A federal court judge in San Jose has declined to throw out the fraud case against former Theranos CEO Elizabeth Holmes and Ramesh "Sunny" Balwani, the startup's former president and chief operating officer, finding the indictment against them contains enough factual information to move the case forward.
Holmes and Balwani were indicted in 2018 for an alleged fraud scheme in which Palo Alto-based Theranos purported it could provide accurate and revolutionary methods of drawing and testing blood and diagnosing patients through devices using only a few drops from a finger prick. It also claimed to have developed a "miniLab" that could quickly analyze the sample. Federal prosecutors allege the devices never worked accurately and they consistently produced unreliable and false results. Holmes and Balwani allegedly tricked investors into believing the method worked while falsifying the results.
Prosecutors later revised the indictment and expanded the charges. Holmes and Balwani faced 11 felony counts, including nine counts of wire fraud, conspiracy to commit wire fraud against Theranos investors and conspiracy to commit wire fraud against doctors and Theranos patients.
Attorneys for Holmes and Balwani sought to have the court dismiss all of the charges on Monday on technical grounds, claiming the indictment failed to show a specific intent to commit wire fraud. They also claimed the indictment was unconstitutionally vague because it did not give the defendants enough information to understand their charges. The defense claimed the indictment did not adequately spell out the facts against the pair and left so many holes amid millions of pages of documents that it was impossible for them to mount an informed defense.
U.S. District Court Judge Edward Davila's signed ruling on Tuesday found the indictment is "constitutionally sound" and provides the defendants with factual information to understand the charges they face. Theranos made statements promising "quick" and "accurate" diagnostic testing using "a single drop of blood," which underlie the fraud charges, for example.
Davila denied defense attorneys' motion to dismiss the whole indictment but threw out some charges. He dismissed charges pertaining to patients whose insurance carriers paid for the tests. Those patients had not lost any money in the scheme and the indictment did not allege that insurance companies were defrauded, he wrote.
The judge only permitted charges related to patients who paid for Theranos blood tests out of pocket to move forward.
Davila also dismissed counts pertaining to fraud against doctors. The physicians did not lose money or property as part of the scheme and they did not make misrepresentations to their patients. The doctors only referred the patients to Theranos for testing, he ruled.
The defense failed to persuade the court with their argument that because the patient received the test, they got what they paid for and therefore Holmes and Balwani did not commit fraud.
"The relevant inquiry is whether Defendants misrepresented the nature of the bargain," he said. "A schemer who tricks someone to enter into a transaction has not 'schemed to defraud' so long as he does not intend to harm the person he intends to trick. And this is so even if the transaction would not have occurred but for the trick," Davila wrote, citing 2007 and 2011 appeals court case law.
But a defendant's lie about the nature of the bargain is actionable in court in two primary forms: If the lie is about the price of the goods or if the lie is about the characteristics of the goods, such as representing a product is designer when it is a knock off, he said.
Davila put forth two hypotheticals to illustrate his ruling against throwing out the Theranos case:
"Imagine you go to the doctor's office for a blood test. The nurse tells you that before the test, he will bring you apple juice. Instead, because he dislikes you, he brings cranberry juice. He takes your blood and you get your (accurate) results. Did you get what you bargained for? Yes. You still got your blood test and received the correct results. The fact that you got cranberry juice is irrelevant; you did not ask for the juice; it was secondary to the core transaction.
"Next imagine, you go to the doctor's office for the same blood test. The nurse comes to your patient-room and tells you about a new type of blood test. He says this new test only requires a couple drops of blood but remains just as accurate and reliable as a classic blood test. You agree to use the new test, only to discover later that the test was neither accurate nor reliable. Have you been defrauded? Yes. Why? because the misrepresentation went to the value of the bargain. You paid for something you did not receive. You paid for an accurate and reliable test and, because you did not receive that, you have been deceived about the characteristics of the good," he wrote.
"Viewing the indictment as a whole and with common sense, it is plain that it sufficiently alleges that patients did not receive the benefit of the bargain. They did not receive the accurate and reliable test they were promised," he said.
The court has not set a trial date for Holmes and Balwani.