Elizabeth Holmes' cross-examination in fraud case is 'pretty devastating,' expert says

After years of silence, the once high-flying biotech CEO Elizabeth Holmes has nearly finished explaining in her own words how her blood-testing company Theranos imploded after raising nearly a billion dollars.

On the witness stand in San Jose’s federal courthouse Tuesday, Holmes, once proclaimed the youngest female self-made billionaire, defended herself, sometimes through tears, in a risky cross examination by prosecutor Robert Leach. Holmes’ cross examination resumes Wednesday.

The 37-year-old's testimony is expected to weigh heavily on jurors' minds as they decide whether to convict her on 11 counts of criminal fraud, each carrying up to 20 years in prison. So far, prosecutors have posed questions suggesting she knew Theranos couldn't fulfill its promise of conducting hundreds of blood tests with a few drops of blood. The questions also elicited an admission from Holmes that she tried to muzzle whistleblowers.

“So far the cross seems pretty devastating,” white collar criminal defense attorney Andrew George told Yahoo Finance. “They're hitting her with some of the most difficult things in terms of efforts to suppress some critics like the Wall Street Journal, and employees of Theranos who were raising questions.”

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During his cross-examination, Leach pressed Holmes on her efforts to kill a 2015 investigative report in the Wall Street Journal by John Carreyrou that exposed Theranos' flawed technology. That report arguably accelerated the demise of the startup Holmes launched at age 19 after dropping out of Stanford University. Leach also showed jurors previously sealed text messages that Holmes exchanged with her former boyfriend and Theranos COO, Ramesh “Sunny” Balwani, expressing a goal to “get ahead” of the Journal’s report. Holmes, in turn, admitted to making a direct appeal to Rupert Murdoch, owner of the Journal’s publisher, who had invested $125 million in Theranos.

“I couldn’t say more strongly, the way we handled the Wall Street Journal process was a disaster,” Holmes testified, according to the Journal's own reporting. “We totally messed it up.”

When none of the tactics against the Journal succeeded, Leach aimed to show that Holmes tried to intimidate former Theranos employees Erika Cheung and Tyler Shultz, who reported concerns to government regulators and informed the Journal's investigation. Shultz — grandson of former Secretary of State and Theranos board member George Shultz — also escalated concerns internally.

On Tuesday, Holmes admitted hiring powerful law firm Boies Schiller to manage concerns that Cheung was disclosing trade secrets; however, she said she didn't know whether the firm’s partner David Boies threatened litigation.

While attempts to quash negative news on Theranos, alone, may not prove Holmes intended to lie to investors or patients for the purpose of defrauding them, the suggestion that she actively tried to silence critics could damage her case. 

“Legally, it's also very significant because it's used to paint a picture of a person with guilty knowledge … a person who thinks that there is a problem here that they need to hide or to cover up,” George said. "It's very damaging."

An argument that could explain Holmes' mindset

The prosecution also pressed Holmes on her claims that her COO, Sunny Balwani, had abused her and that she "deferred" to him while running the company. Balwani, who denies the abuse claims, was charged with the same counts of fraud as Holmes and is expected to face trial early next year.

When her own lawyer questioned her, Holmes acknowledged that Balwani didn’t force her to make statements to investors or journalists and didn’t control her interactions with prospective business partners Walgreens or Safeway. Still, she maintained that Balwani impacted “everything about” who she was, controlling what she ate and how much she slept. Emails admitted into evidence show that Balwani berated Shultz over his concerns about Thearnos’ test reliability, calling Shultz’s comments “deeply disgusting” and “reckless.”

On cross examination, Leach again pointed to text messages between Holmes and Balwani, this time to show their relationship as sometimes a loving one, where Balwani expressed concerns about the company’s public facing representations, including to media and on its website where it claimed it could run its full suite of tests using a finger prick of blood.

There's no way to know whether the jury will accept the abuse claims as a defense against fraud, according to George. Ultimately, he said, the case hinges on whether Holmes knowingly lied to investors. 

“It’s not going to make false things true,” George said of Holmes' claims that Balwani was controlling. “It can potentially be argued to explain what her mindset was when she made whatever statements she made, and why she didn't think she was saying something false."

It's unclear whether Holmes’ lawyers will call additional witnesses to testify in her defense.

“If she did a knockout job, you might consider making her the last witness if you’re the defense,” George explained. “That said, my prediction is the defense will call others.”

Alexis Keenan is a legal reporter for Yahoo Finance. Follow Alexis on Twitter @alexiskweed.

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