The Holmes Trial Enters Excel’s Core

It was around the time counsel referred to “deferred earnings” that I began to feel genuinely bad for the members of the jury in the telefraud trial against Elizabeth Holmes.

Tuesday’s testimonial covered the nuances of accounting, how quality control works in labs, and way too many Excel spreadsheets. I get it – you have to show the financial records to show that Theranos was in a tough financial position. And you have to show how the labs failed to determine that they failed and that Holmes knew. But go through this too quickly, and you risk confusing people.

The first witness to the case, Theranos’ corporate controller, Danise Yam (she also goes by So Han Spivey), gave testimony that was crucial to defending the government’s case. Every scam is ultimately about the same thing: getting money. If Elizabeth Holmes had committed wire fraud, as the government claims, it would have been for the purpose of getting more money.

To that end, District Attorney Robert Leach had Yam go through a series of Excel spreadsheets, often attached to emails. There were two major cash shortfalls, Yam testified: one in 2009 and another in 2013, when cash positions “started to get a little tight, not to the extent of 2009,” but enough that Yam sent updates to Holmes and Balwani on a weekly basis. base.

In 2013, Theranos was burning about $2 million a week.

In the 2012 financial statements there is no line for revenue – because there was none. Also in 2013 there is none. This in itself isn’t particularly damning, but it does paint a picture of a money-losing company on the ropes; in 2012, Theranos had lost $161 million in his lifetime and another $92 million in 2013.

While working at Theranos, Yam consulted with Aranca, an analytics firm, to price stock options for Holmes and other employees. To do this, she consulted with Holmes, as Holmes had “the best information” about what financial projections to give to Aranca. In an email from Yam to Holmes, Yam asks to use numbers she has used before. Holmes writes back and estimates that 2015 sales will be about $100 million.

This was all fine and a bit boring until another document was introduced, one Yam hadn’t seen before.

This document, Leach said, had been given to investors. It showed revenue projections of $140 million in revenue in 2015 and $990 million in 2016. Not only did Yam not give any numbers for this, she didn’t know where these other numbers came from.

Look, That’s strange. Let’s say you give lower marks to the people who price your stock options. That means your options will be worth more if the higher numbers you have given to your investors are correct! On the other hand, let’s say those higher numbers you gave your investors are wrong, and the lower numbers you used to price your stocks are correct. It looks like you may have lied to the investors to get their money.

The discrepancy here confirms no intention – the government must demonstrate that Holmes deliberately lied – but it doesn’t look good. That’s probably why counsel stood up to talk about deferred earnings.

Lance Wade, Holmes’ attorney, not exactly… to define deferred income, which is the world accounting term for prepayments for goods or services that have not yet been delivered. (If the goods or services are not delivered, a company may have to return that money; deferred income appears as a liability on the balance sheet until the work is done.) In response to Wade’s questions, Yam says she has Sunny Balwani – Holmes’ co-defendant, which is being tried separately – with Theranos’ annual deferred income: $169 million.

So Theranos’s situation wasn’t as bad as it seemed, Wade argued: Money was coming in from deals with Safeway and Walgreens and some other companies — Theranos just couldn’t mark it as revenue on the books.

Okay, but what about the mismatched projections? Like, I’m not a mathematician, but $100 million, the 2015 projection given for stock option prices, and $140 million, the 2015 projection given to investors, are different numbers.

I haven’t heard anything satisfactory to explain that. Wade instead argued that different accounting practices can lead to different results — citing another portion of the document the Aranca consultants prepared for Theranos as evidence. See, one way to value Theranos meant it was worth $1.9 billion; another way meant it was worth $9.5 billion. However, this is not quite the same as using different numbers when speaking to different audiences!

After Yam stepped down, former Theranos lab worker Erika Cheung took the stand. She had joined Theranos right after UC Berkeley and had initially been “starstruck” by Holmes.

The secrecy kicked in immediately, in the job interviews where neither Holmes nor Balwani would say exactly what Theranos was doing. Cheung was offered a nondisclosure agreement on her very first day. Then Holmes’ brother Christian made it clear that Theranos employees could not list the company on their LinkedIn or describe their responsibilities.

Cheung had only been with Theranos for six months before retiring.

Before that, however, Cheung was working on validation, a series of experiments conducted to ensure the results were accurate and accurate. Samples of Cheung’s own blood were taken as part of validation testing. While traditional methods showed she was within the normal range for vitamin D, Theranos’ machines consistently showed she was deficient.

Cheung also discussed a similar type of testing used to calibrate equipment on a daily basis, quality control. As part of the process, you take a sample with results you already know and run it through the machine. If the machine’s results don’t match the example, look for problems to see where it went wrong.

But Cheung’s testimony cast doubt on how good the quality control was. She had emailed an internal helpline because, despite troubleshooting her machine, she couldn’t get it to work properly for the vitamin D test. This chain has escalated to Balwani and Holmes.

The problem was solved, but not in a way that Cheung was comfortable with. See, the vitamin D value came from six data points, and in order for the machine to pass quality control, two “outlier values” had to be thrown out. That was when we broke up for the day.

Cheung outperformed the defense attorneys or the prosecutors at explaining technical concepts clearly, yet it was a lot to throw at people all in one day, mostly after the bickering about accounting.

Given the presumption of innocence and the standard of reasonable doubt, confusion works in Holmes’s favor. If the judges get lost, it’s easier for Holmes to win – because if… she If she can’t keep all this straight, then it might seem reasonable that she couldn’t either.