Earlier this month, former Theranos executives, Elizabeth Holmes and Sunny Balwani, convinced U.S. District Judge Davila to throw out criminal fraud charges, while denying other defense motions (see Judge Davila’s order here). The charges allege the pair misled patients on the basis that the government can’t prove that patients who received inaccurate test results were actually harmed. As a recap, Holmes and Balwani are charged with wire fraud and conspiracy to commit wire fraud against investors, physicians and patients based on claims that their promising and novel blood-test would revolutionize the healthcare industry (see indictment here). We have previously blogged about the Theranos saga here and here.
On Monday, February 10th, a hearing was held in which the government and defendants’ counsel argued their positions with respect to Holmes’ and Balwani’s three motions to dismiss which were jointly filed on January 27th.
The first motion argued that the government’s indictment is unconstitutionally vague and does not provide defendants with adequate notice. Under the Federal Rules of Criminal Procedure, and to pass constitutional muster, an indictment must contain plain and concise statements of the essential facts constituting the offense charged such that a defendant can prepare for their defense.
Holmes’ counsel, Amy Saharia of Williams & Connoly LLP, argued that prosecutors hadn’t given the former Theranos executives notice of when the former executives allegedly made false and misleading statements or specified which statements are exactly at issue. Saharia further asserted that discovery has been “massive”. As of the February 10 hearing, the government has produced more than 20 million pages of documents which include statements made on Theranos’ website and marketing materials, news articles and presentations given by Homes relating to the company’s blood tests. However, Judge Davila, denied these arguments, finding that the indictment is constitutionally sound because it provides enough detail to establish the particular factual universe of the underlying investor and doctor/patient scheme and Holmes’ and Balwani’s acts in furtherance of that scheme..
Relatedly, defendants asked Judge Davila to order the government to specify their charges in a bill of particulars (BOP). A BOP gives the requesting party knowledge of what the opposing party has alleged so the requesting party can better prepare a defense and be protected from unfair surprise at trial. The government disputed the suggestion that a BOP was necessary, noting a fear of unfair surprise was unfounded because the defense has been litigating the case at a sophisticated level for nearly two years and thus already knows the “particulars” of the case. However, Judge Davila agreed with Holmes and Balwani and ordered the government to produce a BOP as to the specific misrepresentations underlying the doctor-patient fraud.
The second motion argued that the indictment does not support a conclusion that defendants’ alleged statements and omissions were material. The three alleged false statements at issue were regarding Theranos’ 1) partnership with Walgreens, 2) its supposedly profitable relationship with the U.S. Department of Defense and that its technology had been deployed to the battlefield and 3) statements made to doctors and patients concerning the accuracy and reliability of its blood tests. Defendants focused on details in the indictment, such as the meaning of “consistently.” Prosecutors pointed to Theranos’ claim that its tests had received clearance from the FDA, which could lend surety to investors, physicians and patients that the technology was accurate and legitimate. Ultimately, Judge Davila determined that materiality does not require alleged misstatements to be accurate – it only requires the alleged misstatements to have a “natural tendency to influence”. Relating to the statements at issue, Judge Davila felt the first two statements give the false impression to an investor that Theranos’ business was growing and that it was a good investment. Similarly, the third statement gives a false impression to physicians and patients that Theranos’ technology would provide accurate results. Judge Davila denied this motion to dismiss after determining the indictment sufficiently alleges a factual basis that the alleged misrepresentations were material.
There were four types of possible victims in the alleged doctor/patient scheme: paying patients, non-paying patients, doctors and insurance companies, the latter which were not mentioned in the indictment as being defrauded. With regards to doctors or patients, the third motion argued that counts two and nine through eleven of the indictment did not allege that defendants acted with the specific intent to obtain money or property from any doctors or patients through deceit. Defendants argued that many of the alleged patient victims did not pay for Theranos tests, but rather were paid for by medical insurance companies, and thus portions of the indictment relying on “non-paying” patient victims were invalid. Judge Davila ruled that the indictment didn’t show that defendants had a specific intent to obtain money from patients whose insurance paid for the tests because the indictment does not explain how these patients were deprived of money or property. Judge Davila also determined that the indictment didn’t show that doctors were a victim of fraud. Therefore, the third motion was granted to dismiss counts two and nine through eleven to the extent they depend on “doctor-victims” and “non-paying patient-victims” but not paying “patient-victims.”
Holmes and Balwani each face 20 years in prison and hundreds of thousands of dollars in fines. Things will heat up this summer if the trial begins in August, as currently scheduled.
*Admitted to Maryland Bar. Work supervised by the Firm pending D.C. Bar Admission.