Thursday, January 16, 2020

Federal prosecutors argue against former Theranos head's motion to dismiss indictment

By Rodney F. Tonkovic, J.D.

Federal prosecutors have filed motions in opposition to former Theranos CEO Elizabeth Holmes's motion to dismiss several counts of the indictment against her and the company's COO. Holmes argued that parts of the indictment failed to allege falsity and a duty disclose and also moved to dismiss portions of the indictment relating to defrauding patients who used Theranos's blood tests. The government asks the court to deny the motion in its entirety (U.S. v. Holmes, January 13, 2020).

The action was brought against Theranos founder Elizabeth Holmes and the company's president and COO, Ramesh "Sunny" Balwani. The indictment alleges that Theranos, a blood-testing company, misled the public regarding the capabilities of its technology. Holmes and Balwani represented that the technology yielded accurate results while knowing that the tests were unreliable. Holmes and Balwani were charged with two counts of conspiracy to commit wire fraud and nine counts of wire fraud stemming from two schemes: a multi-million dollar scheme to defraud investors and another scheme to defraud patients and doctors.

Falsity and duty to disclose. Holmes and Balwani ("Theranos") have asked the court to dismiss certain clauses from the superseding indictment, asserting that it fails to allege falsity and a duty to disclose. The government's motion in opposition argues that Theranos articulated the wrong standards. First, Theranos asserts that specific falsehoods are required to allege wire fraud. But, the government says, Ninth Circuit precedent says that all that must be pleaded is a fraudulent scheme or artifice, and any deceptive statements or half-truths are considered material evidence of the fraud. The court can deny the motion to dismiss based on this standard, the government argues, and does not need to consider whether the challenged clauses allege actual falsity. The government says that it only needs to properly allege wire fraud and has done so.

Even if the court considers the allegations, the government continues, they clearly allege falsity. Theranos made misrepresentations in furtherance of the scheme, including lies to doctors and patients concerning the consistency of the company's test devices when the devices' unreliability was known. Further, the statements at issue were also fraudulent as "half-truths" due to critical omissions meant to deceive, the government contends.

The superseding indictment also alleges a duty to disclose. In the Ninth Circuit, a duty to disclose arises from affirmatively telling a half-truth about a material fact, whether or not there is a relationship of trust. Even so, the government asserts that a duty of trust existed because Theranos induced investors to relax their ordinary care and vigilance through deceptive demonstrations designed to show that the technology worked.

Doctors and patients. Not only did investors lose hundreds of millions when the misrepresentations came to light, but thousands of patients received unreliable blood tests which, in many cases, caused actual harm. In their motion, the defendants asked the court to limit the case to fraud targeting investors.

The government says that this motion should be denied for three reasons. First, the indictment meets constitutional standards for pleading fraud against doctors and patients. A charging document alleging every detail that will be presented at trial is not required. Next, the alleged fraud goes to the core of the bargain between Theranos and its customers – the decision to market unreliable tests is the definition of intent to defraud, the government says. Finally, the indictment alleges that Theranos intended to deprive its victims of the money paid for testing services, and the fact that not every victim paid Theranos directly does not affect this charge's viability.

The case is No. 18-CR-00258.