Theranos: The whistleblower who exposed fraud to make blood run cold

Erika Cheung was among those to highlight how $700m investors deceived at medical start-up

Erika Cheung is a whistleblower who helped expose fraud at the $10 billion US tech company Theranos.

 

The saga of white-collar crime at blood-testing start-up, Theranos, only came to light when whistleblowers called time on the company’s dubious practices.

It was the start-up everyone wanted to believe in. A young, female, college dropout sets up a biotech company in male dominated Silicon Valley promising a technological breakthrough in blood-testing and becomes a billionaire in the process. The story of Theranos founder, Elizabeth Holmes, had all the elements of a feel-good Disney blockbuster, with investors so enchanted by the charisma of the then 19-year-old entrepreneur that they bankrolled her business without actually knowing how the technology worked.

It turns out it didn’t. In 2018, the US Securities and Exchange Commission charged Holmes and her right hand man, Ramesh Balwani, with deceiving investors by “massive fraud”.

The fact that the fraud came to light is due to the courage of whistleblowers at the company and the reporting of John Carreyrou, who broke the story in the Wall Street Journal at the end of 2015. The full extent of the whistleblowing is unknown as a number of those involved have remained anonymous, but two of youngest among them, Erika Cheung and Tyler Shultz, went public at considerable personal risk.

Both tried to raise their concerns internally but faced bullying and derision in response. Subsequently, both left the company. But it didn’t end there. Holmes and Balwani went ballistic and Cheung and Shultz were put under intense and sinister pressure to desist.

“When I approached Sunny [as Balwani was known] to tell him about my concerns and that I was leaving, he became very aggressive,” says Cheung, who was in Dublin this week to speak at the sci-tech event, InspireFest. “He said ‘you’re hardly out of college, you don’t know what you’re talking about. Why don’t you do the job I’m paying you for, which is to test samples’.”

It was precisely this testing of samples that had alerted Cheung to what was really going on at Theranos.

She had joined the company as a lab associate in 2013 fresh from Berkeley with a degree in molecular and cell biology. However, right up to the day she started work, she had no real idea what Theranos did or what her job would entail.

“Elizabeth was very mysterious. She said I’d understand everything once I came to work for the company,” Cheung says.

Theranos had had a meteoric rise, becoming one of the most high profile startups of its generation with a valuation of $9 billion. Its persuasive and intensely competitive founder, who dressed head to toe in black to emulate her hero Steve Jobs, secured more than $600 million in backing, not just from big names such as Rupert Murdoch and the Walmart heirs but also from giant retail chains, Walgreens and Safeway.

There is an element of “fake it ‘til you make it” about all start-ups, but Theranos pushed this to breaking point. Those who challenged the golden couple were dismissed or intimidated into silence. Externally, Holmes and Balwani stonewalled anyone who suggested Theranos’s technology didn’t work the way Holmes persistently claimed it did and covered up the fact that it didn’t with deception on a breathtaking scale.

“Elizabeth could be very charming and I suppose I was a bit starstruck by her,” says Cheung, who was 22 when she joined the company. “Theranos really stuck out in the Valley because it was a biotech start-up run by a woman instead of the usual software start-ups run by men.

“I was very inspired by Elizabeth. She was someone to look up to because she was proving that, if you were smart, worked really hard and had a strong enough vision, you could make the impossible happen.”

Cheung was also attracted to Theranos by its much heralded groundbreaking technology, which promised to make blood tests more affordable. Instead of costly blood draws by syringe, Theranos had developed a cheap finger prick test that could detect conditions such as cancer and high cholesterol with a tiny amount of blood.

“Healthcare in the US is so expensive and, idealistically, I saw this as a step toward solving a bigger problem,” says Cheung.

About a month into her new job, Cheung began to notice anomalies but wasn’t overly concerned by them as the testing was still at the research and development stage. What she couldn’t live with, however, was when the company transitioned to clinical mode and began testing on real people.

In a nutshell, if the test didn’t give the desired result, Theranos simply deleted the relevant data points, describing them as outliers.

“The company never told patients [that] mistakes had been made and no one seemed to care that the incorrect results had potentially serious implications for their health and treatment,” Cheung says.

Cheung and Shultz worked in the same lab at Theranos and became very close friends. When they started comparing notes, they realised they were dealing with a conspiracy of lies being perpetrated at the highest level within the organisation wrapped up in a toxic culture of secrecy and fear.

Secrecy was the company’s modus operandi, supposedly to protect its IP. Employees were prevented from even mentioning Theranos on their LinkedIn profiles and were served with cease-and-desist letters for putting descriptions of their jobs online. Employees were also physically shut off from each other to prevent information sharing.

Asked why so many people stayed, given the stratospheric stress levels, Cheung says: “These were incredibly exciting times in Silicon Valley and everyone desperately wanted to work for a start-up. Companies like Lyft and Uber were just getting going and there were very few opportunities for scientists to work in start-ups: the big demand was for developers.

“Theranos was unusual in being a new biotech company and I guess everyone wanted the buzz of being part of the next golden unicorn.”

One of the most remarkable aspects of the Theranos story is the roll call of seasoned investors and savvy elder statesmen who were so mesmerised by Holmes that they pumped $700 million into her business without seeming to apply any of the normal investment criteria or take her lack of formal scientific training and business experience into account.

These figures included former US secretary of state, George Shultz (the grandfather of whistleblower Tyler), venture capitalist Donald Lucas and Stanford University professor Channing Robertson.

“When all of this broke, Tyler and I met his grandfather and while he was very polite, it was clear that he didn’t believe us,” says Cheung. “He had drawn all of his smartest friends and advisers around him so it was like David facing multiple Goliaths.”

Cheung knew that putting her head above the parapet would draw fire and it came thick and fast. She was followed, served with legal papers at her new place of work (for supposedly revealing “trade secrets”) and although she had moved to secret new accommodation Theranos knew where she was living, even though she had told no one, not even her parents.

“Being followed was terrifying. You become totally paranoid and scared to be alone. The hardest part was facing down the constant anxiety and conquering your fear and saying to yourself, ‘okay, how do I manage if the worst case scenario happens here’,” says the now 28-year-old Cheung, whose email to the relevant regulatory agency helped kick off the process that ended with Theranos’s spectacular fall from grace.

“Looking back, I don’t believe Elizabeth went into it intending to deceive people but she was delusional,” Cheung says. “I really wanted her to succeed because her vision was so compelling. It was how she went about realising it that was wrong.

“We were all reading stuff she was saying in the media and it bore no resemblance to the reality. I was deeply shocked by the lack of scientific rigour and the fact that people would be making crucial health decisions based on faulty results.”

Theranos made Cheung’s life hell for a couple of years but, in 2016, she left the US for Hong Kong to start over. She became part of the founding team behind the Betatron start-up accelerator, which aims to be the Asian equivalent of YCombinator in the US. Two months ago, Cheung also launched her own company, Ethics in Entrepreneurship. It will be co-located in Hong Kong and California and its mission is to put ethics on the start-up agenda.

“What happened at Theranos is extreme but it’s not unique. Start-up founders are continually challenged by ethical dilemmas and it’s not always easy to make the right decision,” Cheung says. “Theranos failed on so many levels that there is merit in taking it all apart and learning from its mistakes.”

Cheung points out that ethics usually don’t become an issue until there’s a scandal and that’s something she wants to change.

“I want to build an ethical toolkit that sits alongside the other key elements in any start-up, such as fundraising, building product and hiring. I would like to see it become part of the culture and structure of all new businesses. If you embed it early, it costs a lot less than trying to add it on when something goes wrong. I want entrepreneurs to ask the right questions when they’re starting off,” she says.

Asked if the Theranos scandal has dampened her faith in humanity, Cheung says: “No, I would still trust people but I would verify more.”

What does bother her, however, is the wider impact of the scandal. Start-ups trying to pioneer advances in point-of-care diagnostics are finding it harder to get backing as a result.

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