Just as one massive Silicon Valley scandal begins, another one is nearing its conclusion.
Prosecutors and defense lawyers submitted their closing written arguments late last week in the case of Theranos founder Elizabeth Holmes, who faces prison time following her July conviction on fraud charges stemming from the blood-testing company’s spectacular $9 billion collapse. Holmes’s sentencing is scheduled for Friday.
The hearing will bring one of the tech industry’s most embarrassing episodes to a close—and test the justice system’s tolerance for deception at a particularly pertinent time.
As lawyers in the Holmes case were putting the finishing touches on their sentencing recommendations last week, the schemes of another tech impostor, former FTX CEO Sam Bankman-Fried, were unraveling. Reports emerged over the weekend that Bahamian authorities are conducting a criminal investigation into Bankman-Fried after FTX declared bankruptcy Friday, a stunning downfall likely to cost retail and institutional investors billions of dollars. The Department of Justice and Securities and Exchange Commission also are probing for evidence of criminal activity, the Associated Press reported.
The two cases are, admittedly, decidedly different.
Holmes put patients at risk and aggressively tried to discredit detractors who exposed her fraudulent claims about Theranos’s blood-testing capabilities. She has argued she acted under pressure from her chief operating officer, Ramesh “Sunny” Balwani, accusing him of emotional and sexual abuse. (Balwani has denied the allegations.)
Bankman-Fried, by contrast, will face questions about whether he made fraudulent statements related to FTX’s operations, with a particular focus on the crypto exchange’s ties to an affiliated trading firm, Alameda Research. The Wall Street Journal and other news outlets reported late last week that Bankman-Fried used FTX customer funds to fuel risky bets at Alameda Research, contributing to the exchange’s downfall. Bankman-Fried has not been charged with any crimes, though Fortune’s Jeff John Roberts talked to lawyers who said a criminal prosecution could happen.
But while the fact patterns diverge a bit, the Holmes hearing could serve as an important precedent for the tech sector and Bankman-Fried.
In their written request filed late Thursday, federal prosecutors asked Judge Edward J. Davila to sentence Holmes to 15 years in prison, calling her crimes “among the most substantial white-collar offenses Silicon Valley or any other District has seen.” They are also seeking about $800 million in restitution for three major investors: Walgreens; Safeway; and former U.S. Secretary of State George Shultz, who died in 2021.
The length of incarceration would mirror the prison terms handed down to some of the business community’s most notorious fraudsters, including former Enron CEO Jeffrey Skilling. It also would exceed the nine-year term recommended by the U.S. Probation Office. (Federal sentencing guidelines call for a life sentence in Holmes’s case, largely because of the amount of money lost to the fraud, but Davila is not expected to issue such a harsh punishment.)
As part of their rationale for seeking a 15-year prison term, prosecutors pressed the importance of deterring future fraud in tech entrepreneurship.
“The relationship between innovators and investors generates tremendous good far beyond this community,” Assistant U.S. Attorney Stephanie Hinds wrote. “Unfortunately, Holmes’s crimes damaged the trust and integrity that are necessary for this community to thrive. A significant custodial sentence will serve not only to deter future startup fraud schemes, but it will also serve to rebuild the trust investors must have when funding innovators.”
Holmes’s lawyers, by contrast, argue that Theranos’s demise is part and parcel to the tech biz, where venture-backed startups sometimes soar before a sensational crash. They asked Davila to sentence Holmes to house arrest and community service. If Davila does opt to send Holmes to prison, they requested a sentence of no more than 18 months.
“Ms. Holmes’s conduct should also be considered in the context of this world, and filtered through her role as a young, first-time founder without independent business experience,” defense lawyer Kevin Downey wrote. “Venture investors, advisers, and founders describe the unique challenges faced by a founder and CEO and the unique perspective required to bring a new venture to success.”
Davila’s decision ultimately will incorporate numerous factors: the intricacies of the fraud charges, his sympathy for Holmes’s abuse allegations, her likelihood for re-offending, among others.
A stiff sentence, though, will send a clear message to Silicon Valley—and Bankman-Fried—about the consequences of white-collar chicanery.
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Jacob Carpenter
NEWSWORTHY
It’s a jungle out there. Amazon plans to lay off about 10,000 corporate and tech staffers in the coming days amid a slowdown in sales growth, the New York Times reported Monday, citing sources familiar with the matter. If the layoffs total 10,000 employees, the reduction would represent about 3% of Amazon’s corporate workforce. Amazon plans to make the deepest cuts to its hardware, retail, and human resources divisions.
Fewer police on the platform. Twitter has eliminated an unspecified number of contract jobs dedicated to content moderation, further fueling concerns about the proliferation of offensive posts on the site, the Associated Press reported Sunday. The Elon Musk–owned entity has not commented on the scope of the cuts, though Platformer’s Casey Newton reported that they totaled about 4,400 of Twitter’s 5,500 contractors. Twitter and other social media outfits largely rely on contractors to police content on a day-to-day basis, while company staff often set policy and make higher-level moderation decisions.
A helping hand. Binance announced plans Monday to establish an “industry recovery fund” to help well-run cryptocurrency firms facing liquidity issues tied to FTX’s bankruptcy, CoinDesk reported. Binance CEO Changpeng “CZ” Zhao tweeted the news, but he didn’t offer additional details about eligibility or the fund’s size. The commitment came hours before Crypto.com CEO Kris Marszalek said his cryptocurrency exchange has a “tremendously strong balance sheet” and doesn’t engage in the types of practices that led to the FTX collapse, CNBC reported.
Feds take a side. The Justice Department is expected to speak out Monday in opposition to a judge’s ruling that favored Apple in an App Store–related lawsuit filed by Fortnite developer Epic Games, Bloomberg reported. The federal intervention during an appellate hearing likely reflects the Justice Department’s fear that a lower-court ruling will set a precedent that makes it harder to enforce federal antitrust law. The case stems from Epic Games’ frustration that Apple bans work-arounds designed to avoid the tech giant’s 30% fee for purchases made in the App Store.
FOOD FOR THOUGHT
Collateral damage control. The FTX calamity could have been avoided with a little more corporate transparency—something crypto executives are calling for in light of the crisis. Fortune’s Leo Schwartz reported Monday that some of the sector’s biggest names are advocating for “proof of reserves,” a mechanism by which crypto exchanges publicly disclose an accounting of their assets. Binance CEO Changpeng “CZ” Zhao is leading the charge, pledging to release proof-of-reserves plans in the coming weeks. He’s been joined by several other crypto executives, who argue that additional disclosure will bolster trust in the industry after a spate of scandals.
From the article:
In his initial tweet on transparency, CZ called for exchanges to do “Merkle-tree proof of reserves,” a data structure that encodes blockchain data. While blockchains are publicly verifiable, centralized exchanges like Binance, FTX, and Coinbase do not offer a similar layer of transparency. If they published a Merkle tree, it would provide a map of sorts for the customer assets they hold.
The Merkle trees would organize relevant data—such as transactions with smart contracts or between accounts—into hashes, arranged into a series of parent and children nodes that resemble a Christmas tree. It’s a complicated cryptographic concept that theoretically would allow a third-party auditor to verify the holdings.
IN CASE YOU MISSED IT
How SBF fooled everyone—including me, by Jeff John Roberts
One of the greatest financial writers alive has been embedded with FTX’s Sam Bankman-Fried for 6 months and has a book on the way, by Steve Mollman
Fortune’s 2022 40 Under 40 list features founders, executives, investors, creators, and activists who are creating and seizing opportunity, by Alan Murray and David Meyer
Elon Musk and Mark Cuban are letting loose on FTX’s Sam Bankman-Fried: ‘Bulls**t meter was redlining,’ by Steve Mollman
After issuing return-to-office ultimatum, Musk is now eliminating free meals for Twitter staff—arguing no one was turning up to eat them, by Christiaan Hetzner
Key senator raises the heat on Musk after he’s impersonated on Twitter: ‘Fix your companies. Or Congress will,’ by Steve Mollman
Looking for Twitter alternatives not owned by Elon Musk? Here are some options, by Barbara Ortutay and the Associated Press
BEFORE YOU GO
Time to backpedal? The e-bike craze has gotten a little too hot for some New York City landlords and politicians. Axios reported Monday that a recent rash of blazes tied to e-bike lithium-ion batteries has put the city’s property owners, firefighters, and elected officials on alert. New York City Fire Department officials have documented about 200 flare-ups and six deaths tied to e-bikes this year, with poorly made batteries and charging setups cited as a common cause of the flames. At least one prominent landlord has banned e-bikes in its buildings, while the New York Public Housing Authority tried to institute a similar prohibition before reversing course amid criticism from delivery riders. The issue will gather steam Monday, when the New York City Council will debate several proposed regulations of e-bikes, including a ban on selling used batteries.
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