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Elizabeth Holmes confronts feds’ fraud accusations in third day of testimony

Elizabeth Holmes testified she put pharmaceutical logos on Theranos documents to reflect a working partnership, said her secrecy regarding her testing particulars in 2013 was due to an effort to protect intellectual property and said she never pressured her employees to fake results or meet aggressive deadlines regarding test accuracy.

SAN JOSE, Calif. (CN) — Jurors and the world learned the answer to one of the central mysteries at the heart of the Elizabeth Holmes trial Tuesday, as Holmes continued her dramatic testimony for the third day at a federal court in San Jose, California. 

One of the worst facts for Holmes to come out at trial has been the prosecution’s contention that she put logos from pharmaceutical companies, Pfizer and Schering Plough, on an internally produced document to make it appear as though Theranos technology was independently verified by credible third parties. 

On Tuesday, Holmes acknowledged she placed those logos on the documents in 2010 as Theranos entered negotiations with Walgreens and Safeway, but said it was for innocuous reasons. 

“The work was done in partnership with those companies and I wanted to reflect that,” Holmes testified, referring to several trials that she ran in conjunction with pharmaceutical companies including Pfizer and Schering Plough to validate Theranos' breakthroughs in organic chemistry as it relates to blood testing. 

Because Theranos ran trials with both Pfizer and Schering Plough, Holmes testified she added the logos to reflect partnership and its results. Several investors said they made sizable investments in Theranos under the impression that Pfizer had signed off on all the assertions in the document, including the viability of the hardware and software technology and the accuracy of the tests the company could perform. 

“I have heard that testimony in this case and I wish I could have done it differently,” Holmes said. 

It was a stunning admission as speculation regarding the document has centered on whether Holmes would attempt to steer responsibility for the document to her business partner, Sunny Balwani, or other subordinates at Theranos. 

But so far in direct examination, Holmes has accepted a great deal of responsibility for decisions at Theranos. While the government spent considerable time on trying to establish Holmes and not Balwani as the primary decision-maker at the company, those awaiting the defense’s strategy guessed they would attempt to foist blame on Balwani. 

Over the course of three days, Holmes has not only resisted that temptation but has at times taken responsibility for the treatment of employees by Balwani. 

Surekha Gangakhedkar, a former manager in charge of validating various tests, resigned toward the end of 2013 as the company attempted to ramp up its testing capability to appease Walgreens, its most important client at the time. 

Holmes told the jury Tuesday that she was under the impression Gangakhedkar stepped aside due to health concerns and not ethical considerations, and when she saw emails from Balwani to the Theranos employee she condemned them. 

“That is the wrong way to treat people,” Holmes said, of Balwani’s email. 

But the defense has yet to linger on Balwani’s treatment of employees or his advice to Holmes as her business partner, contrary to widespread expectations. 

Holmes also dealt with other bad facts during her lengthy testimony that began promptly at 9 a.m. and lasted until 4 p.m.

One of the persistent allegations against Holmes by former employees and jilted business partners is that Holmes ran a panoply of blood tests on modified traditional lab machines while claiming to use the small portable blood analyzing devices that went by various names according to iteration. 

Holmes acknowledged this but said she didn’t tell partners like Safeway and Walgreens because Theranos believed the modifications to the Siemens traditional blood analyzers represented a technological breakthrough that needed to be protected as a trade secret. 

“These inventions were that we thought were a big deal … we believed we would be put out of business if people found out about them,” Holmes testified. Specifically, Holmes said if Siemens discovered how their machines could be altered to analyze smaller blood samples, it would soon outcompete Theranos given its outsized market power and larger employee headcount. 

Running tests on modified machines became a cardinal reason for the company's decline, with Erika Cheung, a Stanford student who worked in the Theranos lab, telling John Carreyrou of The Wall Street Journal about the practice in 2015 after she resigned. 

But Holmes said she met with the entire board of directors, which included statesmen George Schultz and Henry Kissinger and others, solicited advice regarding how to proceed with the trade secrets matter and was assured by the board that keeping the practice a secret was the correct way forward. 

“The decision was to preserve it as a trade secret,” Holmes said. 

Holmes must still answer questions about whether her representations of the financial condition of her company in 2013 were forthright and whether she lied to investors about securing military contracts to deploy Theranos machines on medevac helicopters. 

But Holmes’ answers about some of the most incriminatory facts in the case could prove persuasive to a jury that is not familiar with the media coverage of the Theranos downfall. 

Furthermore, Holmes has testified for hours and has come across as credible and more importantly, competent. She has detailed knowledge of Theranos technology, of the investment rounds, of the various individuals who invested in her company and worked on behalf of her vision. She has displayed excellent spoken communication skills — something she had a reputation for during career at Theranos. 

Another problem for the government is that Holmes’s deportment on the stand does not accord with the character of a huckster or a fraudster out to dupe some rich folks to make a few bucks. So far, her testimony is more consistent with what the defense team has said about Holmes — that she was a smart and dedicated person who founded and built a business that she believed would transform an important segment of health care, but simply failed. 

And failure is not a crime, as the Holmes team likes to say.

But the prosecution will have a crack at Holmes on the stand and will have to call into question all that Holmes and her attorneys have unfurled in the past three court days in San Jose. If Holmes lied about her financials to investors or misrepresented contracts she had with the military, the jury could still convict her and send her to jail for a maximum of 20 years. 

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