Judge hits hammer, close up, law concept

“Elizabeth Holmes chose fraud over business failure. A jury has determined, beyond a reasonable doubt, that she intentionally misled investors,” said Special Agent in Charge Craig Fair delivering the decisive remarks upon the conclusion of one of the most notorious and complex laboratory-related criminal cases of the modern era in a Department of Justice news release for the U.S. Attorney’s Office Northern District of California. In January, the saga of Elizabeth Holmes and her company Theranos, which once courted global publicity and wooed elite investors to the height of $9 billion, reached the end of a legal avalanche with multiple convictions for the former CEO, entrepreneur, and criminal conspirator Elizabeth Holmes, age 37, on Tuesday, January 4, 2022. The legal ramifications shed light on possible long-term consequences for both regulatory processes surrounding labs and the legal responsibilities labs may face during criminal inquiries.

Consequential Convictions

The 15-week trial in San Jose California examined almost a decade of deceit scrutinizing incidents as far back as 2013, a final unraveling of a company that misled and calculated its rise to power since 2003. The jury convicted Holmes on three accounts of wire fraud committed and one charge of conspiracy as part of a scheme to defraud investors.

  • The first instance was wire fraud to the amount of $38,336,632 occurring around February 6, 2014.
  • The second occurred on approximately October 31, 2014, with transfers amounting to $99,999,984 and $5,999,997.
  • The final count of wire fraud spanned the course of 2010 and 2015

The jury acquitted Holmes on four other charges including two counts of wire fraud related to a patient’s laboratory blood test results that occurred around May 11, 2015. Holmes was also acquitted of one count of wire fraud totaling $1,126,661, on approximately August 3, 2015. In addition, Holmes was found not guilty on one count of wire fraud for patients paying Theranos for services from 2013 to 2016. According to the United States Attorney’s Office Northern District of California:

“Holmes faces a maximum sentence of twenty (20) years in prison, and a fine of $250,000, plus restitution, for the conspiracy count and each count of wire fraud. However, any sentence following conviction would be imposed by the court after consideration of the U.S. Sentencing Guidelines and the federal statute governing the imposition of a sentence, 18 U.S.C. § 3553.”

Theranos, which was based out of Palo Alto and Newark, California, claimed to revolutionize testing through an analyzer device called Theranos Sample Processing Unit (TSPU), minilab or its most notorious name, the Edison. Holmes and the company fraudulently asserted claims that the analyzer could execute a complete range of clinical tests using nothing more than a small blood sample taken from a finger stick. Furthermore, Holmes not only claimed that the Edison could get results with more accuracy than standard procedures, but she also told investors and the world that this could all be achieved at “a faster speed than previously possible.”

The evidence illuminated that Holmes was well aware that her material representations were fraudulent towards investors. The trial confirmed that “Holmes knew the analyzer had accuracy and reliability problems, performed a limited number of tests, was slower than some competing devices, and, in some respects, could not compete with existing, more conventional machines. Evidence also showed that Holmes resorted to using conventional machines bought from third parties to perform much of Theranos’s blood testing.”

Potential Flaws in the Scope of Regulatory Oversight

The saga of Theranos also revealed rifts in the way the regulatory oversight was conducted. In a Forbes article “Theranos Woes Offer Lesson in How Labs Should Be Regulated,” contributor and physician Scott Gottlieb, MD, offered important commentary on some of the regulatory flaws, that if corrected, may have detected a trend in problems and halted the Theranos scheme far earlier while averting more major consequences to investors and the industry.

One flaw the article alluded to was the reality that the FDA places too much emphasis on the diagnostic platform itself, which it includes more on the medical device spectrum. Gottlieb suggests the FDA itself is not used to oversight when it comes to “a service of practice of medicine.” Because of this minimal scope, Gottlieb asserts that “when it comes to diagnostics like the blood testing platform that Theranos developed, FDA focuses mostly on the tools, and not the conduct of the lab, or how the many aspects of a diagnostic service are executed.”

In his commentary, Gottlieb suggests that a prior FDA review had indicated problems with blood testing machines created by Edison. In addition to claiming that Holmes played the system by hiding and “camouflaging” within the limited scope of FDA policy, he stated as far back as 2016, that “The agency’s actions may have prevented broader use of the platforms, dubbed Edison Machines. Yet that didn’t stop FDA from approving one of the tests run on the company’s signature platform. Nor could FDA reach all of the issues challenging Theranos as its business model evolved.”

Although the jurisdiction of the FDA may be under scrutiny, Medicare and CLIA also hold fault according to the article. Regulators working for Medicare under the direction of CLIA policy needed to apply more “active oversight” to the company’s activities. As the article reveals, these regulators who had inspected Theranos labs, “reportedly found them to be improperly run, and results suspect.” This includes an incident in 2016, where CMS acted to revoke the CLIA certification for their Newark lab and prohibited Holmes from “owning, operating, or directing a laboratory for a minimum of two years,” as a consequence of a CMS investigation which concluded that the labs conduct held an “immediate jeopardy to patient health and safety.” Theranos eventually reached an agreement to pay a $30,000 fine and cease operations of the lab for two years.

As many labs and professionals understand, the chief objective of CLIA is to probe and inspect how laboratories operate their services to achieve regulatory compliance and safety. This policy exists to analyze and enforce how the tests are created and monitor for accurate and consistent results. According to Gottlieb, “this distinction— between the diagnostic tool and the lab service—peaks to a more fundamental question when it comes to the proper oversight of diagnostics.”

However, he also acknowledges CLIA policy, implementation and operations remain far from perfect stating:

 “CLIA has its own struggles. The agency gets short shrift inside the Medicare program, and is chronically understaffed. It can use more resources and expertise to oversee the clinical validity of the diagnostic platforms that it supervises. But for those who advocate for giving FDA a greater role in overseeing laboratory services and diagnostic tests—and use Theranos as a proof point—underestimate the complexity of running a lab company, and the difference between building a diagnostic tool and performing that test as a broad service.”

Future Implications for Laboratories in the Aftermath of the Verdict

Regulatory implications are not the only impacts to be aware of. The Dark Daily’s article “Two Important Aspects for Clinical Laboratories to Consider Following Elizabeth Holmes’ Conviction,” illuminated two key points worth considering for labs. Although they acknowledge that most lab directors will never find themselves facing such an audacious legal case, the director still has legal responsibilities should a fraud case arise. Since the director is listed on a lab’s license, they are subject to CLIA legal provisions. As the Dark Daily states, “Such ramifications were clear during the Holmes trial given that four of Theranos’ former lab directors took the witness stand. However, it won’t take a high-profile case to bring up CLIA licenses in court. Laboratory teams should carefully review what their legal responsibilities are under the regulation.”

Including a whistleblower policy within the operations manual is another critical aspect to be considered. As the article pointed out, “the whistleblowers ended up being powerful sources of information for regulators and prosecutors,” however their complaints were not taken seriously at the time they were presented since they clashed with the global media crown that Holmes ordained herself with through years of fraudulent conquests of the industry. Dealing with whistleblower complaints effectively will be paramount to preventing and mitigating such deep and pathological schemes.

The Theranos scandal serves as a stark reminder that the government will remain vigilant when it comes to conspiratorial schemes, big or small, with the FDA stating, “The FDA’s Office of Criminal Investigations (OCI) will continue to investigate and help bring to justice individuals and companies responsible for putting the public health at risk. FDA-OCI is proud to have partnered with the United States Attorney’s Office and its law enforcement counterparts to bring this prosecution.”

To explore more coding and compliance topics subscribe to our Laboratory Compliance Manager Newsletter. The Laboratory Compliance Manager Newsletter is your monthly gateway to the latest laboratory-specific compliance, coding, and reimbursement news including topics like the clinical laboratory fee schedule, coding changes, the final rules, CLIA-waived tests, PLA code releases, and more. Subscribe today

Information Sources:

https://www.justice.gov/usao-ndca/pr/theranosfounder-elizabeth-holmes-found-guilty-investor-fraud

https://www.forbes.com/sites/roomykhan/2017/02/17/theranos-9-billion-evaporatedstanfordexpert-whose-questions-ignited-the-unicorntrouble/?sh=6d31a5d86be8

https://www.forbes.com/sites/scottgottlieb/2016/04/28/theranos-woes-offer-lesson-in-how-labs-should-be-regulated/?sh=5a0c564748d9

https://www.genengnews.com/molecular-diagnosticsin-vitro-diagnostics/theranos-elizabeth-holmes-convicted-on-fraud-conspiracy-charges/

https://www.darkdaily.com/2022/01/06/twoimportant-aspects-for-clinical-laboratories-to-considerfollowing-elizabeth-holmes-conviction/

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