Deceit and Demeanor: Divergent Outcomes for Shkreli and Holmes

Few white-collar defendants have been more reviled than the man known as the Pharma Bro, Martin Shkreli, even before he was convicted on multiple counts of securities fraud. The Atlantic called him “the perfect and very hateable combination of arrogance, youth, and avarice,” after he gained notoriety for acquiring the rights to generic drugs for rare diseases and then jacking up the prices.

Ben Brafman, Shkreli’s defense lawyer, told me this week that in his four decades of representing high-profile clients, he’d never encountered so many potential jurors who asked to be excused because they didn’t think they could give his client a fair hearing. “I’ve represented people charged with murder and dismemberment, and jurors didn’t bat an eye,” he said. “In Martin’s case, they asked to be excused because they hated him.”

Shkreli was convicted of fraud for his activities at two hedge funds he ran, not for anything related to drug pricing. Brafman argued that Shkreli eventually repaid all of his investors, and some realized large gains. Still, a jury ultimately found Shkreli guilty on three counts — acquitting him on five others — and this month he was sentenced to seven years in prison.

In stark contrast, Elizabeth Holmes, the founder of the Silicon Valley blood-testing startup Theranos, was one of the most lauded members of her young generation. By the time she turned 30, she’d been the subject of glowing magazine profiles and flattering cover photos, the recipient of an honorary degree from Pepperdine University, and a member of the board of fellows of Harvard Medical School.

She was the youngest recipient of the Horatio Alger award in recognition of “remarkable achievements accomplished through honesty, hard work, self-reliance and perseverance over adversity.”

Forbes put her on the cover of its 2015 survey of the 400 richest Americans and estimated her net worth at $4.5 billion.

Last week, the Securities and Exchange Commission accused Holmes and the company’s former president of masterminding a “massive fraud” at Theranos. The complaint describes an elaborate edifice of false statements through which the two “deceived investors” into believing Theranos’ unique technology could perform comprehensive tests on a single drop of blood.

Among the more brazen falsehoods peddled to potential investors: that Theranos technology was used by the Defense Department in Afghanistan and on medevac helicopters, and that the company’s revenue in 2014 was $108 million and was “on track” to generate $1 billion in 2015.

In fact, Theranos technology was “never deployed” on the battlefield in Afghanistan, “or on medevac helicopters,” the SEC said. Theranos’ revenue in 2014 was barely $100,000, “nowhere near” $100 million, the agency said, and the $1 billion projection was a fantasy that “had no basis” in reality.

Holmes settled the SEC’s charges without admitting or denying them. She is barred from being an officer or director of any public company for 10 years and agreed to pay a fine of $500,000. Though she lost voting control of Theranos, a private company, she remains chairman and chief executive.

She could still face criminal charges. It’s unusual, though not unprecedented, for the SEC to settle a case while a criminal investigation is underway. (The U.S. attorney’s office in San Francisco has declined to comment on whether it is investigating potential criminal charges; in a note to outside partners in 2016, the company said the Justice Department had requested documents and that an investigation was active.)

Still, the relatively lenient treatment she’s gotten so far, compared with Shkreli’s seven-year prison term, provokes the question: Is this fair?

“I don’t have any connection to the case, but from reading the SEC’s complaint, the allegations are of a nature that prosecutors would typically pursue to determine if criminal charges can be brought,” said Antonia M. Apps, a former federal prosecutor and partner at Milbank, Tweed, Hadley & McCloy who teaches a course on white-collar crime at Harvard Law School. “It’s outright fraud.” John C. Coffee Jr., a professor at Columbia Law School who teaches classes on white-collar crime, agreed that “it appears a lot of people were defrauded.” But he said he would not be surprised to see a plea bargain or even a deferred prosecution agreement, in which Holmes could avoid a prison term, especially if she cooperates with prosecutors.

“Typically you get more sympathy from the criminal justice system if you’re an attractive young woman than a brash, arrogant young male,” he said.

Coffee and other lawyers I spoke to cautioned that, because she settled the SEC’s charges, the public hasn’t heard her defense. When more facts emerge, her case may be more complex than it now appears. But on the face of the SEC’s complaint, Shkreli’s crimes pale in comparison.

At the heart of both cases are lies: At Shkreli’s sentencing, federal Judge Kiyo A. Matsumoto referred to Shkreli’s “egregious multitude of lies,” and the same might be said of Holmes. But the financial consequences of her deceptions were far greater.

Matsumoto said it didn’t matter that Shkreli later repaid the investors he defrauded, or that some of his investors made millions. Still, the magnitude of the fraud was just over $10 million.

Theranos’ was far greater. According to the SEC complaint, from 2013 to 2015 Theranos used false claims to raise more than $700 million from investors. By late last year, Theranos was “on the verge of bankruptcy,” the SEC said.

Shkreli’s victims were mostly wealthy individuals, presumably sophisticated investors. Many of Holmes’ victims were, too; they included media magnate Rupert Murdoch and Larry Ellison, the billionaire co-founder of Oracle. But she also attracted venture capital funds whose investors included pension funds and endowments, affecting thousands of ordinary Americans.

In comparison to Shkreli’s fraud, the Holmes allegations “are really a different order of magnitude,” Apps said.

But the reactions of Holmes and Shkreli to the charges are also wildly divergent — a factor that may ultimately determine whether Holmes is charged, and, if convicted, whether she ends up in prison.

Both Holmes and Shkreli courted celebrity and seemed to revel in media attention. But in Shkreli’s case, that impulse seemed only to intensify once he was charged. Shkreli repeatedly defied Brafman’s admonitions to keep quiet and avoid the limelight. He smirked through his trial, taunted prosecutors as the “junior varsity,” called the case a “witch hunt” and was suspended by Twitter after he threatened to have sex with a freelance journalist who covered him. His bail was revoked and he was imprisoned after he offered a $5,000 bounty in a Facebook post for a strand of Hillary Clinton’s hair — a “solicitation to assault,” Matsumoto ruled.

In theory, Shkreli’s well-publicized bizarre antics, both in and out of court, should have had no bearing on his guilt or sentence. As Brafman put it in his opening statement, Shkreli shouldn’t be found guilty for being “odd,” “weird,” or having a “dysfunctional personality.” But prosecutors cited his behavior to assert in closing arguments that he “had no respect for the law.” At his sentencing, Matsumoto suggested his actions called into question whether his purported remorse was genuine.

“I’ve never had a client who did more to hurt his own standing with the court than Martin Shkreli,” Brafman said. His behavior and comments “probably added several years to his sentence.”

So far, Holmes has followed the traditional route of the contrite potential defendant: She has maintained a low profile and said nothing to provoke the government or prosecutors.

After the SEC settlement, Holmes made no comment. In keeping with that strategy, John Dwyer, the Palo Alto, California, lawyer representing her, declined to comment for this column. Theranos issued a statement stressing that she had “cooperated with the SEC throughout its investigation” and said its independent directors were “pleased to be bringing this matter to a close.”