United States v. Holmes

UNITED STATES OF AMERICA, Plaintiff, v. ELIZABETH A. HOLMES and RAMESH "SUNNY" BALWANI, Defendants.

Case No. 5:18-cr-00258-EJD

UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA SAN JOSE DIVISION

February 11, 2020

ORDER GRANTING IN PART & DENYING IN PART DEFENDANTS' MOTION TO DISMISS THE SUPERSEDING INDICTMENT FOR LACK OF NOTICE; DENYING MOTION TO DISMISS SUPERSEDING INDICTMENT FOR FAILURE TO ALLEGE FALSITY; GRANTING IN PART & DENYING IN PART DEFENDANTS' MOTION TO DISMISS COUNTS TWO AND NINE THROUGH ELEVEN OF SUPERSEDING INDICTMENT

Re: Dkt. Nos. 204, 205, 206

Defendants Elizabeth Holmes and Ramesh "Sunny" Balwani are charged with nine counts of wire fraud in violation of 18 U.S.C. § 1343 and two counts of conspiracy to commit wire fraud in violation of 18 U.S.C. § 1349. The charges stem from Defendants' allegedly deceptive representations about their company, Theranos, and its technology. Three motions are before the Court: (1) Defendants'¹ motion to dismiss the superseding indictment for lack of notice and, in the alternative, for a bill of particulars; (2) Defendants' motion to dismiss the superseding indictment in part for failure to allege falsity and motion to strike; and (3) Defendants' motion to dismiss counts two and nine through eleven of superseding indictment. Having had the benefit of oral argument on February 10, 2020 and having considered the Parties' papers, the Court GRANTS in part and DENIES in part Defendants' (1) motion to dismiss for lack of notice and (2) motion to dismiss counts two and nine through eleven and DENIES Defendants' motion to dismiss for failure to allege falsity.

I. BACKGROUND

A. Factual Background

Defendant Holmes founded Theranos, a health care and life sciences company, in 2003. Superseding Indictment ¶ 1 ("SI"), Dkt. 39. Defendant Holmes served as the Chief Executive Officer of the company. Id. Defendant Balwani served as a board member, the President, and the Chief Operating Officer of Theranos. Id. ¶ 2.

Theranos' stated mission was to revolutionize medical laboratory testing through its allegedly innovative methods of drawing blood, testing blood, and diagnosing patients. Id. ¶ 5. During the company's first ten years, it pursued the development of proprietary technology that could run clinical tests using only tiny drops of blood. Id. Theranos also worked to develop a method for drawing only a few drops of capillary blood from a patient's finger using a small lancet. Id. That blood was then stored in a "nanotainer." Id. Theranos sought to develop a second device, termed the "TSPU" (Theranos Sample Processing Unit), "Edison," or "miniLab," that could quickly and accurately analyze blood samples collected in the nanotainer. Id. The Government contends that the promises of these devices were never realized; the devices "consistently" produced inaccurate and unreliable results. Id. Despite this, Defendants began a publicity campaign to promote the company. And, in September 2013, Theranos offered blood testing at Walgreens' "Wellness Centers" in California and Arizona. Id. ¶ 10.

The Government argues that Defendants conspired to commit and committed two fraudulent schemes: a scheme to defraud investors and a scheme to defraud doctors and patients. The Court outlines these below.

Scheme to Defraud Investors. Defendants allegedly made materially false and misleading statements to investors and failed to disclose material facts to investors. Based on the false statements, investors invested money in Theranos. Specifically, from 2013 to 2015, Defendants made misstatements regarding:

1. Theranos' Proprietary Analyzer: Defendants allegedly made misstatements about Theranos' proprietary analyzer—the TSPU, Edison, or miniLab—when they claimed the analyzer was presently capable of accomplishing certain tasks, with more precision than other blood tests, and at a faster rate, when, in fact, Defendants knew these statements were false. Id. ¶ 12(A).

2. Theranos' Financial Health: Defendants allegedly misrepresented Theranos' financial well-being when they told investors the company was financially strong and stable and would make huge profits in 2014 and 2015 when, in fact, they knew Theranos would only generate modest revenue. Id. ¶ 12(B).

3. Technology Demonstrations: Defendants allegedly deceived investors through misleading technology demonstrations where they intended to cause potential investors to believe blood tests were being conducted on Theranos' proprietary analyzer when, in fact, Defendants knew the analyzer was operating in "null protocol." Id. ¶ 12(C).

4. Walgreens' Partnership: Defendants allegedly misled investors when they told them Theranos had an expanding partnership with Walgreens when, in fact, the Walgreens rollout had stalled due to concerns with Theranos' performance. Id. ¶ 12(D).

5. United States Department of Defense ("DOD") Relationship: Defendants allegedly told investors the company had a profitable and revenue-generating business relationship with the DOD and that Theranos technology was deployed on the battlefield. In fact, Defendants knew that Theranos had limited revenue from military contracts and that its technology was not used in the battlefield. Id. ¶ 12(E).

6. Food and Drug Administration ("FDA") Approval: Defendants allegedly misled investors when they told investors that Theranos did not need the FDA to approve its proprietary analyzer and tests when, in fact, Defendants knew this to be false. Id. ¶ 12(F).

7. Patient Testing: Defendants allegedly told investors that patient tests were conducted using Theranos manufactured analyzers. In fact, Defendants knew that Theranos used third-party, commercially available analyzers. Id. ¶ 12(G).

8. Peer Review: Defendants allegedly falsely told investors that Theranos technology had been examined, used, and validated by several national or multinational pharmaceutical companies and research institutions. Id. ¶ 12(H).

9. Media Representations: Defendants allegedly made the false and misleading statements described above to reporters and then shared the resulting articles directly with potential investors and via the Theranos website. Id. ¶ 12(I).

Scheme to Defraud Doctors and Patients. The Government argues from 2013 to 2016, Defendants advertised and marketed Theranos technology to doctors and patients and falsely claimed that the tests were accurate and reliable. Id. ¶¶ 15-16. Claims about Theranos technology were implicit and explicit. Id. ¶ 15. Despite knowing that Theranos' technology² suffered from recurring accuracy and reliability problems, Defendants allegedly advertised the tests as accurate and reliable. Id. ¶ 17. Specifically, Defendants used materially false and misleading marketing materials and advertisements and transmitted Theranos blood results that Defendants knew contained, or likely contained, inaccurate information. Id. For instance, Theranos' public website touted its labs ability to perform tests "quickly and accurately on samples as small as a single drop." Id. ¶ 9. Defendants also allegedly provided reports to patients that contained or were likely to contain: (1) inaccurate and unreliable results; (2) improperly adjusted reference ranges defining a normal or healthy result for a given test; (3) improperly removed "critical" results, i.e. results suggesting a patient needed medical attention; and (4) results generated from improperly validated assays, further decreasing the reliability of those tests. Id. ¶ 17.

B. Procedural History

Defendants filed three motions to dismiss. The first motion argues the SI must be dismissed because it is unconstitutionally vague. Motion to Dismiss Superseding Indictment for Lack of Notice and, in the Alternative, for a Bill of Particulars ("Notice Mot."), Dkt. 204. The Government opposes this motion and argues that the SI is not vague because it gives Defendants sufficient information to understand their charges. United States' Opposition to Defendants' Motion to Dismiss Superseding Indictment for Lack of Notice, and, in the Alternative, for a Bill of Particulars ("Notice Opp."), Dkt. 265. Defendants maintain that the SI fails to provide adequate notice. Reply in Support of Motion to Dismiss Superseding Indictment for Lack of Notice ("Notice Reply"), Dkt. 296.

The second motion argues that the SI must be dismissed because it does not support a conclusion that Defendants' alleged statements and omissions were materially false. Motion to Dismiss Superseding Indictment in Part for Failure to Allege Falsity ("Falsity Mot."), Dkt. 205. The Government opposes this. United States' Opposition to Defendants' Motion to Dismiss the Superseding Indictment in Part for Failure to Allege Falsity and Motion to Strike ("Falsity Opp."), Dkt. 266. In their Reply, Defendants maintain that material falsity is not shown in the SI. Reply in Support of Motion to Dismiss in Part for Failure to Allege Falsity ("Falsity Reply"), Dkt. 297.

The third motion argues that the counts in the SI (counts two and nine through eleven) must be dismissed because they fail to allege the required element of specific intent to commit wire fraud. Motion to Dismiss Counts Two and Nine Through Eleven of Superseding Indictment ("Counts Mot."), Dkt. 206. The Government opposes this. United States' Opposition to Defendants' Motion to Dismiss Counts Two and Nine Through Eleven of Superseding Indictment ("Counts Opp."), Dkt. 267. Defendants maintain that these counts fail to allege intent to defraud. Reply in Support of Motion to Dismiss Counts Two and Nine Through Eleven of Superseding Indictment ("Counts Reply"), Dkt. 298.

The Court addresses each motion in turn.

II. DEFENDANTS' MOTION TO DISMISS FOR LACK OF NOTICE AND, IN THE ALTERNATIVE, FOR A BILL OF PARTICULARS

A. Lack of Notice

1. Legal Standard

Federal Rule of Criminal Procedure 7 requires that an indictment contain a "plain, concise, and definite written statements of the essential facts constituting the offense charged." Fed. R....