Just as one massive Silicon Valley scandal begins, another one is nearing its conclusion.
Prosecutors and defense lawyers submitted their closing written arguments late last week in the case of Theranos founder Elizabeth Holmes, who faces prison time following her July conviction on fraud charges stemming from the blood-testing company’s spectacular $9 billion collapse. Holmes’s sentencing is scheduled for Friday.
The hearing will bring one of the tech industry’s most embarrassing episodes to a close—and test the justice system’s tolerance for deception at a particularly pertinent time.
As lawyers in the Holmes case were putting the finishing touches on their sentencing recommendations last week, the schemes of another tech impostor, former FTX CEO Sam Bankman-Fried, were unraveling. Reports emerged over the weekend that Bahamian authorities are conducting a criminal investigation into Bankman-Fried after FTX declared bankruptcy Friday, a stunning downfall likely to cost retail and institutional investors billions of dollars. The Department of Justice and Securities and Exchange Commission also are probing for evidence of criminal activity, the Associated Press reported.
The two cases are, admittedly, decidedly different.
Holmes put patients at risk and aggressively tried to discredit detractors who exposed her fraudulent claims about Theranos’s blood-testing capabilities. She has argued she acted under pressure from her chief operating officer, Ramesh “Sunny” Balwani, accusing him of emotional and sexual abuse. (Balwani has denied the allegations.)
Bankman-Fried, by contrast, will face questions about whether he made fraudulent statements related to FTX’s operations, with a particular focus on the crypto exchange’s ties to an affiliated trading firm, Alameda Research. The Wall Street Journal and other news outlets reported late last week that Bankman-Fried used FTX customer funds to fuel risky bets at Alameda Research, contributing to the exchange’s downfall. Bankman-Fried has not been charged with any crimes, though Fortune’s Jeff John Roberts talked to lawyers who said a criminal prosecution could happen.
But while the fact patterns diverge a bit, the Holmes hearing could serve as an important precedent for the tech sector and Bankman-Fried.
In their written request filed late Thursday, federal prosecutors asked Judge Edward J. Davila to sentence Holmes to 15 years in prison, calling her crimes “among the most substantial white-collar offenses Silicon Valley or any other District has seen.” They are also seeking about $800 million in restitution for three major investors: Walgreens; Safeway; and former U.S. Secretary of State George Shultz, who died in 2021.
The length of incarceration would mirror the prison terms handed down to some of the business community’s most notorious fraudsters, including former Enron CEO Jeffrey Skilling. It also would exceed the nine-year term recommended by the U.S. Probation Office. (Federal sentencing guidelines call for a life sentence in Holmes’s case, largely because of the amount of money lost to the fraud, but Davila is not expected to issue such a harsh punishment.)
As part of their rationale for seeking a 15-year prison term, prosecutors pressed the importance of deterring future fraud in tech entrepreneurship.
“The relationship between innovators and investors generates tremendous good far beyond this community,” Assistant U.S. Attorney Stephanie Hinds wrote. “Unfortunately, Holmes’s crimes damaged the trust and integrity that are necessary for this community to thrive. A significant custodial sentence will serve not only to deter future startup fraud schemes, but it will also serve to rebuild the trust investors must have when funding innovators.”
Holmes’s lawyers, by contrast, argue that Theranos’s demise is part and parcel to the tech biz, where venture-backed startups sometimes soar before a sensational crash. They asked Davila to sentence Holmes to house arrest and community service. If Davila does opt to send Holmes to prison, they requested a sentence of no more than 18 months.
“Ms. Holmes’s conduct should also be considered in the context of this world, and filtered through her role as a young, first-time founder without independent business experience,” defense lawyer Kevin Downey wrote. “Venture investors, advisers, and founders describe the unique challenges faced by a founder and CEO and the unique perspective required to bring a new venture to success.”
Davila’s decision ultimately will incorporate numerous factors: the intricacies of the fraud charges, his sympathy for Holmes’s abuse allegations, her likelihood for re-offending, among others.
A stiff sentence, though, will send a clear message to Silicon Valley—and Bankman-Fried—about the consequences of white-collar chicanery.
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Jacob Carpenter
