History repeats itself. Behind a swindler always comes another one

A few months ago, E. Holmes was sentenced to 11 years in prison. Holmes, an American who, at only 19 years of age and with two semesters at Stanford, founded what was, during the last decade, the promise of global healthcare. She founded Theranos, whose market value reached $10 billion in its last round. Theranos was a fraud, just as Madoff was a Ponsi scheme. But the cases, practically identical, although in different sectors, have the characteristic of the lack of supervision by regulators. These public entities are the ones that provide confidence to the Western consumer or investor. If they do not intervene, it will only be because they do not do their job and this is paid by the citizens in different ways and time.

By Miguel ÁngelTemprano

April 4, 2023Reading time: 4,3min

Since I finished my university studies, I have continued to follow scientific advances in the area of biomedicine, although I have never dedicated myself professionally to it, perhaps because I initially decided to work in a country where science has never been important for our rulers. But, on the other hand, and for other reasons unrelated to this subject, I have closely followed the advances that have occurred in the world in this area.

During the last decade I was struck by a case, just as extremely popular in the U.S. as it was unknown in many European countries, the case of Theranos.

“Stanford sophomore quits studies and re-discovered the world of diagnostics. What a news flash!”

A young Stanford student claimed to have discovered a technology whereby with a simple drop of blood she was able to diagnose a multitude of complex diseases in a few seconds.

In reality, Elizabeth Holmes, as she is named, was just another scammer. She cheated not only venture capital companies, which is a risk her investors take, but also Larry Ellison, the founder of Oracle, G. Schultz, Secretary of the Treasury and Secretary of State under two different administrations, Henri Kissinger and Bill Clinton. Clinton promoted him publicly on television, saying that the future was in good hands. What an embarrassment the former President must have been!

But perhaps the most striking was to deceive the Stanford Medical School Board, which appointed her as a member without even having finished her second year of medical school.

Her case ended last December with an exemplary sentence of 11 years in prison, of which, by the way, she has not yet begun to serve, abusing from the system she cheated.

The shame of all these characters is still being paid for today by patients who were diagnosed with AIDS without having it or cancer patients who were not diagnosed by Theranos, as the swindling weapon is called, as not suffering from it.

But instead of telling the “anecdote”, if we can call it that, I would like to focus on the role of the supervisor. In this case of the health regulator, the FDA.

Everyone who buys a drug in the USA assumes that the company is sufficiently controlled and that what it says on the label is complied with. Well, since no one asked for it, the FDA – the food and drug regulatory agency – never intervened. Allowing, by omission, medical tests to be performed without strict supervision of the procedures.

Sorry, without any procedural oversight.

“the deceptive power of a swindler is beyond what society considers privileged minds, what is left for the rest of us?”

But of course, the SEC also swung and did not require any oversight either, allowing capital increases at the company’s everincreasing market value. Someone would tell me that it is not the fault of the SEC but of the investors, who did not demand true clarity, and that is true. But let’s not forget that capitalism, of which I am a fan, has created guidelines and measures to prevent crooks from taking advantage of the rest of the people.

Obviously, an investor should only invest in what he understands, but even me, if you put me in a laboratory, you can’t fool me. And I say me, because after all I have studied this subject for five years, but I think that if I were an engineer, which I am not, I would be screwed just the same if the laboratory is a materials laboratory.

So, a supervisor must act ex officio and not randomly, but on a regular basis.

Elizabeth Holmes with her massive fraud -this is how she defines herself in her guilty verdict- has damaged her investors and employees -stained for many years by her history- but much worse has damaged new creators of ideas and/or products and the most bleeding to the rest of women entrepreneurs.

When someone does what she did, their damage extends far beyond what they cause at the time. It extends for years, hurting even people who have never heard of her.

“E. Holmes has hurt a lot of people, but as a member of any collective that vindicates the position of that collective in society, the one he hurts the most is him.”

This is why the role of regulators is so important.

We are living through scandal after scandal in the banks. Obviously the only ones to blame are the bank managers, but Western societies have placed our trust in regulators who certainly have not done, and are not doing, their job. As with Theranos, Holmes’ company did nothing and neither the FDA nor the SEC did anything.

When the FED, the ECB, the BoE or Japan do not do their job properly, they harm the whole system, damaging not only at that moment but also in the future, since the real asset of the banks is not their promises to pay, but an intangible that their accounts do not reflect and that is trust.

Holmes and his $10 billion (yes, I didn’t miss the zeros) worth shack were knocked down by a federal program supervisor. Literally a client, CMS. CMS is the agency that oversees the expenditure of funds for the public health care program, Medicare.

But make no mistake, they did not inspect on their own initiative, but because of a complaint. A complaint from a person who took a gamble, given that he had signed a confidentiality agreement.

The most mediatic case in the history of economic crime, “the Madoff case”, comes to mind. It is a copy of the “Theranos or Holmes case”. With one detail against the latter, and that is that Holmes starts with his farce practically at the same time that Madoff’s case is uncovered, which makes the SEC and the FED appear to be even more guilty.

By the way, Madoff got 150 years in prison for a pure economic fraud crime. Holmes, whose crime is not only with investors but also of deceiving patients, got “only” 11 years.Let everyone draw their own conclusions.

I do not know if you, reader, are aware of the details of the Madoff case, but the seriousness of it is that the intermediation system that Madoff managed was false, because it did not exist and he was really managing an investment fund in an open-ended manner, that is, he was not advising his clients where to invest for a commission, but he was investing for them. This here and there is the definition of a mutual fund.

Well, the SEC seemed to know this and turned a blind eye because when asked for the name of the custodian bank, i.e. where the securities were held, Berny made it up and the SEC never checked.

But Madoff didn’t have a little shack in the Bronx, he was the god of the American stock market. Investing with him was a pride only within the reach of the chosen ones, like Optimal, the Swiss Hedge Fund of Santander bank.

Nobody, i.e. the regulator, ever thoroughly supervised this investment company, although it was many people that it was a fraud long before the FBI “occupied” its offices. Just like Theranos.

“we should rethink our priorities when a money-only fraudster is sentenced to 150 years and one who has caused false diagnoses to 11.”

The regulator has only one client, the citizen, and when it fails to act alone, he or she pays for it, either in the form of money or in the form of prestige.

The regulator will still be there after the scandal, but the one who needs the financing will pay in the form of refusal from investors and banks for the loss of confidence caused by the regulator’s misconduct.