How Silicon Valley’s Zeal Explains Elizabeth Holmes’ 11-Year Sentence

Elizabeth Holmes’ 11-year sentence would not have been possible without the zeal of Silicon Valley’s wealthy startup class.

When US District Judge Edward Davila ordered the former CEO jailed last week, one thing was crucial: how much money Investors had lost because of their crimes.

That’s because the federal sentencing guidelines, which judges use to determine appropriate sentences for people convicted of felonies, give more weight to the loss of money than anything else in fraud cases.

And, like so many buoyant startups, Theranos was awash with investment funds. It raised around $945 million from media mogul Rupert Murdoch, Oracle founder Larry Ellison and former Secretary of Education Betsy DeVos.

However, Holmes was only fined for a fraction of the nearly $1 billion investment Theranos had raised.

Davila identified ten investors who were scammed and came up with this number: $121 million, which the judge said how much investors would have lost if they were offset against the amount the Theranos shares would have been worth without Holmes’ scam .

To put it another way, Holmes received more than a decade in prison for only about 10% of what Theranos collected.

“The numbers in Silicon Valley are so far from reality that these benchmarks are going to be huge,” said Jeff Cohen, a former federal prosecutor who now teaches at Boston College Law School. “If she ran an equipment factory with the same behavior, she would have gotten a lot less.”

While other Silicon Valley executives have been accused of wrongdoing, Holmes is the first CEO of a major tech company to be prosecuted and sentenced to prison.

That means she’s the first in the industry to learn that raising hundreds of millions of dollars not only skyrockets a startup’s valuation, but could make a serious prison sentence all but inevitable if a fraud conviction is found in federal court – possibly a warning of other imploded tech companies now under scrutiny, like Sam Bankman-Fried’s FTX cryptocurrency exchange.

According to former US Attorney Bill Portanova, federal sentencing guidelines consider the amount of money withdrawn to be the most important factor in punishing scammers because it allows authorities to target organized drug rings and large-scale institutional fraud.

“At the end of the day, if the music stops and there aren’t enough chairs for everyone, Silicon Valley guidelines point to serious punishment,” said Portanova, who is now a criminal defense attorney in Sacramento, California.

Holmes’ punishment comes amid signs the tech sector is becoming less seedy. Both big tech and startups are laying off employees, new $1 billion companies are becoming harder to spot, and venture capital firms are warning of a hard road ahead. Has the tech bubble burst or is it about to burst? That determination, say experts, is easier to make in hindsight.

“Tech bubbles don’t burst the way gum bursts,” said David Kirsch, a University of Maryland management professor who wrote a book on bubbles and crashes. “Investment bubbles tend to empty slowly.”

A long prison sentence for ‘a gross lie’

Holmes led patients, pharmacies, and savvy investors to believe that Theranos could revolutionize how blood tests detect diseases when they couldn’t.

Why did she do it? It’s a question even Davila pondered from the bench before announcing her punishment.

“Unfortunately, what prompted Ms. Holmes to make these decisions that she has made?” said Davila. “Was there a loss of moral compass here?” he said. “Was it hubris? What caused this?

Whatever drove her, once Holmes was convicted by a jury, she faced a serious prison sentence.

The sentencing guidelines spit out a crime level after considering a variety of factors. Holmes’ level was 33 – 24 of which came from the amount of money she cheated.

And Davila, one could argue, could have imposed an even harsher sentence. Based on her offense level, Holmes’ sentencing range was between 11 and 14 years behind bars.

(For context: The U.S. Parole Board recommended 9 years; prosecutors asked the judge to sentence Holmes to 15 years in prison. The maximum statutory sentence was 20 years. Holmes’ legal team requested that she serve her sentence at home and avoid incarceration.)

Portanova said Holmes’ punishment included vast sums of money, but her actions – repeatedly protesting her technology could do what it couldn’t – were outrageous.

“She wasn’t just an ambitious saleswoman who went beyond her skis,” he said. “She spent a lot of time because it was a blatant lie and she had ample opportunity to quit and she didn’t.”

Will “fake it till you make it” ever change in Silicon Valley?

In their court filing to the judge ahead of the sentencing hearing, prosecutors argued that Holmes’ jail sentence was necessary to “ward off future startup fraud schemes” and “restore the confidence investors need to have when funding innovation.”

But will Holmes’ imprisonment have that effect?

Some say the Theranos case could be the start for federal prosecutors to more aggressively monitor Silicon Valley.

“In Silicon Valley, historically, there was a mentality of don’t follow the rules because that’s how you get ahead,” said Steven Davidoff Solomon of the UC Berkeley School of Law. “Holmes may be the first, but I suspect there will be more.”

But touting a product and exaggerating are not crimes, but knowingly deceiving investors is a crime. Sometimes the dividing line isn’t so clear, experts said.

Cohen of the Boston College of Law said the line between embellishment and criminal fraud actually remains a blur for most in the tech world, so the chances are slim that Holmes’ judgment will resonate in a way that drastically disrupts the culture of the industry would change.

“The ‘fake it till you make it’ culture in Silicon Valley involves a certain amount of boasting, and here the jury said there was more than that: There was cheating,” said Cohen.

“But I think it’s a really hard line to see,” he added. “And I have no hope that Silicon Valley gets the message.”

Kirsch, who studies tech entrepreneurs, was similarly skeptical about major restructuring in the world of venture-backed tech startups.

“The venture community is vulnerable to a bright new story. They were it. They always will be,” he said. “We’re deluding ourselves if we think the recipe will change because Elizabeth Holmes goes to prison.”

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