Securities Regulation Daily Wrap Up, FRAUD AND MANIPULATION—9th Cir.: Panel upholds convictions of Theranos founder and her second in charge, (Feb 24, 2025)

By R. Jason Howard, J.D.

Revolutionary blood-testing technology was all a mirage.

The Ninth Circuit Court of Appeals has upheld the fraud convictions, sentences, and the district court’s $452 million restitution order for Theranos founder Elizabeth Holmes and her second in command, Ramesh “Sunny” Balwani after the pair defrauded investors through claims about the company’s revolutionary blood-testing technology (USA v. Holmes, No. 22-10312 (9th Cir. Feb 24, 2025)).

District Court ruling. In addition to the restitution, Holmes was found guilty in January 2022 on four counts of investor fraud and conspiracy and was sentenced to 135 months in prison and Balwani was convicted of fraud and conspiracy in July 2022 and was sentenced to 155 months in prison.

Arguments. The defendant’s had argued that the district court erred by allowing former Theranos employees to offer improper expert testimony but, after consideration, the panel determined that while some aspects of the testimonies veered into expert territory, any error was harmless.

Holmes argued that a report prepared by the Center for Medicare and Medicaid services was irrelevant under Federal Rule of Evidence (FRE) 401 and should have been excluded pursuant to FRE 403 because of the risk that the report would mislead the jury. The panel found that court did not abuse its discretion in finding that the report was relevant and that the probative value of the report was not “substantially outweighed by its potential for unfair prejudice.” The panel also found that the district court did not abuse its discretion when it allowed testimony that Theranos voided all patient sample tests from a device used in Theranos’s clinical lab

Holmes further argued that her Sixth Amendment Constitutional rights were violated when the district court prohibited the cross-examination of a former Theranos lab director on aspects of his post-employment with Theranos, but the panel found that the district court did not abuse its discretion in in limiting the scope of cross-examination. In addition, Holmes argued that portions of testimony given by Balwani to the SEC should have been admitted but the panel held that the district court “correctly recognized that the statements were not solidly inculpatory and did not abuse its discretion” in declining to admit those statements.

Balwani argued that the indictment was constructively amended as to violate his Fifth Amendment rights because it only charged him with misrepresentations concerning the accuracy and reliability of tests run of proprietary technology, but the government presented evidence concerning the accuracy and reliability of tests being run on conventional technology. The panel rejected this argument, noting that the indictment “plainly gave Balwani notice that he was charged with misrepresenting the accuracy of a non-exhaustive list of patient tests, regardless of which type of device the tests were run on.”

Among others, the defendants also argued that the district court erred by awarding restitution based on investors’ total investments rather than the decrease in value of the shares after the fraud was discovered. The panel recognized that the district court should have considered possible credits against defendants’ possible restitution obligation by accounting for the value of the shares when the fraud was discovered but concluded that any error was harmless “because the district court’s factual findings compel the conclusion that the victims’ actual losses were equal to the total amount of their investments.”

Conclusion. The panel affirmed the defendants' convictions on numerous fraud charges, their sentences, and the $452 million in restitution ordered by the district court.

The case is No. 22-10312.

Judge: Nguyen, J.

Attorneys: Kelly I. Volkar, U.S. Department of Justice, for the U.S. Amy M. Saharia (Williams & Connolly LLP) for Elizabeth A. Holmes.

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