Thread by @doratki

Good morning from San Jose! I'm in the overflow courtroom for another day of Elizabeth Holmes' criminal fraud trial. This one should be long. It's unclear who the gov't will be calling and the parties are already arguing before the judge over Theranos' infamous missing database.

The parties are arguing over whether the gov't "opened the door" to telling the jury who's to blame for the missing database (which WilmerHale attys helped lose). The judge says "if the door is not open, the light is certainly shining through the cracks." (Lotta door metaphors)

The parties moved on to another issue - Holmes' renewed request to introduce Theranos customer feedback, which she received. Her attorney argues that the data is important to her defense and it speaks to Holmes' understanding that Theranos' biz "was working."

Judge Ed Davila notes that some of the customer feedback mentions that doctors gave patients $100 "gift cards" for Theranos testing services. (This is the first time I've heard about Theranos gift cards. Imagine getting one of those for Christmas.)

Prosecutor John Bostic notes that patients looking at Theranos blood-testing reports weren't able to know if their test results were accurate before they filled out the feedback forms, so any positive feedback can't speak to accuracy of the results.

Bostic also counters Holmes' argument that the customer feedback data shows that customers liked Theranos' low blood-testing prices. Bostic says there's no dispute that customers like lower prices.

Judge Davila notes that one customer wrote that “I came here because I saw Elizabeth on TV," and another said she took a Theranos pregnancy test. The comment was submitted around the time a patient who testified said she got a result that wrongly suggested she had a miscarriage.

Judge Davila says he's not going to change his mind on barring Holmes from introducing Theranos' customer feedback data during trial. He notes this isn't a price-fixing case, and the data isn't relevant to the testing accuracy issues in the case.

Bostic says Holmes' counsel has agreed to rest on Alan Eisenman. (There were some outstanding issues over the legitimacy of his personal notes, but sounds like Holmes' counsel is giving up on that fight for now.) The judge excused him, and there'll be a new witness this morning.

The jury is back in the courtroom. The gov't called former Theranos Controller So Han Spivey back to the stand. She was the first witness to take the stand ~3 months and 32 (!) trial days ago, and the feds just need her to testify to a doc so that it can be admitted as evidence.

Prosecutors pull up a 2015 email in which she asked Holmes and Balwani to sign off on a $1.12M payment to Horizon Media Inc for ads. The ads included a People Magazine ad for $228k, $282k in radio ads, $14k ads in Phoenix Magazine and $25k for "DJ and TV host on air segments."

On cross, defense counsel gets Spivey - who goes by Danise Yam - that she didn't play any role in the ads and she doesn't know if they ever ran. She just transferred the funds.

The parties wrapped with Yam. The government's next witness up is PFM LP hedge fund manager Brian Grossman.

Grossman says PFM is an investment firm that is registered with the SEC and he is a managing partner and chief investment officer, who primarily does portfolio management and risk management. He recalls that he started his career at JPMorgan.

Grossman says his firm manages a variety of funds - both public and private. He says he and his partner, Chris James, met Holmes and Balwani in Palo Alto for about an hour and they showed him a presentation on a laptop.

Grossman says the meeting, which was in Dec 2013, was a "little unusual," and Holmes and Balwani told him that Theranos' devices could do "a thousand" CPT code blood-tests, and that they had spent 10 years in clinical trials developing the tech w/ the DOD and pharma cos.

Grossman says "Holmes was very clear that they could match every test" on rival Labcorp & Quest menu blood-tests, "and those are probably the most well known." He adds "she did highlight that there was limitation they had around cultures," which relates to growing microorganisms.

Grossman says he was told Theranos had "something over $200 million in revenues from the Department of Defense" during the period when they were building tests. He says he primarily talked with Holmes and Balwani and Holmes never disagreed w/ each other during the meeting.

Grossman says Holmes and Balwani told him that Theranos was starting to roll out the tech in Walgreens' 8,100 stores, and they were using Theranos tech on humans at the time, which he thought was “very” impressive.

In Jan 2014, Grossman sent Holmes and Balwani "due diligence" q's. Grossman says "we as a group came up with questions," and his "deal team" included himself, as well as a junior analyst, a healthcare services specialist and a diagnostics specialist.

Grossman's multi-prong due diligence q's asked about the tech's accuracy, its competitors and IP, its Walgreen's partnership, the hospital market, regulatory issues and its financial projections. He says Balwani and Holmes responded to q's, but he doesn't remember who said what.

Grossman says they wanted to know whether Theranos' risks were just commercial rollout/biz strategy, or if the technology had issues, so they asked in various ways about the tech, but they were told there were no limitations. He also asked if Theranos could sell minilabs to drs.

The qs asked the gross margins on the analyzers, b/c Grossman says even if the tech was "incredible" if you can’t make it, then they needed "dramatically more capital to commercialize the tech or they would never be profitable." He was told it was 20% cheaper than rival devices.

Grossman says Holmes never told him that Theranos devices could only perform a few tests or that Theranos was using modified third-party devices to do tests, even though it would have been responsive to his DD q's.

Grossman recalls meeting with his team and Balwani and Holmes after he sent the DD q's, but Holmes left the meeting mid-way through. He says he was told Theranos could do tests in under 4 hours in retail stores and under an hour in hospitals. We're taking a 30 min break, brb!

We're back! Grossman is on the stand. He's wearing a suit with a light blue tie. He has a full head of grey hair, but I think he's the youngest Theranos investor (possibly by at least a decade) to testify in this trial to date.

Gossman says after their in-person meeting, he emailed Balwani in Jan 2014 asking for financial projections, which Balwani sent him. It's unclear to me if Gossman ever received written responses to his team's "due diligence" questions.

Prosecutor Robert Leach is flipping through various Theranos investor material that Gossman says he reviewed. Leach notes it has the same "Theranos runs any test available in central labs and process all sample types" language that was in binders given to other investors.

Gossman says he thought that Theranos' CLIA lab meant that its devices were able to meet regulatory standards. He also thought that institutions like Johns Hopkins and the FDA had validated the tech, based on a page in Theranos' investor binder.

On Jan 20 2014, Gossman wrote Balwani they wanted to "better understand" various aspects of Theranos' biz, like the FDA approval process for its tests and the manufacturing process for its devices. He also asked to see the facility where the devices were made.

Gossman says Balwani told him Theranos had "slack" so they wouldn't have a problem meeting demands to manufacture the devices. Again, this sounds like Gossman received Balwani's answers to his q's verbally at a meeting, and not in writing.

Gossman says he asked Balwani to talk to Walgreens and United Healthcare representatives, but Balwani was hesitant, didn't like the idea and said "it wouldn't look good."

Gossman says Balwani told him that the co had a contract w/ UnitedHealthcare, which Gossman considers the "smartest most sophisticated national health plan" and "we highly value their ability to vet tech cos." He also noted that United had a contract w/ Theranos rival Labcorp.

Balwani again told Gossman he wasn't comfortable with investors talking to UnitedHealthcare. "He said 'no, we are not comfortable with that. It would look badly if investors are asking to speak with the company,'" so Gossman didn't reach out to UnitedHealthcare.

Gossman says he spoke to Sanford prof Channing Robertson who vouched for the company, and he saw the manufacturing facility where they were making and distributing the devices. He says he was never told Theranos was using modified non-Theranos devices.

Prosecutor points to Theranos' financial rev projections, which estimated the startup would earn $260M by end of 2014. Gossman thought it was "strong" and impressive at the time he reviewed it ~Jan 2014, and he didn't know Theranos had zero revenues the prior year.

Gossman says he went to a Walgreens store w/o telling anyone at Theranos to get a test. He said he was surprised when the phlebotomist drew his blood venously & not fingerstick & it took over 4hrs to get results. He told Balwani & Balwani said it was bc he ordered an unsual test.

Despite Gossman's experience, within a few weeks of first meeting with Holmes and Balwani, his firm invested a total of $96.1M into Theranos in Feb 2014. The amount included $2.2M from a "friends and family fund," which Gossman said represents funds from "low income" folks.

The gov't wrapped direct, and Holmes' counsel Lance Wade is up on cross. He begins by pulling up a calendar and showing Grossman** first learned about Theranos investment opportunity Nov 1, 2013, first met w/ Holmes and Balwani Dec 12 and Jan 10, and then invested Feb. 4-5.

Wade gets Grossman to acknowledge he could've passed on investing. Wade asks Grossman if he ever met or interacted with Elizabeth Holmes after Jan 10, 2014. He replies "I don’t recall if I interacted with her again after," but he concedes he continued his analysis after.

Wade points out that Grossman prepared an analysis that 2 funds - a partner fund and family and friends fund - reviewed before investing in Theranos. He also acknowledges that the "more risk you take, the greater the reward."

Wade gets Grossman to acknowledge that his hedge fund charges fees and his firm makes money depending on how well it performs, but Grossman refuses to say outright that he makes money off investments doing well. We're taking another 30 min break. Brb!

We're back! Holmes' counsel points to a Nov 1 2013 email that Coatue Management firm founder Thomas Laffont sent Grossman with a link to Theranos' website. He wrote: "Let me know ASAP if this private co is of interest to you One of the most impressive boards I’ve ever seen."

Grossman's partner Chis James replied to Laffont's email "Wowsy" and Grossman replied "Pretty cool. Never heard of it."

Holmes' counsel asks Grossman if he understood from the email that Theranos was trying to raise money. He replies, "Sort of. Private companies are always raising money."

In a Nov 18 email, he asked his colleagues if Theranos is something he should "work up on the private side." His colleague replied "very good feedback from WAG" (ie. Walgreens) and another firm gave it a bullish rating. Grossman replied “Wowzer. That’s quite an endorsement."

(Wondering if any of these hedge fund dudes know the proper way to say "wow.")

Holmes' counsel points to a Dec 9 2013 email to Grossman in which his colleague writes Labcorp thinks Theranos' tech "does not work" and that its blood test menu is limited, but Walgreens thought "it is very exciting and will likely bundle with their existing payor contracts."

Holmes' counsel asked Grossman about Walgreens' earnings call and Grossman explains public companies and what quarterly calls are. (In case you're wondering why this trial has gone on for 32 days, this type of testimony might have something to do with it.)

Holmes' counsel points to a Dec 19 2013 email to Holmes in which he was just "checking in to see if we can move the process forward." Grossman agrees that Theranos was not "banging on our door" to secure funding from the firm.

In a Dec 23 2013 email, Chris James wrote he thinks they needed to form a list of q's "like a big private equity deal...We need serious deal experience here.” Grossman replied "we get a presentation to review or is that asking too much? Some basic background on [Theranos] tech"

Holmes' counsel tries to get Grossman to concede that he knew Theranos was using venous draws to perform some tests. He eventually says yes, but he adds it would be "troublesome" if Theranos was using microsamples on non-Theranos devices, b/c they weren't FDA approved for that.

In a Jan 2014 email before a meeting with Balwani and Holmes, Grossman wrote the hedge fund's analyst that "Bring your A game. U are the technical expert, need u to be skeptical (but not a A hole)." Grossman says the analyst spent most of the time talking to Balwani.

Grossman acknowledges that he told the firm's analysts to "drill" into Theranos' data, and they hired consultants to review it. Trial is breaking until tmr at 9 a.m. Defense counsel says they have an update on a "sealed matter" so they're going to discuss it in chambers.

Prosecutors want to know how much time the defense on cross. Wade says he'll let the gov't via email, but the judge seems annoyed and he also wants to know. He adds "there have been many questions that have been asked and answered on direct."

Defense counsel says they'll be done with Grossman tomorrow, and the prosecutors should have another witness ready. ✌️

A hedge fund manager testified in Elizabeth Holmes' fraud trial yesterday that his firm and its affiliates invested $96.1M, even after he didn't get complete answers to due diligence q's and its rival said its technology didn't work. My recap! law360.com/articles/14409…