?

Well, it’s all about the culture of not only Silicon Valley but much of present-day corporate America.

From The Wall Street Journal’s story filed last Friday night: “Her sen­tence is a re­mark­able out­come for a startup ex­ec­u­tive buoyed by Sil­i­con Val­ley’s fake-it-un­til-you-make-it cul­ture, in which a founder’s vi­sion and bravado are of­ten the big­gest draws of at­ten­tion and money. Over the years, some have de­fended Ms. Holmes as no dif­fer­ent from her startup founder peers who make the oc­ca­sional ex­ag­ger­ated sales pitch.”

True enough. But it’s not just Silicon Valley. That’s just the most extreme expression of the business world’s modern-day mores.

As we’ve said before – especially with the fall from grace of Facebook exec Sheryl Sandberg – there’s a culture of rot that originated at Harvard Business School and oozed out to the rest of the land.

Some years ago in her book Quiet: The Power of Introverts in a World That Can’t Stop Talking, author Susan Cain described an information session for prospective HBS students: “Speak with conviction,” was the message she came away with. “Even if you believe something only 55%, say it as if you believe it 100%.” [Emphasis ours]

HBS students “look like people who expect to be in charge,” she wrote. “I have the feeling that if you asked one of them for driving directions, he’d greet you with a can-do smile and throw himself into the task of helping you to your destination — whether or not he knew the way.”

“Our society once routinely called people ‘bull**** artists’ if they spoke with total certainty without any basis for such certainty so as to persuade others and get attention for themselves,” wrote the clinical psychologist Bruce Levine – reacting specifically to Cain’s description.

“Nowadays, bull**** training is called ‘leadership training’ and unashamedly taught at ‘elite institutions’ and at expensive leadership seminars.”

“Harvard Business School, like much of the MBA universe,” wrote Duff McDonald in a 2018 Vanity Fair piece, “has always cared less about moral leadership than career advancement and financial performance.”

We’ve long lamented the MBA-ization of America. By one estimate, American universities were cranking out fewer than 5,000 MBAs a year during the 1950s. By 2005, the number had exploded to 142,000 — and swelled further to 185,200 by 2015.

And is American business any better run or more competitive for all the sheepskin that’s been issued? The question answers itself. (As colleague Sean Ring quips, MBA stands for “Mediocre But Ambitious.”)

All this bull**** artistry raises a troubling question: Where does 55% confidence end and fraud begin?

Reading the WSJ’s sentencing coverage, it appears the most damning thing to come out of the trial – the most persuasive evidence of outright fraud – was an attempt to whitewash Holmes’ 55% bravado.

“Ju­rors learned dur­ing the trial that Ms. Holmes forged re­ports pro­vided to some in­vestors and part­ners such as Wal­greens Boots Al­liance Inc.’s U.S. drugstore unit by adding lo­gos of Pfizer Inc. and other ma­jor drug com­pa­nies with­out per­mis­sion from the com­pa­nies. Pros­e­cu­tors showed in court how text had been deleted and added to the doc­u­ments, which some in­vestors said in tes­ti­mony made them ap­pear to them to be com­pli­men­tary val­i­da­tion re­ports, which they weren’t.”

In other words, having expressed 100% confidence in something she believed only 55%… and then later turned out to be approaching 0%… Holmes realized she was in too deep and she had to resort to fraudulent acts if her creation were to survive. Again, shades of FTX, right?

Brings to mind the saying made famous by Watergate: “It’s not the crime, it’s the cover-up.”

An even more troubling question: How many other Elizabeth Holmeses are out there and we just don’t know about it because, for the time being, they’re getting away with it?

Or worse: How many Elizabeth Holmeses were already outed as frauds but never faced the consequences?

The WSJ’s story about Holmes’ sentencing includes this remarkable paragraph citing an “outside expert” for analysis.

“‘The fact that she was pros­e­cuted, taken to trial and con­victed goes a long way of send­ing a mes­sage to Sil­i­con Val­ley about the line be­tween puffery and sales pitches on the one hand, and ma­te­r­ial mis­rep­re­sen­ta­tions on the other,’ said Amanda Kramer, a for­mer fed­eral pros­e­cu­tor in New York and at­tor­ney with Cov­ing­ton & Burl­ing LLP.”

Covington & Burling?!

It’s Covington & Burling – whose clients include most of the big banks – that literally kept an empty corner office waiting for Eric Holder before he returned from his stint as Barack Obama’s first attorney general.

It’s Eric Holder who sheepishly acknowledged to Congress in 2013 that he didn’t want to prosecute the big banks for their misdeeds in the 2008 financial crisis because “if you do bring a criminal charge, it will have a negative impact on the national economy, perhaps even the world economy.”

In other words, “too big to jail” was official policy.

When “too big to jail” is official policy… and when “55% confidence” is good enough to hawk your wares… well, is there any hope for a culture that corrupt?

Contra Ms. Kramer, the ex-prosecutor now cashing in at a white-shoe law firm, the feds’ pursuit of Holmes was not about “sending a message to Silicon Valley.”

It was about identifying a sacrificial lamb… making her an example… and assuring the masses that the system still works the way they were taught in elementary-school civics.

Go back to sleep. Move along, nothing to see here.

The whole point of Holmes’ prosecution was to lend a patina of legitimacy to an utterly illegitimate system in which there’s no accountability.

It’s a system in which Jamie Dimon is still the CEO of JPMorgan Chase despite the firm admitting to an unprecedented five criminal counts between 2014-2020.

It’s a system in which Boeing’s punishment for the 737 Max fiasco – two crashes, 346 dead – was a $2.5 billion settlement, or just over 2% of its market cap. Like the banks, Boeing is too big to jail – given its role as a linchpin of the military-industrial complex.

It’s a system in which there’s no accountability for the broken promises that mRNA vaccines would prevent both infection and transmission of COVID-19. (And we’re not even alleging fraud in the clinical trials; we’ll leave it to others to try to do that. Again, it’s that frustratingly fuzzy line between “55% confidence” and fraud.)

In the end, it appears Holmes’ ego made her an easy target for the feds, looking for someone to make an example.

At age 18, Holmes approached one of her Stanford professors about a concept she had for a skin patch that would constantly scan the wearer for infections and even release antibiotics if needed.

Told it wouldn’t work, Holmes “just stared through me,” Phyllis Gardner tells the BBC. “And she just seemed absolutely confident of her own brilliance. She wasn’t interested in my expertise.”

Sure, lots of brash entrepreneurs hope to show up the experts as being wrong. It’s how much of human progress is made.

But there was more to it than that, according to one of her early investors – who affirms our conjecture that Holmes did not set out to commit fraud.

“If she wasn’t on those [magazine] covers, she’d probably still be raising money and building her company,” Marc Ostrofsky tells The Wall Street Journal.

Like Willy Loman in Death of a Salesman, Elizabeth Holmes was “way out there in the blue, riding on a smile and a shoeshine.

“And when they start not smiling back – that’s an earthquake.”

For you, the retail investor, this is mighty depressing stuff.

How can you possibly invest with confidence if the system is shot through with corruption?

Especially now that Sam Bankman-Fried makes Elizabeth Holmes look like a piker?

Even if evidence never emerges that U.S. taxpayer money went to Ukraine and was laundered through FTX to return to the United States in the form of campaign contributions… The known facts are damning enough: Customer funds on deposit at FTX were “loaned” to its sister company Alameda Research and used for speculation on high-risk leveraged trades.

And while the feds may or may not pursue a fraud case, they’re definitely seizing on the debacle to crack down on crypto and decentralized finance “for the good of the consumer.” Uh-huh…

Well, unless you’ve already amassed your fortune, you don’t have much choice. You can’t really “opt out” of the system.

Fortunately you’ve already made an outstanding choice to ally yourself with people who are likewise fed up with the system.

Many of the editors at Paradigm Press are refugees from Wall Street – people who’ve seen the system inside-out.

They’ve found renewed purpose in life by helping folks like you reach your financial goals – without all the conflicts of interest that come from answering to clients or advertisers or a board of directors.

They answer only to you, the reader. And if you feel they’re not coming through for you, they’re well aware you’ll snap your wallet shut come renewal time.

Even if the system is nothing like you were taught in grade-school civics, you can still make a better life and a better future for yourself and your family. Thanks for allowing the Paradigm Press team to help you in that endeavor.

And thanks for indulging us a rare single-topic edition of The 5. We’ll have our usual wrap-up edition 5 Things You Need to Know tomorrow… and the weekday edition will be back to regular programming on Monday.

Best regards,

Dave Gonigam




Dave Gonigam
The 5 Min. Forecast

Dave Gonigam

Dave Gonigam

Dave Gonigam has been managing editor of The 5 Min. Forecast since September 2010. Before joining the research and writing team at Agora Financial in 2007, he worked for 20 years as an Emmy award-winning television news producer.

Recent Alerts

Here Comes the AI Cartel

Maybe you saw the news earlier this week: An outfit called the Center for AI Safety issued a 22-word statement — as dire as it is terse. Read More

A Deal in D.C., a Wipeout on Wall Street

Debt ceiling deal, U.S. Treasury auctions, Wall Street liquidity, Fed policy reversal, BlackRock recession call, gross domestic income, GDI, Maryland license plate snafu Read More

Climate, Carbon… and Control

“The climate change agenda is not about climate change,” says Jim Rickards. “It’s about total political and economic control of the population.” Read More

White House’s New Witch Hunt

Go figure: The stock market is at nine-month highs, but the Biden administration is amping up its jihad against short sellers Read More

The Biden Bleed

Presidents have meddled with the SPR for political purposes. But Biden is really leveling up. Read More

Natural Gas Gets Blacklisted

The EPA — with Team Biden’s blessing — proposes an overhaul of U.S. power plants by 2042. Read More

Green Smokescreen

Ray Blanco is on the lookout for presumed do-gooders… blowing “Green Smoke” up our collective rear ends. Read More

“No Blood for Chips!”

Fair warning: This edition of The 5 might be the most controversial issue we’ve ever published. Read More

The Dollar’s Death March

Nine years after The 5 started writing about “de-dollarization,” you can’t get away from headlines about it now. Read More

The “F” Word

No sooner did G7 leaders sit down yesterday than they declared they’re doubling down on sanctions targeting Russia. Read More