Entrepreneurial Crime – Elizabeth Holmes and Ramesh Balwani Wire Fraud

Describe the entrepreneurial crime you researched

In June 2018, Theranos Inc.’s Chief Executive Officer (CEO) Elizabeth Holmes and former president Ramesh Balwani were formally charged before a federal court on several counts of wire fraud. In addition to this, they were also indicted for knowingly conspiring with a number of close associates to commit wire fraud. Formerly a Silicon Valley success story, Theranos was now facing criminal charges for defrauding its partners, physicians and investors regarding the unreliability of its products.  The corporation was initially founded to promote health technology in a rapidly transforming business environment. Its founders used this sales pitch to rise over US$710 million from a number of venture capitalists keen on the firm’s corporate activities and even promising to bring other private investors on board (“Theranos Sued by Investor Who Accuses It of Securities Fraud,” 2017).

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Theranos had promised its investors that its blood test technology would be a first in the market and boost its valuation based on its diagnostic-lab industry sales. Unlike its contemporaries, Therano’s CEO Elizabeth Holmes claimed that the novel technology would only require a lesser amount of blood than what was normally required. These projections would ultimately result in reduced costs for the investors while still ensuring that revenues increased. However, doubts and questions were posed over the authenticity of this technology. Investigations by the Centers for Medicare and Medicaid Services (CMS) and state attorneys revealed a well-orchestrated scheme to defraud investors. The CMS was first to crack the whip on Theranos, sanctioning all its diagnostic-lab activities and withdrawing its Clinical Laboratory Improvement Amendments (CLIA) certificates. The company’s downfall finally came when U.S. Securities and Exchange Commission (SEC) formally charged Elizabeth Holmes and Ramesh Balwani with fraud for their role in the racket.

Discuss how the psychological characteristics of individuals and accounting opportunities for omission(s) may have contributed to the commission of the entrepreneurial crime you researched.

Elizabeth Holmes and Ramesh Balwani both had a need for control which fueled the commission of their entrepreneurial crime. Both were acutely aware of their role in the health industry and were committed to making sure that they achieved their objectives. It is also fundamental to acknowledge that they pursued research related to their novel blood testing technology without considering the consequences involved. In particular Elizabeth was a highly driven individual who was prepared to surmount any challenges related to her idea’s authenticity. Through careful scheming and exercising total control over the company’s narrative, Holmes managed to obtain funding from some of the wealthiest moguls in the world. One noticeable characteristic of Elizabeth Holmes is her projection of an aura of confidence that, in part, convinced many that her idea was feasible. As a collage drop out with no known experience in health sciences, Holmes capitalized on the need to control the narrative and successfully convinced investor that her idea would work.

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As a descendant of yeast mogul Charles Louis Fleischmann, Holmes was grandiose in envisioning herself as the only individual capable of restoring her family’s lost pride (“Rise and Fall of Elizabeth Holmes, Who Started Theranos when She Was 19 and Became the World’s Youngest Female Billionaire Before It All Came Crashing Down,” 2019). Although the idea that a microfluidic patch could be used to detect diseases was yet to be proved, Holmes was deceitful in claiming that it had been proven to work and was dependable. Claims of her untrustworthiness are further backed by a culture of secrecy which she enforced in Theranos. She misled her employees by claiming that her intent was to protect “trade secrets” when it is apparent that she was micromanaging her employees to avoid any leak regarding the status of her invention.  Balwani acted as an enforcer who did not expect any of the company’s employees to ask tough questions. He dissuaded dissenting opinions at the company and was responsible for the termination of employees who doubted the blood telemetry invention. Both Holmes and Balwani continued with their elaborate deception as a way of ensuring that they did lose their company’s valuation. 

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Analyze the cost of Sarbanes-Oxley in regulating the white-collar crime you researched and evaluate its impact on the “free market.”

           The enactment of the Sarbanes-Oxley Act of 2002 still remains a regulation milestone in the United States. For the first time, Congress had passed a piece of legislation that would bolster regulation while liaising with the Securities and Exchange Commission (SEC).  It is fundamental to acknowledge that Sarbanes-Oxley also introduced reforms that would go a long when combating white-collar crime. The so-called “free market” would now have to contend with corporate responsibility whenever the actions of individuals at the helm of leadership impacted their employees and shareholders. In addition to this, criminal punishment now became a reality for corporate officers who engaged in underhand activities such as providing false financial statements and abetting fraud.  The SEC’s efforts in regulating white-collar crime are evident in its disclosure requirement that make certain that all financial details provided by companies are accurate. Auditors are also expected to establish clear internal controls to avert the possibility of an individual wielding undue influence. In addition to this, companies face strict penalties if it is established that they participated in the falsification of business records. The intrigues surrounding Theranos are an example of a white-collar crime that was subsequently delimited by Sarbanes-Oxley.

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Partner Fund Management (PFM) initially claimed that Elizabeth Holmes and Ramesh Balwani duped the company into making a US 96.1 million investment (“Theranos, CEO Holmes, and Former President Balwani Charged with Massive Fraud,” 2018). The law suit that followed explicitly outlined the repeated lies that the defendants used to obtain money from unsuspecting investors. The “proprietary technology” was nothing more than an elaborate falsehood that soon caught the attention of the Securities and Exchange Commission (SEC). Theranos had wrongly assumed that, as a private entity, Sarbanes-Oxley would not apply to their activities.  The SEC proceeded to charge Elizabeth Holmes and Ramesh Balwani for engaging in fraud in adherence to the Sarbanes-Oxley Act of 2002. They had used their positions to acquire over US$710 million from investors and are now expected to pay a US$500,000 penalty (“Theranos Sued by Investor Who Accuses It of Securities Fraud,” 2017). Major players in the free market are now aware of the stiff penalties that accompany white-collar crime, especially when inaccuracy and untrustworthiness are involved.

Compare and contrast the adjudication of the white-collar crime you researched as a criminal action versus a civil action.

At the crux of white-collar crimes such as the Theranos controversy is the commission of a crime using deception for financial gain. Holmes used her privately-held firm to defraud investors by falsifying claims about her viability of her idea.  These claims attracted federal prosecutors in 2016 whose primary goal was to establish the authenticity of these claims. Holmes had misled many of her wealthy investors who had generously offered financial support aimed at enabling her realize her dream. Nevertheless, federal prosecutors soon established that Holmes and a number of cronies, using her position to amass a US $4.5 Billion fortune (Anderson, 2019).

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The SEC also sued Theranos in 2018 for being the chief architect of a scheme where she raised over US$710 million from a host of investors using false claims (“Theranos Sued by Investor Who Accuses It of Securities Fraud,” 2017). Moreover, the SEC also instructed her to return a substantial amount her shares and prohibited from holding public office for ten years. Holmes’ legal woes continued in 2018 when she was indicted for conspiring with Balwani to commit wire fraud. In the deposition made, it was apparent that both acted with resolve to deceive their patients and investors that the blood-testing device worked.  It was this crime that prompted the federal government to accuse Holmes as a major player in a major fraud scheme (“U.S. v. Elizabeth Holmes, et al,” 2019). Any payment made by the investors and victims first passed through their pharmacies before being deposited in offshore accounts operated by Holmes. From the offences mentioned above, it is clear that it required a criminal action as opposed to a civil one. The federal government and its agencies accused Holmes of using her influence to commit an unlawful act.

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Also, the government was expected to collaborate with the Department of Justice (DOJ) to determine the guilt of the accused persons. If it is established, beyond any reasonable doubt, that Holmes to enrich herself, she would be facing 20 years of incarceration in a federal penitentiary. Conversely, if the bulk of the accusations made were made by a private aggrieved party, then Holmes would have been required to compensate them for their wrongdoing. A civil action does not result in legal penalties and imprisonment, which is not the case regarding Holmes’ indictment.

Determine whether agencies that are vested with statutory powers of investigation and imposition of penalties should choose a non-adversarial approach to regulation, as well as how your determination would have impacted the crime you researched.

Agencies with statutory powers of investigation and the imposition of penalties should not choose a non-adversarial approach to regulation. They are uniquely placed to exercise a certain degree of autonomous authority that allows them to act independently when assessing the conduct of entities. Their statutory powers ensure that they enforce specific standards with the primary aim being the protection of consumers. In carrying out their mandate, regulatory agencies are well aware of the undue influence that influential figures may have in the market. They, therefore, use their power as branches of the executive to practice oversight after interpreting appropriate legislations. Regulation is a complex endeavor which is why it is always fundamental to apply an adversarial approach.

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The parties participating in a particular enterprise need to be cognizant of the rules of engagement and obtain the necessary certifications from sector regulators. Additionally, they also set price controls in the market while making sure that transparency precedes any decision made by the organization.  Statutory powers also make it possible for the agencies to probe administrators regarding their activities in a company before enforcing a particular action.  The Centers for Medicare and Medicaid Services (CMS) Securities and Exchange Commission (SEC) were among the first agencies to participate actively in Therano’s activities (Carreyrou, 2018). The CMS is responsible for ensuring quality standards in health care and providing the necessary certification. Its investigation into the Theranos scandal revealed that the firm had given false claims to investors and patients about its ability to accurately test blood samples. This led to a revocation of Theranos Clinical Laboratory Improvement Amendments (CLIA) certificates and a settlement for its role in misleading patients. The SEC is tasked with ensuring that investors are always protected from fraudsters while enabling capital formation. It charged Theranos leadership with fraud for deceiving investors for personal gain. A non-adversarial approach to regulation would have done little to combat fraud and other forms of white-collar crimes. The imposition of stiff penalties is a deterrent that seeks to ensure that potential perpetrators are made aware of the sanctions that would accompany such behavior.

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