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Posts Tagged ‘Elizabeth Holmes

“The Dunning-Kruger effect is the hemophilia of dynastic capitalism”*…

Espen Gleditsch, Thanatos. From the exhibition “On the Whispering Wind, QB Gallery 2023. Photo credit: Tor Simen Ulstein.

Anyone too scared to say Thanatos, Elizabeth Schambelan argues, might wind up with Theranos

… Melinda Cooper thinks family capitalism is a useful term for comprehending our circumstances. The historian Steve Fraser proposes dynastic capitalism, which has a stronger sense of occasion. Either phrase seems like it could appease the nomenclatural martinets among us, the ones who think neo-feudalism is almost as vulgar a term as fascism, and that vulgar rubrics must be avoided as we strive to come to grips with such classy phenomena as private submarines that vaporize on their way to James Cameron’s favorite place, state officials obsessing about high school athletes’ menstrual cycles, children getting chemical burns while working the graveyard shift in slaughterhouses, and Sam Bankman-Fried paying somebody 700 million dollars to introduce him to Orlando Bloom. But I digress. With respect to family or dynastic capitalism, there is an incredible moment in The Inventor, the HBO documentary about Elizabeth Holmes, when one of her investors—the famous venture capitalist, the one in the cowboy hat, if that narrows it down, whose name is escaping me—defends his choice to give her millions of dollars by noting that one of her grandfathers ran a hospital and the other ran a bank (or something to that effect), “so you see, she came by it quite naturally!” Another of the VCs in the documentary is wearing a tie covered in Bitcoin logos, and says he invested in Theranos, Holmes’s company, because Holmes was friends with his daughter, and that if his gut cosigned, he’d be willing to invest in “a guy and a dog, or two girls and a cat,” though presumably only if at least one member of the team could claim friendship with his child or his labradoodle. The Dunning-Kruger effect is the hemophilia of dynastic capitalism. The dynasty is perhaps best understood expansively, as encompassing friends, and relatives’ friends, and loyal retainers with up to four legs, but nevertheless insular and exclusive, rarely open to true upstarts. Entrepreneurship in this system is a euphemism for a set of favors dispensed from above, from a consortium of patrons that might or might not include the innovator’s literal daddy.

Several years ago I read about a scientific study indicating that one out of three people have no internal monologue, no inner homunculus to offer a constant stream of unsolicited opinions and irritating queries. My guess is that a disproportionate number of dynastic scions enjoy this enviable yet hazardous self-congruence. There is no still small voice to muse, “Hmm, does Theranos sound kind of sinister” or “Does OceanGate sound like a Daytona Beach water park that opened in 1995?” Both Holmes and Rush evinced blasé contempt for regulatory agencies and accrediting organizations, because they stifle innovation, are run by bureaucrats, etc. And if a bureaucrat hadn’t shut Holmes down, Theranos would still be operating little slices of purgatory in Walgreens stores across the land. Holmes called them “wellness centers,” which is a weird name for a place where a person with syphilis has a thirty-five percent chance of getting a false negative on their syphilis test. Rush had a similar rhetorical bent. He said there were sensors all over the Titan to provide real-time monitoring of “hull health,” as if the hull were living tissue and the submersible perhaps a gigantic kernel of corn, which for all I know is the vibe his marketing team was going for—organic and plant-based, if a bit high-carb. More to the point, calling the sensors hull-health monitors is like calling a fire alarm a building-health monitor, except in this analogy if the fire alarm goes off, it means the building and everyone in it will cease to exist in two milliseconds.

I do think Holmes is a useful comparanda for Rush, but of course, she’s not the only one. Maybe she’s on my mind simply because of that recent profile that offered real-time monitoring of the health of her ability to gull journalists. Or maybe it’s because Theranos, the word, is a kind of twisted emblem for an entire ethos. Even if she never voiced it to herself, Holmes knew what the real namesake of her company was. I’m not the first person to comment on the similarities between the two words. The differences are typical of what is called taboo deformation—little changes to phonemes that permit a dangerous word to be safely said aloud. Persephone’s name was perilous to utter because she was queen of the underworld, so people used variations like Persephassa. Anyone too scared to say Thanatos might wind up with Theranos.

I’m sorry to speak ill of the dead and the recently incarcerated, but I just don’t have the energy for taboo deformations of my sentiments. I’m tired of the sensation of gradually sinking through an abyssopelagic murk where light is a memory kindled by queasy blips of bioluminescence. Lanternfish have bio-lamps attached to their heads by slim appendages; the orbs hang directly in front of their open mouths, attracting prey. But at least lanternfish aren’t pompous megalomaniacs who arrogate the right to steer us all into darkness and then expect to be thanked for letting us exist in the sickening phosphor of their tiny little privatized suns. That’s more than can be said for our era’s plutocratic class, as apotheosized by an unhinged emerald-mine heir who looks like he’s had a marginally successful face transplant—a chilling visage, once mystifying to me in its peculiar lifelessness, finally explicable as the mask of a psychopomp who’s here to usher all of us to the chthonic depths whence came his wealth and ego. On the scale of self-awareness, Stockton Rush was a veritable Socrates compared to the space captain who is currently the world’s richest man. As for the scale of the damage wreaked by each entrepreneur’s risky business—I am not going to engage in that calculus. It is hard to take much satisfaction in the knowledge that chaos agents are vulnerable to the chaos they create. I don’t think I could rejoice in mortal comeuppance even if the most richly deserving person were on the receiving end, and even if the circumstances were less horrific than what befell those aboard the Titan, and even if it really were comeuppance instead of the mere illusion of it. If there is going to be justice it will have to be in life, since death by definition just evens out the scales. Theranos is coming for us all…

Eminently worth reading and pondering in full: “Little Privatized Suns,” from @ESchambelan in @nplusonemag.

Via Ingrid Burrington‘s (@lifewinning) glorious newsletter, Perfect Sentences.

* Elizabeth Schambelan


As we reevaluate our esteem of estates, we might recall that it was on this date in 1834 that slavery was abolished in the British Empire, as the Slavery Abolition Act 1833 came into force (though it remained legal in the possessions of the East India Company until the passage of the Indian Slavery Act, 1843).

“Am I Not a Man and a Brother?”, 1787 medallion designed by Josiah Wedgwood for the British anti-slavery campaign (source)

“The opposite of knowledge is not ignorance, but deceit and fraud”*…

In follow-on to our last look at corporate fraud, a provocative piece by Byrne Hobart

This paper has been getting some attention lately for its eye-catching estimates: 11% of publicly traded companies are committing securities fraud every year, with an annual cost of over $700bn…

[There follows an illuminating discussion of lessons that can be drawn for the follow-on to Arthur Andersen’s collapse after the implosion of Enron, the rules/regulations developed then to prevent similar public company frauds, and a consideration of whether corporate fraud has waned– at least among publicly-traded companies– and is perhaps a little less wide-spread than the paper argues…]

But since fraud is a human problem, and not purely a matter of better accounting standards, it’s not likely to have just gone away. But if the rate of accounting problems among big publicly-traded companies is lower than the 11% number cited in the paper, the question isn’t “why did it disappear?” but rather “where did it go?” And we can take our list of trends against fraud and invert them:

• Sarbanes-Oxley does apply to private companies, but only on the penalty side, not the disclosure side. But accounting frauds in private companies are often less visible; many investments go to zero, anyway, and it’s less embarrassing for everyone involved not to say why.

• There are no short-sellers in private markets. There have been efforts here, but they don’t work out because the market doesn’t clear (“everyone wanted to short Theranos, Dropbox and WeWork”). The closest you can get to shorting is to pass on a round and then brag about it later. Big deal: I didn’t invest in FTX, either.

• There’s less data available on private companies, though the rise of alternative data tools means it’s easier to get decent proxies.

• Startups are not expected to return capital. It’s a bad sign if they do. They’re often valued either based on strategic considerations or starting with a multiple of sales—a dollar of sales is much easier to fake than a dollar of earnings or cash flow, so the incentive to do so is strong.

• The idea market in startups is liquid when it comes to successes, but it would be pretty tacky for a VC to write a long blog post explaining why they passed on a live deal. (That memo may exist internally, but to the extent that it’s shared it’s in the form of a quick summary over Twitter DM or Signal.)

JPMorgan Chase’s writedown of their fintech acquisition Frank is a great case study in all of these forces. The NYT has a good story digging into the details: Frank’s founder is a serial exaggerator whose self-promotion veered into fraud (once again, if the rate of continuous improvement in public perception to be maintained exceeds what the fundamentals can deliver, compound interest works its ruthless magic). The company was valued at a high multiple of what turned out to be a flexible metric, total email addresses captured. And there were alternative datasets that could have pointed to problems: given the likely number of student aid applicants in the US, Frank’s numbers implied that it had reached near-dominant market share in the category with little marketing. Meanwhile, its monthly site traffic was not enough to have acquired that sizable a customer list over Frank’s entire existence. So it could have been caught, if the buyer had been looking for fraud. But one paradox of frauds and cheats in general is that lying is less than half the work—most of the effort is in appearing not to need to lie. The more impressive a company looks, the more embarrassing the basic due diligence questions are.

A down market and a series of high-profile failures might give private markets the same kind of natural experiment that Arthur Andersen’s failure did for public markets. Due diligence checklists will get longer and more thorough, and new funding rounds will feel more like a cross-examination and less like a party. One reason for a high base rate of fraud is that at least some of it stems from inattention rather than malice—the Arthur Andersen study finds that most of the frauds were fairly minor, and could be more the result of poor internal metrics than of intent to mislead. But either way, standards will get higher, and private companies will need to step up their efforts accordingly…

Has the primary locus of corporate fraud moved from public to private companies? “Where Fraud Lives and Why,” from @ByrneHobart.

[Image above: source]

* Jean Baudrillard


As we do due diligence, we might recall that it was on this date in 2016 that the Centers for Medicare and Medicaid Services (CMS) sent a letter to Theranos after an inspection of its Newark, California, lab. The investigation, which took place in the fall of 2015, had found that the facility did not “comply with certificate requirements and performance standards” and caused “immediate jeopardy to patient health and safety.” This followed on three exposes on Theranos in the Wall Street Journal (in October [here and here] and December of 2015) and a critical FDA report. Things unraveled from there: in March, 2018, Thearnos, CEO Elizabeth Holmes, and President Sunny Balwani were charged by the FCC with fraud. Three month later, a federal grand jury indicted both Holmes and Balwani on two counts of conspiracy and nine counts of wire fraud, finding that the pair had “engaged in a multi-million dollar scheme to defraud investors, and a separate scheme to defraud doctors and patients.” Theranos closed in 2018. Holmes was convicted and sentenced to 11 years in prison for her crimes (a sentence she is appealing); Balwani, to 13 years.

Theranos was a private company, funded by investors including Henry Kissinger, Betsy DeVos, Carlos Slim, and Rupert Murdoch.

Elizabeth Holmes found guilty (source)

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