In this episode, Matt Kelly and I take a deep dive into the recent SEC enforcement action against Elizabeth Holmes, the disgraced founder of Theranos, for her massive fraud around the former unicorn. Holmes claimed to have developed a proprietary system of blood testing so that with only one pin-prick of blood over 200 diagnostic tests could be performed. It turned out to be completely smoke and mirrors as the company never came close to developing the technology. In fact, the company and Holmes specifically hid the true nature of the company’s technology from investors using an elaborate deceit.

Holmes was one of the most famous women to come out of Silicon Valley. She founded Theranos, hyped the fraudulent blood testing scam and became for a short time a billionaire. Now all of that is gone, gone, gone. According the SEC Compliant, Holmes agreed to a civil penalty of $500,000, returned some 18.9 million shares that she obtained during the fraud and relinquished her voting control of Theranos by converting her super-majority Theranos Class B Common shares to Class A Common shares and she is banded for 10 years from holding office in a publicly traded company.

We explore the questions surrounding this massive fraud and the penalty assessed by the SEC. Was the fine and penalty enough or should Holmes have been criminally prosecuted? Is there enough money left in Theranos to pay off all those the company defrauded? Where was the Board of Directors in all of this miasma? At what point does a start up with a revolutionary or innovative idea actually have to prove the idea works? Should the SEC regulate private companies which go into the market for capital? Matt and I take a deep dive into these and other questions in this fascinating look at one of the former highest-flying unicorns who fell to other with a resounding thud.

For additional reading check out my blog post Black Holes, Theranos and Elizabeth Holmes.

In this episode, I welcome back Steve Durham, a partner with Labaton and Sucharow to discuss the continued reverberations from the recent Supreme Court decision narrow the definition of whistleblowers in Digital Realty Trust v. Somers. Durham discussed the impact the decision may portend for the SEC Office of the Whistleblower and both the quality and quantum of tips and information brought forward to the SEC after the decision.

In his practice, Durham represents whistleblowers before the SEC. He provides insight that the decision in Somers will put more pressure on the SEC as now there is no incentive to report internally because you are not eligible for any financial incentive nor will you receive any protections from discrimination or retaliation. It is possible the SEC will be literally inundated with potential securities-laws violations. This will cause the problem of such whistleblower reports taking years for resolution to increase, thereby allowing the potentially illegal conduct to continue and perhaps get worse.

We also explore the role and increased importance of whistleblower counsel such as Durham. As there are more tips submitted to the SEC and less resources at the SEC to deal with the increased number of tips, the full vetting of the claims before their submission to the SEC will be more and more critical. We discuss how the SEC will need to rely even more on whistleblower counsel to vet, document and submit claims which lay out all the facts, documentary evidence and law to demonstrate the validity of the information. Durham and his firm are uniquely suited to bring this type of legal assistance t whistleblowers and evidence of securities law violations to the SEC.

If you watched the end of the Loyola-Chicago-Miami game, you are well aware that March Madness is officially here. I was barely functioning during the second half of the Gonzaga-UNCG game, having picked the Zags into my Final Four this year but at least they held on. About the best I can say is that I did not get knocked out on the first day, which has happened way too often. It leads us to Ethics Madness II.

Just as March Madness is a ritual for all basketball junkies, Jason Meyer is creating another type of Madness which is becoming almost as interesting. Jason premiered Ethics Madness last year on March Madness’s first weekend and he is back this year with Ethics Madness II. I was fortunate to participate last year, and Jason has invited me back for this, our sophmore year. We will be live blogging while watching games on Friday afternoon from 2-6 Eastern Daylight Time. It is not simply an excuse to watch basketball and call it work. It is also a ton of fun.

This year Jason has invited Mr. Radical Compliance himself (and my partner on Compliance into the Weeds) Matt Kelly to join us from snow-bound Boston. We hope to be joined by several guests who will try to join the conversation for a while, including Amy McDonough, Richard Bistrong, and Jason’s friend Dan Day, who is a communications honcho at Princeton. What will we cover? Here is how Jason explained it,

“WHAT WE WILL TALK ABOUT: Whatever we want to. Who’s to stop us?! To me, there are three dominant themes driving the thread:

One, is using the occasion as a reason to chat about E&C generally, and especially in the context of sports, education, and national culture. I’m sure we’ll talk about the NCAA basketball scandal of the year, on payments to recruits, but we don’t need to limit ourselves to such direct sports+ education topics. Always good to keep linking things to the corporate E&C world.

Two, we will be looking for things seen in the cultural moments during the telecast that prompt ethics and compliance issues. Like the “boss” button on the March Madness web feed. Commercials, announcers struggling with deep topics. Part of the idea is explicitly that we and our audience are all watching the game together — that this is a dandy excuse to spend Friday afternoon watching hoops without feeling like we are not working.

On the social media front, we will be checking in to see what is trending on Twitter regarding the games and ethics, and to pick up on that. Use the hashtag EthicsMadnessII  to follow the twitter feed.

Three, is the games, and just things we want to say as fans of the sport.”

Some of the specific topics will be the NCAA (cue Send in the Clowns now) basketball scandal, where the organization is shocked, just shocked, on potential and actual ‘student athletes’ taking money to play at the school of their choice. No word from the NCAA on whether it will give back any of the $1.06 billion revenue it made from its March Madness Tournament last year.

We will consider the sordid story of Michigan State, the United States Olympic Committee and Dr. Larry Nassar. No doubt the massive fraud of Elizabeth Holmes and Theranos will be covered. Other topics include scoring by the Russian judge at the recent Olympics, focusing on the national favoritism of ice skating judges. We are thrilled by joined by John Templon, data reporter for Buzzfeed, as our special guest. Jason is determined to explore the Department of Justice (DOJ) expansion of the FCPA Corporate Enforcement Policy to other types of cases and we will explore #MeToo and what compliance can do to help stop harassment.

Joining Ethics Madness II will be about as easy as falling asleep, which means that even I can figure out how to use. The live blog will appears on Jason’s website, at Simply go to his site, where you see the Ethics Madness II box on the sidebar. Click on LeadGoodLive and you will be in.

I hope you will join us online and on Twitter, #EthicsMadnessII. It will be a ton of fun with lots of great games to boot!

Black holes lost a mentor yesterday as Stephen Hawking died. While Hawking’s stature no doubt merits a full blog post on its own, when someone holds the same academic chair as Sir Isaac Newton and also plays himself on an episode of Star Trek: The Next Generation; there is probably not much more that can be added. Like most non-scientist Americans, I was introduced to Dr. Hawking through his international best-selling book “A Brief History of Time: From the Big Bang to Black Holes,” published in 1988. It has sold more than 10 million copies and inspired a documentary film by Errol Morris. His own story was the basis of an award-winning 2014 feature film, The Theory of Everything. He also had Lou Gehrig’s disease (ALS) for over 50 years.

According to his obituary in the New York Times (NYT), Perhaps the most famous theoretical scientist since Einstein (I would add – certainly since Richard Feynman), Hawking was the baby boomer “generation’s leader in exploring gravity and the properties of black holes, the bottomless gravitational pits so deep and dense that not even light can escape them… In a long and daunting calculation, Dr. Hawking discovered to his befuddlement that black holes — those mythological avatars of cosmic doom — were not really black at all. In fact, he found, they would eventually fizzle, leaking radiation and particles, and finally explode and disappear over the eons.”

I thought about Hawking and his work on black holes, when I read about the day the Securities and Exchange Commission (SEC) had yesterday. One very famous business person agreed to a civil SEC Complaint over some very troubling, fraudulent conduct. The second event was a criminal complaint for insider trading filed against a high ranking senior executive of Equifax.

Elizabeth Holmes first. Holmes was one of the most famous women to come out of Silicon Valley. She founded Theranos, hyped the fraudulent blood testing scam and became for a short time a billionaire. Now all of that is gone, gone, gone. According the SEC Compliant, Holmes agreed to a civil penalty of $500,000, returned some 18.9 million shares that she obtained during the fraud and relinquished her voting control of Theranos by converting her super-majority Theranos Class B Common shares to Class A Common shares. Oh, and she is banded for 10 years from holding office in a publicly traded company.

According to the Complaint, Holmes, and its former President and Chief Operating Officer (COO), Ramesh “Sunny” Balwani, and the company itself, “raised more than $700 million from late 2013 to 2015 while deceiving investors by making it appear as if Theranos had successfully developed a commercially-ready portable blood analyzer that could perform a full range of laboratory tests from a small sample of blood. They deceived investors by, among other things, making false and misleading statements to the media, hosting misleading technology demonstrations, and overstating the extent of Theranos’ relationships with commercial partners and government entities, to whom they had also made misrepresentations.”

Theranos promised to more than disrupt the blood testing industry; it promised to completely transform it. Through its proprietary technology, Holmes claimed the company could analyze literally a pinprick of blood in a drug store or even grocery store setting with a wide variety of general chemistry tests, wellness tests, and some predictive and diagnostic health tests. Theranos heralded the end of laboratory testing as we know it. Now for just a few dollars and a single pin pricked finger, you could obtain a suite of health information. Too bad it was all one big fraud.

The smoke and mirrors were that the Theranos equipment not only could not run the 200+ plus tests Holmes boasted of but could not run any tests. Theranos solution was to purchase blood testers from other third parties and run the tests on those modified machines, all out of the watchful eyes of investigators and investors. It was fraud on a massive scale, for which Holmes was richly rewarded in salary and stock.

Perhaps the final word should come from Jina Choi, director of the SEC San Francisco Regional Office, who said in a statement, “The Theranos story is an important lesson for Silicon Valley. Innovators who seek to revolutionize and disrupt an industry must tell investors the truth about what their technology can do today, not just what they hope it might do someday.” Holmes neither admitted nor denied the facts laid out in the Compliant. She may find herself in the black hole of litigation for many moons however.

The Equifax matter was equally head-turning. In another civil complaint filed yesterday, the SEC alleged that a former executive, international Chief Information Officer (CIO) Jun Ying, of insider trading after he sold stock just before the massive hack affecting 147 million individuals was publicly disclosed. According to an article in by Thomas Fox-Brewster (fab name but not related), entitled “How Equifax Kept Its Mega Breach Secret From Its Own Staff”, the bombshell revelation in the SEC Complaint was described by its title, that Equifax literally hid from its own employees the fact that it had been hacked. Fox-Brewster went on to note, “A source close to the Equifax breach confirmed that some staff were not informed of the real name of the victim as the company tried to compartmentalize what was known in the  to the public release. But, the source said, it was standard practice and nothing resembling a cover-up.” [Emphasis mine]. I somehow doubt that either the SEC or any other US or foreign regulator who looks at this matter will conclude that last statement.

Ying’s Complaint alleges that Equifax initially discovered unusual activity in late July 2017 but did not disclose the breach to the public until September 2017. The company created two teams to work on the problem, Project Sierra to deploy security measures to stop the breach and Project Sparta to design remediation measures. Only employees on Project Sierra knew that the company had been breached. Employees on Project Sparta were told they were working a client’s breach. Ying was on Project Sparta.

On August 25, Ying and his team were told that an emergency had arisen, and they would have to work late on a Friday. Ying called the CIO and, as noted in the Compliant,

“30. During the call, the global CIO told Ying that Ying was expected to comply with the requests. The global       CIO also told Ying that, at that time, Ying did not need to know why he had to comply, but that at some point, Ying would understand what was happening.

  1. At 5:27 p.m., Ying texted the direct report he had communicated with earlier, writing: “On the phone with [global CIO]. Sounds bad. We may be the one breached. . . . Starting to put 2 and 2 together.”

Ying did indeed “put 2 and 2 together” to figure out that it was Equifax which had been hacked. As it was now Friday night, he could not sell any stock but by 10 AM the next Monday, Ying had managed to exercise options worth almost $950,000 before the company publicly announced the hack and data breach. The Complaint state, “By selling Equifax shares before its cybersecurity breach was publicly disclosed, Ying avoided more than $117,000 in losses that he would have suffered had he not sold until after the news of the breach became public.” Perhaps Ying thought he survived the Equifax black hole. Then again maybe not.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at

© Thomas R. Fox, 2018

In this episode, Matt Kelly and I continue our exploration of the fallout from the recent Supreme Court decision in Digital Realty Trust v. Somers in light of the filing by BioRad in its appeal of the whistleblower award to its former General Counsel, Sanford Wadler. Wadler had internally reported allegation of FCPA violations by the company in China to its Board of Directors. Wadler was later terminated and filed suit claiming his termination had been in retaliation for his whistleblowing efforts. The jury agreed with him and he was awarded approximately $11MM in damages, including damages under Dodd-Frank.

Last week, BioRad filed notice in its appeal of the Digital Realty Trust v. Somers decision and asked for approximately $3MM in damages awarded to Wadler be thrown out as they were based on Dodd-Frank. There was no evidence that Wadler has whistleblown to the SEC, although there was evidence he reported as required under SOX. We explore three issues which the case raises:

  1. That employees must go to SEC and not report internally first.
  2. The inherent conflict between corporate legal departments and corporate compliance departments.
  3. Whether companies can require, on pain of termination, employees to report internally first through internal company policy and whether companies would then terminate such internal whistleblowers.

For more information on these issues see Matt Kelly’s blog post Supreme Court Whistleblower Ruling, Already in Play 

See Tom Fox’s blog post Whistleblowers at the Supreme Court-Part II: Impact of the Somers Decision