Elizabeth Holmes’ 11-year prison sentence wouldn’t have been possible without the zeal the affluent class has for Silicon Valley startups.
When U.S. District Judge Edward Davila sentenced the former CEO to jail last week, one thing was key: how much money investors had lost because of her crimes.
That’s because federal sentencing guidelines, which judges use to determine appropriate sentences for people convicted of crimes, put more weight on the amount of money lost than anything else in fraud cases.
And Theranos, like so many bustling startups, was full of investment cash. It raised about $945 million from media mogul Rupert Murdoch, Oracle founder Larry Ellison, and former Secretary of Education Betsy DeVos, among others.
Yet Holmes was convicted of only a fraction of the nearly $1 billion in investment Theranos raised.
Davila identified ten investors who had been defrauded and came up with this number: $121 million, which the judge said was how much investors lost when offset by the amount Theranos stock would have been worth without Holmes’s deception.
Put another way, Holmes got more than a decade in prison for only about 10% of what Theranos made.
“The numbers in Silicon Valley are so out of step with reality that these guidelines are getting huge,” said Jeff Cohen, a former federal prosecutor who now teaches at Boston College Law School. “If she ran a widget factory with the same behavior, she would have received much less.”
While other Silicon Valley executives have been charged with wrongdoing, Holmes is the first CEO of a major technology company to face criminal charges and be sentenced to prison.
That means she’s the first in the industry to discover that raising hundreds of millions of dollars not only boosts a startup’s valuation, but that if she’s convicted of fraud in federal court, a serious prison sentence is all but inevitable. could become – possibly a warning to other flopped tech companies now under scrutiny, such as Sam Bankman-Fried’s cryptocurrency exchange FTX.
Federal sentencing guidelines consider the amount of money drained as the most important factor in punishing fraudsters because it allows authorities to target organized drug gangs and large-scale institutional fraud, according to former federal prosecutor Bill Portanova.
“For Silicon Valley, if at the end of the day the music stops and there aren’t enough chairs for everyone, the guidelines point to a severe penalty,” said Portanova, who now practices law in Sacramento, California.
Holmes’ punishment comes amid signs that a tech sector is becoming less frothy. Big tech companies and startups alike are laying off staff, new $1 billion companies are becoming increasingly difficult to spot, and venture capital firms are warning of a tough road ahead. Has the tech bubble burst or is it about to burst? That determination, experts say, was made easier in hindsight.
“Tech bubbles don’t pop the way a bubble pops out of gum,” said David Kirsch, a management professor at the University of Maryland who wrote a book on bubbles and crashes. “Investment bubbles are slowly deflating.”
Long prison sentence for ‘gross lie’
Holmes tricked patients, pharmacies, and savvy investors into believing that Theranos could revolutionize the way blood tests detect disease when it could do no such thing.
Why did she do it? It’s a question that even Davila pondered from the couch before announcing her punishment.
“What was the reason Mrs. Holmes sadly made the decisions she made?” said Davila. “Was there a loss of moral compass here?” he said. “Was it overconfidence? What caused it? Was it intoxication with the fame that comes with being a young entrepreneur?”
Whatever drove her, once a jury convicted Holmes, she faced a serious prison sentence.
The sentencing guidelines, after considering many factors, spit out a level of offense. Holmes’s level was 33 – 24 points of which were of the amount of money she swindled.
And Davila, it might be argued, could have meted out an even more severe punishment. Based on her offense level, Holmes’ sentence range was between 11 and 14 years behind bars.
(For context, the U.S. Parole Board recommended 9 years; prosecutors asked the judge to imprison Holmes for 15 years. The maximum sentence under the law was 20 years. Holmes’s legal team requested that she serve her sentence at home and avoid incarceration .)
Portanova said that Holmes’ sentence involved large amounts of money, but that her actions – repeatedly claiming that her technology could do what she was unable to do – were egregious.
“She wasn’t just some ambitious saleswoman getting off on her skis,” he said. “She did a lot of time because it was a blatant lie and she had plenty of chances to quit and she didn’t.”
Will ‘fake it till you make it’ in Silicon Valley ever change?
In their court case ahead of the sentencing hearing, prosecutors argued that jail time for Holmes was necessary to “deter future startup fraud schemes” and “restore the confidence investors should have when financing of innovation”.
But will Holmes’ incarceration have that effect?
Some say the Theranos case could be the start of federal prosecutors starting to more aggressively scrutinize Silicon Valley.
“In Silicon Valley, there’s traditionally been a mindset of not following the rules because that’s how you get ahead,” says Steven Davidoff Solomon of the UC Berkeley School of Law. “Holmes may be the first, but I suspect more will follow.”
But praising a product and exaggerating are not crimes, but what is a crime is knowingly defrauding investors. Sometimes the dividing line isn’t so clear cut, experts said.
Boston College of Law’s Cohen said the line between embellishment and criminal fraud does indeed remain blurred for most in the tech world, so it’s unlikely Holmes’s sentence will reverberate in a way that would dramatically change the industry’s culture .
“‘Fake it till you make it’ culture in Silicon Valley involves a certain amount of boasting, and here the jury has said there was more than that: there was fraud,” Cohen said.
“But I do think it’s a really hard line to discern,” he added. “And I have no hope that Silicon Valley will get the message.”
Kirsch, who studies tech entrepreneurs, was similarly skeptical of a major shakeup in the venture capital-backed tech startup world.
“The entrepreneurial community is vulnerable to a shiny new narrative. They have been. They always will be,” he said. “We’re kidding ourselves if we think the recipe is going to change because Elizabeth Holmes is going to prison.”