Theranos Investors: Defrauded, Foolish or Both?

On June 14, 2018, Theranos founder Elizabeth Holmes and former Theranos president Sunny Balwani were indicted on 11 counts of wire fraud and conspiracy to commit wire fraud. Allegedly defrauded persons are patients, doctors and investors, including 4 anonymous investors who transferred $ 10.2 million, $ 38.3 million, $ 100 million and $ 6 million, respectively, into Theranos’ coffers.

The media has provided more specific information about Theranos investors and their respective investments:

— The Walton family, heirs to Walmart Founder Sam Walton: $ 150 million
— Rupert Murdoch, Executive Chairman of News Corp.: $ 125 million
— Betsy DeVos, Secretary of Education, and her family: $ 100 million
— The Cox family, owners of media properties: $ 100 million
— Partner Fund Management, investment management firm: $ 96 million
— Shareholders who invested through venture funds: $ 70 million
— Carlos Slim, media investor: $ 30 million
— Andreas Dracopoulos, Greek shipping heir: $ 25 million
— The Oppenheimer family, former owners of De Beers: $ 20 million
— Riley Bechtel, former Chairman of Bechtel Corp.: $ 6.2 million
— Robert Kraft, owner of the New England Patriots: $ 1.0 million

(http://fortune.com/2018/05/04/theranos-investment-lost/)

The Indictment does not address how Theranos’ claimed trade secrets may factor into the charges. But, claimed trade secrets were part of Theranos’ bravado. For example:

1. Ms. Holmes “took investors’ money on the condition that she wouldn’t have to reveal how Theranos’ technology worked.” (https://amp-businessinsider-com.cdn.ampproject.org/c/s/amp.businessinsider.com/theranos-founder-ceo-elizabeth-holmes-life-story-bio-2018-4)

2. Mr. Balwani “was as honest with [investors] as he could have possibly been short of revealing trade secrets,” according to Balwani’s lawyer, Jeffrey Coopersmith. (https://amp-businessinsider-com.cdn.ampproject.org/c/s/amp.businessinsider.com/former-theranos-executive-sunny-balwani-legal-argument-2018-6)

Assuming those 2 statements are true, could Theranos investors, on their own, have avoided the harm they sustained? Yes.

A company (or its founder or president) touting claimed trade secrets, but not disclosing them in confidence to potential investors, is a red flag. A big red flag. Indeed, an investor who ponies up on the condition that claimed trade secrets will not be disclosed in confidence to the investor may, and probably will, realize a corresponding return on investment, i.e., a big or total loss.

Ms. Holmes and Mr. Balwani should be held responsible for any of her, his or their wrongdoing that has caused any harm to any patient, doctor or investor. At the same time, the Theranos investors’ plight should not be analyzed in a common sense vacuum. The Emperor’s new clothes… the great and powerful Oz… Theranos’ claimed trade secrets. What would you invest in?