Whistleblower details descent from belief to disillusionment at Theranos

(CN) — Day three of the trial of Theranos founder Elizabeth Holmes on fraud charges featured extensive testimony from Erika Cheung, one of the principal whistleblowers that brought about the downfall of company and its founder.

Cheung, who now runs a nonprofit dedicated to fostering ethics in the startup culture, detailed how she went from a bright-eyed recent college graduate eager to support Theranos’ mission to a disillusioned employee that cooperated with the John Carreyrou, the investigative journalist with The Wall Street Journal who broke the story about potential fraud within the blood-testing company.

“I was stressed and uncomfortable with what was going on,” Cheung said about the end of her brief tenure at Theranos in 2014. I amassed a lot of evidence that the tests were not adequate enough to test on patients.”

Under direct questioning by U.S. Attorney John Bostic, Cheung said some of the tests that Theranos’ ostensibly innovative device, the Edison, had a 50% fail rate when testing for thyroid markers and testosterone in the bloodstream. 

“Patients had the same chance as flipping a coin in terms of getting their results from a test,” she said. 

Cheung started talking to co-workers about the alarming problems brought forward by the data and started bringing it to the attention of higher-level decision-makers within the organization. She met with Sunny Balwani, Holmes’s right-hand man in the organization, in April 2014 and brought the significant problems to his attention. 

"While all these issues are going on we are still testing patient samples,” Cheung said. “They don’t know that behind closed doors, we are having these problems.”

The meeting with Balwani did not go well. Instead of responding to her concerns, Balwani told her to stay in her lane, process tests and let other more qualified members of the corporation worry about testing problems. 

“He seemed more irritated that I was bringing up these problems, more concerned that I was raising alarm,” Cheung told the jury. 

At the same time, Cheung was communicating daily with Tyler Schultz, another recent college graduate working in the research and development and lab processing portion of the company. 

Schultz was also the grandson of President Ronald Reagan's secretary of state George Schultz. The elder Schultz sat on the board of directors for Theranos and was an early investor. 

Tyler Schultz knew Holmes through family connections and sent her a detailed email about the testing problems, which was revealed to the court during Wednesday’s session. Cheung said Schultz’s relationship with Holmes was one reason she never sought to talk directly to the CEO. 

“I just figured he was communicating with her basically,” Cheung said. “I didn’t contact her directly.”

The defense will likely make the case that Holmes has plausible deniability, at least in terms of the issues raised by Cheung, due to that lack of communication. 

But during cross-examination in the afternoon, Holmes' attorney Lance Wade spent a good amount of time asking Cheung about her colleagues and their qualifications, noting that many of her superiors had advanced degrees. 

The defense also spent considerable time going over how her department developed quality control protocols and the process whereby Theranos determined given tests were ready to move from the research and development phase to clinical use. 

The trial continues Friday, when the defense will reveal its strategy regarding the cross-examination of Cheung, who along with Tyler Schultz is one of the most important witnesses for the prosecution.

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