[SOLVED] What possessed a CEO to hype a

What possessed a CEO to hype a product that didn’t work and lie to financial institutions, pharmacies, the government, and the public about it? Is it hubris; plain and simple? Or was there something nefarious going on? The case of Theranos, an once high-flyer in Silicon Valley, portrays a company run by an ambitious person who thought she could get away with just about anything. Perhaps she would have if an employee, Tyler Schultz, had not blown the whistle to a Wall Street Journal reporter in 2015.
The Wall Street Journal investigative reporter, John Carreyrou, who broke the story, wrote a book, Bad Blood: Secrets and Lies in a Silicon Valley Startup, that characterized what went on at Theranos as the biggest corporate fraud since Enron and a tale of ambition and hubris set amid the bold promises of Silicon Valley.
In 2003 Elizabeth Holmes, who dropped out of Stanford University in 2003 to start Theranos, a privately-held company that would make blood tests cheaper, more convenient, and accessible to consumers. Simply by using a pin prick, blood could be analyzed quickly for diseases. Holmes believed the testing procedures were a revolution in the way diagnostics were done and preventative medicine. Using a machine called the Edison, pharmacies were able to use this portable blood test from a drop of blood. However, most tests were not a needle prick but actually a venipuncture.
Physicians could not get information on how the tests were done. The whole process was sort of a black box, which had mysterious or unknown internal functions or mechanisms. Theranos was very secretive about the workings of the machinery and knew it did not working as intended.
Holmes duped just about everyone about the efficacy of Edison. She was able to raise hundreds of millions of dollars until Schultz blew the whistle. For twelve years, Holmes essentially ran a Ponzi scheme by attracting investment funds from primarily venture capitalists that saw it as a unique opportunity to cash in on the boom in Silicon Valley. Exhibit 1 summarizes the facts of the case.
Holmes, the chief executive officer, and Ramesh “Sunny” Balwani, the chief operating officer, served as chairperson of the board of directors and a member of the board, respectively. A group of mostly figure-heads also served on the board including George Shultz, a former U.S. secretary of state and the grandfather of whistleblower Tyler Schultz. A majority of board members lacked the experience necessary to ensure due diligence on the part of the company.
The majority of the board members were not qualified with respect to knowledge of how financial information should be disclosed and lacked experience in dealing with products and services like Theranos. Holmes controlled the board so she controlled the information flow.
According to a federal indictment, Holmes and Balwani defrauded doctors and patients (1) by making false claims concerning Theranos’s ability to provide fast, reliable, and cheap blood tests and test results, and (2) by omitting information concerning the limits of and problems with Theranos’s technologies. Allegedly, the defendants knew Theranos was not capable of consistently producing accurate and reliable results for certain blood tests. Other allegations include:
• The defendants made numerous misrepresentations to potential investors about Theranos’s financial condition and its future prospects, including that its patients’ blood was being tested using Thermos-manufactured analyzers; when, in truth, they knew that the company had purchased and used third party, commercially available-analyzers.
• The defendants’ represented to investors that Theranos would generate over $100 million in revenues and break even in 2014 and that the company was expected to generate approximately $1 billion in revenues in 2015; when, in truth, Theranos would generate only negligible or modest revenues in 2014 and 2015.
• The defendants used a combination of direct communications, marketing materials, statements to the media, financial statements, models, and other information to defraud potential investors about the company’s revolutionary and proprietary analyzer, Edison. Supposedly, the machine could perform a full range of clinical tests using small blood samples drawn from a finger stick at a faster speed than previously possible and with more accurate and reliable results. Allegedly, the defendants knew that the claims about the analyzer were false. It was slower than competing devices and, in some respects, could not compete with existing, more conventional machines.
Tyler Schultz claimed to know something unethical was going on and could have major repercussions on the company. He complained to Holmes that the research results were tampered with and multiple quality control tests were failing. Shultz said the prototype of Edison only had an accuracy of 65 percent while the required accuracy results were 95 percent, adding that Theranos was knowingly misrepresenting information to its users. He told HBO in a documentary that if a hundred people who had syphilis came and got tested on the Theranos devices, the company would only tell 65 of them that they had syphilis and told the other 35 that they were healthy: no need for medical intervention.
Schultz had signed non-disclosure and confidentiality agreements. Theranos accused him of leaking trade secrets and violating the agreement. He and his family fought it spending between $400,000 and $500,000 in legal fees.
In an interview with ABC News for its 20-20 television show in May 2019, another former Theranos employee, Erika Cheung, pointed out the flawed quality controls at the company that had ignored problems with the process of analyzing blood. Cheung said she raised these issues directly with Balwani who reacted by saying, “What makes you think that we have problems? What was your training in statistics?...I’m tired of people coming in here and starting fires where there are no fires and sort of thinking that there are problems when there are no problems.” Cheung realized her concerns were falling on deaf ears. She told the reporter that “This was not an environment, that is not a culture, where they really care about what consequences this might have on patients.”
The story of Theranos is a cautionary tale where one lie leads to another and before you know it the story snowballs out of control and coverups ensue. The culture of the company was such that it hid important information from the public, pharmacies, medical professionals, and the government. It is a classic case of the ethical slippery slope.
Exhibit 1 Theranos Timeline
Partnerships
Between 2012 and 2015, Theranos partnered with Safeway, Walgreens, and the prestigious Cleveland Clinic, to market its product to labs and the public. The following summarizes those deals.
In 2012, Safeway invested $350 million into retrofitting 800 locations with clinics that would offer in-store blood tests. Following missed deadlines and questionable results, the deal was called off in 2015.
In 2013, Theranos partnered with Walgreens to offer in-store blood tests at more than 40 locations. Following the story in the Wall Street Journal, Walgreen’s suspended plans to expand blood-testing centers in their stores. In 2016, Walgreens’ filed a lawsuit against Theranos for breach of contract. In 2017, the original claim for damages of $140 million was settled for less than $30 million.
In March 2015, the Cleveland Clinic announced a partnership with Theranos in order to test its technology and decrease the cost of lab tests. Theranos became the lab-work provider for Pennsylvania insurers AmeriHealth Caritas and Capital BlueCross.
In July 2015, the Food and Drug Administration approved the use of the company’s fingerstick blood testing device (the Edison) for the herpes simplex virus outside a clinical laboratory setting. Theranos was awarded the 2015 Bioscience Company of the Year.
Exposure and Downfall
In October 2015, John Carreyrou of the Wall Street Journal reported that Theranos was using traditional blood testing machines instead of the company’s Edison devices to run its tests. Carreyrou had interviewed an employee at Theranos, Tyler Shultz, who said he attempted to bring his concerns to the attention of management to no avail. He blew the whistle by reporting the company to the New York State Department of Health.
Theranos claimed the allegations were “factually and scientifically erroneous.” Walgreen’s suspended plans to expand blood-testing centers in their stores. The Cleveland Clinic announced it would work to verify Theranos technology.
In January 2016, the Centers for Medicare and Medicaid Services (CMS) sent a letter to Theranos after inspecting its Newark, California lab, reporting that the facility caused “immediate jeopardy to patient health and safety” based on a test to determine the correct dose of the blood-thinning drug warfarin.
In 2016, Walgreens and Capital BlueCross announced a suspension of Theranos blood tests from the Newark lab.
In March 2016, CMS regulators announced plans to enact sanctions that included suspending Elizabeth Holmes, the chief executive officer, and Ramesh “Sunny” Balwani, vice president and chief operating officer, from owning or operating a lab for two years and CMS would revoke the Newark labs license.
By April 2016, Theranos came under criminal investigation by federal prosecutors and the SEC for allegedly misleading investors and government officials about its technology. The U.S. House of Representatives Committee on Energy and Commerce requested information on what Theranos was doing to correct its testing inaccuracies and adherence to federal guidelines.
In May 2016, Theranos announced that it had voided two years of results, representing one percent of its tests, from its Edison device.
In July 2016, Theranos announced that the CMS had revoked its license and issued sanctions including the suspension of approval to receive Medicare and Medicaid payments, and a civil monetary penalty. Theranos announced its intention to appeal the decision by regulators to revoke its license to operate the Newark lab and other sanctions.
October 2016, Theranos announced that it would close its laboratory operations and wellness centers and lay off about 40 percent of its work force to work on miniature medical testing machines.
On January 17, 2017 Theranos announced that it had laid off approximately 155 people and closed the last remaining blood-testing facility after the lab failed a second major U.S. regulatory inspection.
In April 2017, a lawsuit by Partners Investments LP alleged that Theranos had misled company directors about the practices concerning laboratory testing and that it had secretly bought lab equipment to run fake demonstrations. The company reached an undisclosed settlement.
In April 2017, Theranos reached a settlement with CMS agreeing to stay out of the blood-testing business for at least two years in exchange for reduced penalties and signed a consent decree over violations of the Arizona Consumer Fraud Act. Alleged violations included false advertisement and inaccurate blood testing.
In August 2017, Theranos announced it had reached a settlement with Walgreens.
In March 2018, the SEC charged Theranos, Holmes and Balwani in an “elaborate years-long fraud” wherein they “deceived investors into believing that its key product – a portable blood analyzer – could conduct comprehensive blood tests from finger drops of blood.” Holmes reached a settlement with the SEC, which requires her to pay $500,000 forfeit 19 million shares of company stock and be barred from having a leadership role in any public company for ten years. Balwani did not settle with the SEC.
On June 15, 2018, Holmes and Balwani were indicted on multiple counts of wire fraud and conspiracy to commit wire fraud. According to the indictment, investors, doctors, and patients were defrauded. It alleged the defendants were aware of the unreliability and inaccuracy of their products but concealed that information. If convicted they each face a maximum fine of $250,000 and 20 years in prison. The case was expected to begin in October 2020.
In September 2018, it was announced that, with the approval of the company’s board of directors and shareholders, Theranos would begin the process of corporate dissolution. The company owed at least $60 million to unsecured creditors. The move to dissolve rather than file for bankruptcy left the company with $5 million to distribute to creditors.
Questions.
1. Evaluate the behavior of Elizabeth Holmes and Sunny Balwani, as officers of Theranos, from the perspective of the six pillars of character discussed in Chapter 1.
2. What can you conclude about the culture at Theranos and why?
3. Tyler Shultz signed a nondisclosure agreement not to divulge confidential information. Yet, he did just that in the interview with the Wall Street Journal reporter thereby violating the agreement. Analyze his actions from both a legal and ethical reasoning perspective.

Question: What possessed a CEO to hype a