A Closer Look With Arthur Levitt: John Carreyrou

Arthur Levitt, former chairman of the U.S. Securities and Exchange Commission, interviews John Carreyrou, author of, “Bad Blood: Secrets and Lies in a Silicon Valley Startup,” ”on "A Closer Look With Arthur Levitt." To contact the producer and editor: Michael Lysak [phone] or [e-mail]

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Episode Transcript

Speaker 1 (00:00):
This is a closer look with Arthur Levitt. Arthur Levitt
is a former chairman of the U S Securities and
Exchange Commission, a Bloomberg LP board member, a senior advisor
to the Promontory Financial Group, and a policy adviser to
Goldman Sachs. John carry Row has won two Pulitzer Prizes

(00:23):
for investigative reporting, and his coverage of the Silicon Valley
blood testing company Pharaohs for The Wall Street Journal has
won George Polk and Gerald Lowell Awards. He published his
first story about problems with the Pharos blood testing system
in October of two thousand and fifteen. By March of

(00:46):
this year, the SEC had charged its founder, Elizabeth Holmes
with defrauding investors, and she's facing criminal charges. His in
depth reporting is now a book, Bad Blood, Secrets and
Lies in a Silicon Valley start up. The New York

(01:06):
Times Book Reviews says it's chilling, reads like a West
Coast version of All the President's Men. He joins me
now for a closer look. Elizabeth holmes first idea, a
patch that could diagnose and treat conditions didn't work out,

(01:28):
but it impressed a professor at Stanford Channing Robertson. He
encouraged her to pursue her dream and joined her board.
Is that why she dropped out of Stanford? Robertson was
her first enabler for sure. I mean, like you said,
the original idea was this patch, this futuristic patch that

(01:48):
would have these micro needles inserted that would insert themselves
in the arm and draw minute amounts of blood and
diagnose you with whatever ailed you and then practically simultaneously
treat you. Um. You know, he had to know. He's
a guy obviously who's very he was very well regarded
on the Stanford faculty, a star of the engineering school there,

(02:10):
and he had to know that this was science fiction
and then it was completely unfeasible. Um. And yet you
know he did encourage her to drop out, he did
join her board, and he did accompany her for more
than a dozen years. And um, his backing uh and
you know, his reputation uh really helped her gain credibility

(02:32):
when she was just a teenager, when she was nineteen
years old and back in two thousand three, two four,
and she was pitching venture capitalists. There's no question in
my mind that he was her first big enabler. Why
would he do that? You know, he's never agreed to
speak to me. I've tried several times, Um, and uh
he remains I think in in the Holmes camp and

(02:52):
a supporter of homes that that obviously becomes very difficult
now to justify. I think if if I'm guessing what
was going on is he saw a young woman who
was very passionate, very intelligent, um, great saleswoman. He must
have sensed that, and he probably figured that, uh, she

(03:14):
was going to be able to raise a lot of money,
and that with that money she would hire people who
actually had the formal training and had the degrees of
the medical degrees and the PhDs, and that um, they
would they might take her there and that uh and
her vision might actually come true over the years, and
then this might become, you know, a great Silicon valley startup,

(03:36):
and he might become very wealthy. I think those are
the things going through his mind. Who was her first investor?
So the first investor, the first person who cut her
check for a million dollars was Tim Draper Um that's name, right,
famous venture capitalist who has made a ton of money

(03:56):
over the past twenty years. Um. Uh and And is
actually from a line of venture capitalists. I think his
grandfather is known as the first venture capitalist in Silicon Valley.
UM and and the reason it was Tim Draper is
Elizabeth and her parents h and her younger brother had
lived in um near Palo Alto and Woodside, California in

(04:20):
the late eighties and early nineties for several years, and
they'd been neighbors with the Drapers, and Elizabeth had gotten
to know Jesse Draper, Tim's daughter, So when she dropped
out of Stanford a little bit more than a decade later,
she was able to knock on his door. And by
then he was quite prominent UM and and UH. He
met with her, and as he later described it was

(04:43):
really impressed by her passion and her um, her her
willpower to to execute on her vision and and And
In fact, he was one of the first people to
compare her to Steve Jobs after that meeting, in a
private conversation with his UH partners Steve Jervitson, he compared
her to Steve Jobs. He said that Elizabeth reminded him

(05:05):
of Steve Jobs. Now the other lead player, Ramish Sunny
bel Wanni got involved with the company and then personally
with Elizabeth was the personal involvement what really brought them together.
They first met in Beijing in the summer of two
thousand two. This was before Elizabeth had even started her

(05:27):
undergraduate studies at Stanford. They met in the context of
Stanford Summer Intensive Mandarin program, which included several weeks of
instruction in Beijing and then uh and then she went
to Stanford for a year and a half and they
stayed in touch, and then when she dropped out, um,
he became sort of her advisor. And he's a guy

(05:48):
who had made a lot of money in the late
nineties dot com boom um. I like to think that
it was a really a lucky stroke. He joined an
unknown startup and in sunny Vale, California. I think it
was that got acquired a few months after he joined
it as its number two executive. And he walked away

(06:11):
from that deal with more than forty million dollars. And
and that was five months before the dot com bubble, uh,
you know, peaked and then and then the bubble burst.
Did Paraos have any successes, tests that did work without cheating,
any real progress or in your judgment, was it a fraud?

(06:31):
The whole time. Well, it wasn't a long con in
the sense that Elizabeth Holmes dropped out of Stanford in
late two thousand three with this uh, you know, premeditated
plan to over the next twelve fifteen years the fraud
investors of hundreds of millions of dollars and put patients
in harms away. That's not how this this happened. She

(06:52):
dropped out of Stanford because she really did want to
become a successful Silicon Valley entrepreneurs. She idolized Steve Jobs.
She even started dressing like him, and and and sort
of copying his management techniques. UM. She she really had
this dream to be a great entrepreneurs. She wanted to
join the pantheon of these billionaire tech founders. But along

(07:16):
the way, UM, she ran into difficulties. Sciences is hard. Uh,
it's harder than coding. Um. A lot of Silicon Valley
startups are based on coding, on computer programming, and on software.
Um Thara nos Uh its product was a medical device
and and uh, medicine and science are harder. And I

(07:38):
think as she encountered these challenges, in these failures, she
started um papering them over and continued to overpromise to
investors and to the public. Um and and it reached
a point where the gap between what she promised and
what she had achieved became enormous, and and that effectively

(08:01):
turned Therapnis into a fraud. Did did she have her
have technology that worked? The short answer is no. There
were three iterations of the technology and she never got
any of them to work properly. But she had to
know that. So what that is suggesting is that she
knowingly perpetrated a fraud. Of course she knew it. She

(08:22):
knew exactly what the state of the technology was. She
knew very well that the tests hadn't been properly validated
to prove that they were reliable and accurate. I think, Um,
the reason that she could rationalize this is that she
came at this from a culture of the traditional Silicon

(08:42):
valley jobs were was her idol and Um. She knew
that Jobs and Gates and people like Larry Ellison and
who in fact was an early investor in Therapnis, that
they had all faked it to some extent before they
made it. They had overpromised. You know, Ellison was famous
for over promise, saying about what it's about what Oracles

(09:03):
early software could do, and he was famous for delivering
early versions of the Oracle software that was crawling with bugs.
And I think Elizabeth channeled that culture and that ethos
um and forgot that what she was doing was building
a product that that was actually going to have an
impact on patient lives because patients and doctors we're going

(09:23):
to rely on it for very important health decisions. And
so I think, um, from there, you know, stems a
lot of the a lot of the problems. It's been
said that among her investors, you won't find a major
healthcare vcs such as med Venture Associates. If they knew
something others didn't, why didn't they warn anyone else? Well,

(09:49):
the the vcs that were experienced in medical technology and
diagnostics and biotech smelled a rat and were suspicious, but
they didn't have proof that that Elizabeth and these were
completely overselling what they had. Because the few that that

(10:10):
did have encounters with Elizabeth and that the Noose management
and started asking hard questions. We're we're basically told that
very quickly that the AONIS was no longer interested in
talking to them. So, um, it was a case where
there was certainly some suspicion, but no one had proof.
And I would say the same applies to the world

(10:30):
of laboratory science and pathologists who were watching this Sarnis
phenomenon as it as it became public, and as its profile,
as the company's profile rose, and as Elizabeth's profile rose,
and two thousand and two thousand fifteen and two thousand fifteen,
there there was a lot of uh, you know, skepticism,

(10:52):
but no one could prove that, um, what she was
saying wasn't true. Now, in the book, there are so
many jaw dropping stories involving major names who should have
known him better. But tell us how James Maddis, the
current Secretary of Defense got involved with Pharah knows And

(11:13):
isn't his story ethically problematic? Well, it is in the
sense that he's now our current secretary Secretary of Defense,
and you really have to wonder about his judgment. Um,
And a lot of people um seem to think that,
you know, Maddis is a voice of reason and the
Trump administration, which kind of makes me smile. But the

(11:34):
way that Elizabeth met Madnis is um is actually through
one of her biggest enablers, the former Secretary of State
George Schultz and Uh. She met Schultz in two thousand
eleven and he became her biggest champion, joined her board,
and then soon thereafter introduced her to General Madness at

(11:54):
a Marine memorial event in San Francisco, and she immediately
pitched matt Us on the potential that her technology had
in the military. Um you know that that the vision
that that she sort of unspoiled before him was that
thearonysis quick fingerstick tests in the field would would give

(12:15):
answers to um uh doctors in the field about you know,
wounded soldiers much more quickly, and would therefore enable the
army in the military to save lives. And and Madness
to his credit as a guy who was incredibly popular
in the military, even though he could be gruff, because
he really cared about his men and he would do

(12:38):
anything he could to protect his men and to keep
them safe and to to create conditions that were favorable
to them. And so he really believed that this there
in his technology, as Elizabeth described it to him, could
be a game changer. John, do you believe that Elizabeth
Holmes is I believe she's a con artist. Yes, Um,

(12:59):
I believe she's a car artists who started out as
a would be entrepreneur. UM. But I believe along the
way she started cutting corners and stopped listening to sound
advice and started committing fraud to achieve her her goals.
And her goals were celebrity and wealth. She wanted to

(13:22):
join the likes of Mark Zuckerberg, of Larry Page, of
Larry Ellison, all these uh Steve Jobs, all these legendary
Silicon Valley tech founders who became billionaires and who became
American icons. That was her goal. She wanted to be
among them, and ultimately she was willing and ready to

(13:42):
do whatever it took to get there. Do you think
you'll go to jail? I think there's a very decent
chance that she will. UM. Uh. The the evidence is
pretty overwhelming, UM, based on on what I understand, The
prosecutors in the U. S. Attorney's Office and same Cisco
have garnered testimony from very key witnesses, among them former

(14:06):
Fariness employees uh, some of which some of whom were
sources from my book. UM. And then there's you know,
there's email evidence, there's documents, UM, and there's uh quality
control data from the company's lab. There there the two
inspections that the f d A and the Centers for
Medicare and Medicaid Services conducted in two thousand fifteen, and

(14:29):
there's a really a trove of a critical mass of evidence.
And using that evidence, I believe that the government will
be able to persuade a jury at trial that she
committed fraud. You write that for more than twenty years
in journalism, you've never encountered anything close to the unbelievable
campaign of intimidation against you and your sources. What happened

(14:52):
to you while you were doing this investigation, Well, the
first couple of months, I looked into the company quietly
to see if there was anything to the tip I
had received UM and eventually made contact with an ex
employee who had just left the company and who had
been in a key position. He had been the laboratory
director at Thariness and he was alleging all manner of wrongdoing.

(15:13):
So but I had to grant him confidentiality. He was
being harassed by Tharoness lawyers. He didn't want to be
sued by the company UM, so I agreed to to
keep his identity confidential. And from there it became a
game of corroboration, and I started making other sources among
ex employees, and then I went to UM the Arizona
which was the the sort of launch pad for the

(15:35):
Tharoness partnership with Walgreen's. It was where Tharoness was offering
its fingerstick tests and about forty walgreen stores. And I
started collecting h interviews with doctors and patients who had
received erroneous test results from the company. And then from
there UM I started confronting the company and started to

(15:56):
ask for an interview with Elizabeth Holmes and her boyfriend
Sonny Balwani, who's the number two of the company. At
first I got the runaround. UH. They hired an outside
PR guy to sort of keep keep me at arms
length and uh uh. In the meantime, it was surreal
because as this went on for almost two months, Elizabeth

(16:16):
Holmes continued to UH speak to virtually every other reporter
who asked for an interview UH and appeared on TV
and at conferences. And finally I let the PR guy
know that this strategy of putting me off was was
not going to work, that they I was not going
to go away. They needed to address my questions. So
at that point, the themis approach shifted from putting me

(16:39):
off to really uh conducting a scorched earth campaign to
kill my story and to intimidate my sources. And it
started with a big showdown at the Wall Street Journal
newsroom in a conference room at the Wall Street Journal
in midtown Manhattan, with David Boys, the famous litigator who's
the company's outside council, and he came with UH two

(17:02):
other lawyers from his law firm INTEW, as well as
Heather King, who was the general counsel of Aaronis, who
had previously been one of his partners at his firm,
and we had a showdown in a conference room for
five hours, UM, where they essentially, you know, UH argued
that I had misappropriated Tharonis trade secrets and that I
needed to either return them or destroy them. Uh oh,

(17:25):
and that, by the way, also my sources were feeding
me wrong information. UM, and and you know, letting us
know that that, UM, if we didn't back down, things
we're going to get ugly. And sure enough, within a
few days we started getting letters from David Boys explicitly
threatening litigation, and at the same time, UH, several of

(17:47):
my confidential sources um UH were sort of unmasked by
the Aonis and that Tharonis was able to figure out
some of their identities and were UM threatened and pressured.
One of them was Tyler Schultz, the grandson of the
former Secretary of State George Schultz, who was on the
Faranis board and UH Tyler was put through an unbelievable ordeal.

(18:13):
UM he was He was ambushed at his grandfather's house
just off the Stanford campus by two boys Schiller attorneys
and pressured for months after that to to assigned documents
essentially recanting what he had told me and naming my
other sources. Parais was deeply tied in with the American political,

(18:38):
business and media establishment through her high profile board. I
suppose she did this on purpose to give her cover.
That's absolutely correct. I mean her her biggest trick, her
her tactic for twelve years until I came along, was
to associate herself with older men who had UH sterling

(19:00):
reputations and UH and to leverage that association to to
gain credibility. It was sort of like UH reputational laundering.
And at the height of her fame in two thousand
thirteen two thousand fourteen. She she was surrounded by this
board of luminaries, these these aging X statesmen who were legends,

(19:23):
you know, the likes of George Schultz, Henry Kissinger, Sam
nunn Uh, Jim Maddish, Admiral Roughhead, the former chairman, the
former CEO and chairman of one of the country's biggest
bank banks, Wells Fargo, Dick Kavassovitch um Uh, all these

(19:45):
guys you know, we're we're on the board. And and
she she had them believing in in farness, but also
she had them beholden to her because she was paying
them for their board due these and there are no
stock um And at that point in late two thousand
early two thousand fourteen, Thorns became valued at nine billion dollars,

(20:09):
and so the shares of fairness that she was doling
out to them were worth millions of dollars. What an
extraordinary con Where were the regulators on thoraphns. We assume
with healthcare products there there's got to be some oversight authority.
Maybe maybe there isn't, or she avoided it somehow. I mean,

(20:31):
they bear some responsibility for for not monitoring and policing
this company closely enough but I would say that it's
mostly because Elizabeth Holmes and Sunny Balwanni misled them. Um.
She really, uh, in her communications and contacts with the
f d A was talking out of both sides of

(20:54):
her mouth. You know, she was telling the f d
A one thing, but then she was doing in another
and she was telling the public another. Um. The like
I said earlier the interview, the cover story that arguably
the most to really rocket or to fame was the
Fortune magazine cover story in in June two fourteen, and

(21:15):
in that story she made all sorts of claims, namely
that Theonis could do hundreds of blood tests off a
tiny drop of blood pricked from the finger and get
results back to patients and doctors very quickly. And in
her communications with the f d A, she was actually
acknowledging to the f d A that most, if not all,

(21:38):
of the Theoris blood tests were being done on modified
commercial analyzers. There's an anti regulatory environment right now. But
do you think the private companies such as thorough nos
that work in public health need more regulations and more
rules for transparency. I think certainly in the in the

(21:58):
realm of health and medicine, UH, that regulations should not
be weakened, they should not be diluted. UM. And I
think exhibit A to support that argument is theness. I
mean that this is a scandal that that had very
real implications for the public health. When when I came
along and started digging in the company, THEONIS was on

(22:19):
the verge of expanding its partnership nationwide with Walgreens, which
would have meant that that the blood test services that
Aarons offered in forty Walgreen stores in Arizona, another two
or another handful in northern California, I would have been
expanded to eight thousand other Walgreen stores throughout the country. UM.

(22:39):
And and UH, as it stands, UH, scores of patients UH,
you know, had health scares and had their health impacted
by these erroneous blood tests. And you can imagine the
scale of the disaster had thearess UH gone national with
its blood tests through Walgreen stores. UM, it would have

(23:01):
been a real public health disaster. And so I don't
see how in light of this you can make a
case for loosening regulations in in medicine and in health.
How much did investors ultimately lose and did people such
as George schultzar the other notable board members put hard

(23:27):
money into the company or was it all just stock
and options that they received. The board members, I don't
believe put in any real money. They were hoping to
make a lot of money by enabling her and being
on her board. UM. Altogether, almost a billion dollars went

(23:49):
poof with their nos in the end um if you
count the sixty million dollars that Fortress Investment Group, the
private equity firm, loan their nois last year to keep
it afloat UM, so about sixty five million dollars in
inequity and in debt financing, and another nine hundred million
in inequity raises. And the people who lost the most

(24:11):
are billionaires and and the family offices of billionaires such
as Rupert Murdoch, who by the way, controls the Wall
Street Journal. My employer UH he put in a hundred
twenty five million dollars in their nos. The Walton's of
Walmart fame UH put in a hundred and fifty million
dollars through two separate vehicles. The Cox family, which controls

(24:34):
Cox Enterprises, the Atlanta based conglomerate, put in a hundred million. Um.
The family of our current Secretary of Education, Betsy Devas
put in a hundred million. H A San Francisco hedge
fund called Partner Fund Management put in almost a hundred
million as well. The Mexican billionaire Carlos Slim put in

(24:55):
uh twenty five or thirty million dollars. So a lot
of very wealthy people, um lost a lot of money. Um.
You could say that, um uh, they can afford to
um uh. These people are all all billionaires and in
some ways that these sums of rounding errors for them.
But you know, UM, my response to that is fraud

(25:16):
is fraud. At its peak, Paros was valued at nine
billion dollars and employed eight hundred people. Earlier this year,
the SEC charged its founder, Elizabeth Holmes with running an elaborate,
years long fraud. The full inside story of the rise
and shocking collapse of Thorough No Nos, by the journalist

(25:37):
who first broke the story, is now a national best
selling book, Bad Blood, Secrets and Lies in a Silicon
Valley Startup author John Carrirew, thank you for joining us.
Thanks very much for having me. By the way, if
you have comments about the show or suggestions for topics,
please email me at a closer Look at Bloomberg dot net.

(25:59):
That's a closer look one word at Bloomberg dot net.
And follow me on Twitter at Arthur Levitt one word.
This is a closer look with Arthur Levitt.