Good morning from San Jose! My train was on time today and the courthouse has gotten its water back, so it's (hopefully) full-steam ahead in Elizabeth Holmes' criminal fraud trial as we head into the 3rd month of testimony today. Judge Davila is on the bench.
The parties are discussing limiting various buckets of testimony, including emails about Theranos' financial projections from ex-Cravath partner Dan Mosley and Fortune writer @rparloff's testimony. The judge is (big surprise here) holding off on ruling on the evidentiary issues.
The judge notes that the jurors have told him they have some scheduling conflicts, so tmr we're going until 3 p.m. instead of 4 and starting at 10 a.m. on Nov. 29 instead of 9 a.m. (Reminds us all that we have at least another month of this circus.)
It's been a week since we were in court, but last we left off, Elizabeth Holmes' attorney Lance Wade was cross examining Lisa Peterson, a private equity manager for the DeVos family's investment firm. ICYMI, here's my recap of her exam so far. law360.com/articles/14346…
The jury is in the courtroom. Judge Ed Davila reminds everybody again that they need use silent keyboards and if they don't, he'll "force" observers to go to the overflow courtroom (where I am and where we can type as loud as our fingers want). Lisa Peterson is back on the stand.
Wade resumes Peterson's cross pulling up an Oct 14, 2014 email written by Bob Schierbeek, who was the CFO of the DeVos family investment firm RVD Corp., and another Oct 5 email. Both were written before Peterson prepared a due diligence memo on Theranos.
The Oct 14 email says RDV* CEO Jerry Tubergen "is traveling to California today to meet with Theranos founder Elizabeth Holmes. Jerry has been very bullish on this potential relationship/investment. Cheri, Doug and Rick are traveling with him today. Probably a $100M investment."
The Oct 5 email says "There are two very ‘active co investments (not in our cash flow model) that will likely take place at or near month end. Theranos-private co-investment $100 million."
Lisa Peterson pushes back stating repeatedly that Schierbeek couldn't transfer DeVos' money before she or Tubergen gave him the OK. But Holmes' defense counsel gets her to concede the emails were sent before she spoke to Holmes, traveled to Theranos' HQ & prepared a DD memo.
Holmes' counsel pulls up a Sept 2014 letter from Theranos to investors that states "all current resources are focused on commercial lab business, and future growth in pharmaceutical, military, and other business will follow."
Peterson points out the letter also says Theranos "historically" had pharma and military business, but the judge strikes her comment as non-responsive. Holmes' counsel again notes that the letter went on to say pharma and military deals were on hold. She concedes the point.
Holmes' counsel is walking through Theranos slides that Peterson viewed to prep her due diligence memo for the DeVos family. Judge Davila has stricken multiple comments by Peterson, who has added that she didn't know Theranos did venous draws to many of her answers.
Holmes' counsel Lance Wade pulls up the Theranos study that had a Pfizer logo at the top (which an ex-Pfizer exec testified wasn't authroized). Wade points out the footer of each page of the report has a Theranos address and Theranos' website. Peterson says she didn't notice it.
Wade points to an "RDV approval" doc on a new equity investment into Theranos that was signed by RDV CEO Jerry Tubergen. The doc says "Closed Oct 31, 2014," but there's no date under Tubergen's signature. (The DeVos fam didn't get Peterson's due diligence memo until Nov/Dec 2014)
Wade points out that the RDV document pulls a graph that appears to be verbatim from Roger Parloff's Fortune Magazine article on Theranos stating that Theranos' analyzers don't need FDA approval.
Wade also notes RDV signed a doc acknowledging that Theranos has “a limited financial and operating history” and it's “highly speculative and involves substantial risks." Peterson says "it did, but we also relied on what we heard." The judge strikes the second part of her answer.
Wade points to other provisions in RDV's contract w/ Theranos says RDV is an accredited investor, which Peterson acknowledges means it's sophisticated. But she adds "we weren’t given complete" info. The judge again strikes her added comment.
Wade wrapped cross, and Robert Leach is up on redirect for the government. He asks Peterson if she thought the risk provisions in Theranos' docs meant what Holmes and Balwani said weren't true. She says no.
Leach notes that Theranos projected in Sept/Oct 2014 that by the end of the year, it's revenues would be $140 million, but it ended the year with zero revenues. He asks Peterson if she thought that revs would be 0 based on what Theranos gave/told her. She says no.
Leach is walking through the various Theranos slides that Peterson reviewed to prep the due diligence for the DeVos family. He notes that much of the language is in the present tense, and it says Theranos can do "any test available in central labs and processes all sample types."
The judge called a break and let the jury go, but he asks a man in the gallery to come up. He says he was told the man took a pic in the courtroom, which is not allowed. The judge says if it happens again, he'll have U.S. Marshalls "take action." We're on a break. Back in ~30!
And we're back! Defense counsel has an objection to an email prosecutors want to ask Peterson about, so they're going to have a sidebar about that. After q's about it, the gov't will wrap redirect.
After a 20 minute sidebar, the judge sustained the defense's objection, and Lance Wade is up now for a few more q's on recross.
Wade points out that Theranos had "deferred revenue" of $169 million in 2014 (to counter the testimony that Theranos had zero revs at the end of 2014). The parties finished with Lisa Peterson's examination.
The government calls Dr. Constance Cullen, who worked at Schering Plough - which later was acquired from Merck - from 1996 to 2016. She served as the director of its bioanalytical lab.
She said she learned of Theranos in 2009 after her boss and his boss asked her to evaluate Theranos' tech. She said Schering Plough acquired two Theranos devices to do beta testing and she traveled to Theranos' HQ in California as a part of its due diligence.
Cullen says Schering Plough also evaluated three Theranos assays - CRP, il-6 and TNF-a multiplex - but she says Schering Plough had "no role other than review of documents." Theranos billed $279k for the cartridges used to run assays on the two devices for beta testing.
Cullen says she & other Schering Plough due diligence team members met w/ Elizabeth Holmes at Theranos in May 2009. But "my recollection were the answers to the questions were not necessarily forthcoming. I was disappointed in the answers" b/c there were insufficient details.
Cullen says Elizabeth Holmes primarily responded to the q's during the May 2009 meeting, even though she tried to ask other Theranos employees q's b/c they were technical, and she "did not seem to be forthcoming."
Cullen says: "There were no direct answers to questions and the questions are fairly technical so the answers should be fairly technical and direct. There were what I would describe as cagey responses or attempts [by Holmes] to redirect to other topics of discussion."
Cullen says she shared her thoughts about Theranos privately with some of my colleagues, but didn’t share her concerns at the meeting w/ Holmes at Theranos "because it’s awkward."
Cullen said she followed up a month later, in June 2009, asking Theranos personell for an update on assay development, b/c her company had paid Theranos $279k.
Prosecutors pulled up Theranos' validation report w/ the three assays -- CRP, il-6 and TNF-a multiplex -- that Theranos sent to Cullen in December 2009. She said she never discussed the report w/ Theranos b/c she was "swamped" w/ Schering Plough's merger w/ Merck.
Prosecutors pulled up another validation report that Elizabeth Holmes emailed Walgreens execs in April 2010. The report appears to be identical but has Schering Plough's logo at the top, next to Theranos. Cullen says Schering Plough never validated the assays.
Holmes wrote in her April 2010 email to Walgreens that "these reports are from Glaxosmithkline, Pfizer and Schering Plough after their own technical validation and experience with Theranos systems in the field." Cullen says she and no one at Schering Plough validated the assays.
Prosecutors finished Cullen's direct. John Cline is up for Holmes on cross. He begins by getting Cullen to acknowledge that she was impressed by the testing "sensitivity" of Theranos' devices when she first received two devices for its beta testing.
Cline points out that in a Dec 2008 email, Cullen wrote Theranos that "the reports that you provided showed correlations," but she wanted more info. Theranos then sent her four validation reports, and she says she "probably reviewed" two of the reports.
Cline also points to Holmes' April 2009 email to Cullen and her boss in which Holmes wrote that "we of course work through the validation program with [Cullen] in great detail." Cullen says she's not sure if Holmes' statement is true.
Cline gets Cullen to acknowledge that she never voiced her concerns about Theranos' responses to her technical q's in the May 2009 email and that aside from her June 2009 email, Schering Plough never asked Theranos for more info.
Cline points out Holmes emailed Cullen in early 2010 and Cullen replied in March 2010 apologizing for her delay and telling Holmes she asked a scientist to reach out to Theranos to discuss "the specifics of validation." That was Cullen's last communication w/ Holmes, she says.
The parties wrapped with Cullen's examination. The government calls former @Cravath partner Daniel L. Mosley as the next witness.
Mosley, who invested ~$6M into Theranos, says he first heard of Theranos in July 2013 through his Cravath client, Henry Kissinger, who was on the board of Theranos at the time. Mosley recalls that Kissinger asked Mosley to review Theranos and he put Mosley in touch w/ Holmes.
In July 2014, Mosley wrote Holmes that “It was certainly a pleasure speaking with you yesterday. Once I receive the private placement memorandum, I will give you a call or send you and email to find a time to get a briefing from either you or someone from your staff.”
Mosely's email went on stating that he reached out to Greg Penner, who is Rob Walton’s son-in-law and vice chair of Walmart. Penner "would very much like to have an opportunity to review the private place memo on behalf of the Walton family & have a chance to discuss Theranos."
Mosley says in Aug 18 2014, Holmes sent Mosley a thick package of material about Theranos. Holmes letter said "historically" Theranos has worked with pharmaceutical and military clients, which Mosley says was important to him.
Mosley said at some point in his conversation with Holmes, he started considering investing his personal money into the startup. "I was really doing what Dr. Kissinger had asked me," but he couldn't help but consider the company "in a broader scope," he says.
Mosely said he invested in Theranos by purchasing "Series C-2 Preferred" stock, which he explains had priority over other stock classes - like series B - in the case of liquidation. He says he doesn't know who owned series B stock.
Mosley*** (dumb typo) says the stock agreement also had an "unusual provision" that gave Theranos board members the option to buy back series C-2 shares based on what they thought was fair market value. He had concerns about that provision, he says. Taking a ~30 min break! Brb.
We're back! The judge observes that "it seems warm in here and I don't know what that has to do with our issue last week with the water," but they'll look into it.
Prosecutor points to notes that Mosley took on Theranos. His notes mention there were 30 Walgreens stores offering Theranos services and that those numbers will grow to "11k stores in 10 countries. He also wrote Theranos collaborating w/ 3 hospital groups -“massive undertaking."
Prosecutor flips through the info that Theranos gave to Mosley, including the statement that "Theranos has been comprehensively validated over the course of the last seven years by 10 of the 15 largest pharmaceutical companies, with hundreds of thousands of assays processed."
It also says "Theranos runs any test available in central laboratories, and processes all sample types" and "Theranos provides the highest level of oversight automation and standardizations." Mosley adds he thought Johns Hopkins validated tests based on the logo in the binder.
Mosley says Theranos included a validation report with the Pfizer logo on it, and he thought Pfizer had written it. He notes that the Pfizer logo is "on every page" and the report's conclusions "read as third-party conclusions" by somebody other than Theranos.
Prosecutor points to Theranos' financial projections in Aug 2014 were $140M total revs by end of the year and $990M by end of 2015. Mosley said he thought the estimates were reliable and made in good faith, given they were 3/4ths of the way through 2014 at that point.
Mosley says he also read the Fortune Mag cover story on Theranos before he invested. He emailed Holmes in Sept 2014 and thanked her for the chance to invest. He explains "this was a co that had enormous potential to do good things for people" and could be financially successful.
Mosley says he arranged meetings with the DeVos family, the Walton family and the Cox family, who were all his clients, and Elizabeth Holmes, because he thought it was a good investment opportunity.
Mosley sent Henry Kissinger a Theranos analysis memo on Sept 2014 that said "the materials on Theranos provided by Elizabeth Holmes are fairly extensive and provide substantial insight into the company and the investment opportunity."
Mosley's memo says "There does not appear to be any sign of any q about the quality accuracy or reliability of the testing" and he cites the Johns Hopkins info, the purported Pfizer validation report and Theranos' statement that 10 of 15 largest pharma cos validated the tests.
Mosley's memo points out that Elizabeth Holmes owned Class B shares, which had 100 votes per share as opposed to the one vote per share in the other classes. That way, she had 100% control of the company, he says.
Mosley's 2014 memo also states a risk is that Theranos expected to earn $990 million in revs in 2015 and it would be "helpful to know the basis for these estimates," as well as how many Walgreens stores would have Theranos services in 2015.
Mosley wrote another "important q is why Theranos is now willing to sell additional shares and wishes to raise additional cash," b/c it could dilute the shareholder's value in the co. He still chose to invest tho, he says.
In a Sept 2014 email, Mosley wrote Elizabeth Holmes that he sent Theranos' blank confidential disclosure agreement to Cox family and to DeVos family. He also thanks her for letting him be involved, adding "I can’t tell you how enamored I am in what you’re doing.”
In an Oct 20 2014 email, Mosley wrote Elizabeth Holmes that he wants to invest $6 million into Theranos through a shell company owned by him for a trust for his three daughters. Holmes replies "I am looking forward to having you and your family be part of this."
Holmes also told Mosley that "We have spent a lot of time on how we’re sizing this transaction and who we’re bringing in," but she confirms that there's "an allocation" for Mosley, the Cox family and the DeVos'.
Mosley acknowledges that he knew he could risk losing all of his investment in the Theranos and the investment was highly speculative, but "it was a risk I was willing to take, based on what I knew."
Lance Wade is up for Holmes on cross. He begins by getting Mosley to acknowledge that Cravath is one of the most "preeminent law firms in the world," and he counseled high-profile, high-net worth families in creating trusts and managing their estates.
Wade notes Mosley's clients invested in Theranos. The DeVos fam invested $100M, Walton fam invested $150M, the Cox family invested $100M and Henry Kissinger's trust invested $3M. He also talked w/ Stavros' Andreas Dracopoulos, who invested $25M, & John Elkann, who invested $5M.
Wade has turned to three binders of info that Mosley received from Theranos before investing in 2014, but trial is breaking for the day. Mosley will be back on the stand bright-and-early tomorrow morning (assuming no water pipes break). ✌️
After writing Elizabeth Holmes that he was "enamored" w/ her business, ex-Cravath partner decided to invest $6M into Theranos and introduced his rich clients to Holmes, who secured a total of $385 million from them. Here's my recap of today's trial action! law360.com/articles/14369…
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