How the Scandal at America's Biggest Startup Came to Light

Most scandals and cons begin to come apart from the inside, one piece at a time.

If not for the long investigative report The Wall Street Journal published last October, Elizabeth Holmes might still be counted among Silicon Valley's brightest startup stars.

Fortune once named her the world's youngest self-made female billionaire, and Forbes ranked her No. 1 on its list of America's richest self-made women.

Theranos, which she founded in 2003, sold investors a story about upending the blood-testing business at very low cost, and drew several former heavyweights of American politics and the military onto its board. They included former Secretary of State Henry Kissinger; former Defense Secretary William Perry; James Mattis, who had just been nominated as defense secretary in the incoming Trump administration; and George Shultz, Secretary of State under Reagan.

Once the Journal's investigation was public, Holmes's beautiful startup story stopped dead.

The report found that Theranos had badly overstated what its technology could do. Around the same time, the U.S. Food and Drug Administration made public the problems it found when it inspected Theranos: uncleaned medical instruments, quality-control reviews that were never carried out, no written documentation of supplier qualifications, and more.

After that coverage broke, Holmes, who held half of Theranos's shares, watched her fortune go from US$4.5 billion to zero in a year. Besides the questions and investigations from the public and from regulators, former partners sued the company.

A fortress usually falls from the inside first, and that is how the Theranos scandal came out.

One employee told the story to the press: Tyler Shultz, grandson of Theranos board member George Shultz.

Not long ago, The Wall Street Journal wrote the whole thing up.

At first, Tyler and Theranos had a honeymoon that lasted two or three years

Because of his grandfather, Tyler Shultz made contact with Theranos, and with Holmes herself, in 2011.

The elder Shultz lived near Stanford University. Tyler, then a Stanford junior, met Holmes on one of his visits to his grandfather.

Tyler believed in what Holmes was doing and in what she wanted to achieve: detecting many diseases from a tiny blood sample, drawn in a way that was almost painless. He wanted in.

"I knew then that I had to be part of this," Tyler told the Journal. He interned at Theranos first, then joined as a full-time employee in 2013. He even switched his college major to biology to prepare for a career there.

Theranos began offering blood tests to the public in late 2013. By the summer of 2014 it had raised US$400 million and was valued at US$9 billion. Holmes, who owned 50% of the company, became the youngest and the prettiest face on that year's Forbes list of the richest Americans.

Tyler was first assigned to the assay validation team, which verified and documented the accuracy of blood tests run on the Edison machine before they went into the lab for use on patients.

Tyler says he found that results varied widely when the same blood sample was tested again. To reduce that variability, he says, Theranos often deleted outlying values from validation reports.

One validation report on the Edison's test for a sexually transmitted disease said the test was sensitive enough to detect the disease 95% of the time. But when Tyler saw the two finished sets of experimental results, they showed sensitivity of 65% and 80%.

That meant 35 out of every 100 people might carry the disease without Theranos's technology catching it — seven times worse than the sensitivity the company claimed.

A few months later Tyler moved to Theranos's production team. There he set the range of deviation allowed in patient test results during daily quality control. Under U.S. law, a lab may set that range itself, within accepted industry guidelines.

Tyler says he noticed that the Edison often failed Theranos's own quality-control standards, but that president Sunny Balwani made the lab ignore those failures and keep running blood tests on the machine — the opposite of accepted lab practice.

There were other cases of Theranos interfering with test results. A senior former employee revealed that by December 2014 the great majority of the company's blood tests were being run on conventional machines, such as Siemens's, something never disclosed before.

Another former employee told the press that Theranos did not report results showing the Edison had accuracy problems, and that when a conventional machine and an Edison disagreed, the company went with the conventional machine.

Theranos offered 240 tests, from blood lipids and blood sugar to cancer screening, but the Edison could actually run only 15 of them. The company said it had FDA clearance; in fact just one test had been cleared, for herpes simplex virus type 1 (HSV-1).

Tyler found the problems and warned the company. What he got back was ridicule

Before Tyler put it in writing to Holmes — that the company was doctoring research reports, ignoring failed quality-control checks and so on — he had raised his worries with her face to face. Holmes told him to take it up with Daniel Young, the vice president in charge of biostatistics.

When the email arrived, Holmes did not come to him to talk it through. She forwarded it to company president Sunny Balwani.

Balwani told him he did not understand basic math and knew nothing about laboratory science, and added: "The only reason I have spent this much time outside of work handling this personally is that you are Mr. Shultz's grandson."

Holmes never replied, and Tyler decided to quit. Then his mother called, sounding upset. Holmes, she said, had already phoned his grandfather to warn that if Tyler took "revenge" on Theranos, he would lose for sure.

"Whatever you are doing, stop!" his mother said.

He did not stop. He first contacted the New York State public health laboratory under a false name, accusing Theranos of manipulating test results and hurting the accuracy of its tests. It was the first known complaint to a regulator about Theranos's lab results.

Then, in early 2015, Tyler began talking to a Wall Street Journal reporter as an anonymous source.

Theranos later accused him of breaking a confidentiality agreement and leaking trade secrets. It hired David Boies, one of the best trial lawyers in the country. In October 2015, the same month the report on Theranos's deception of the public appeared, Boies joined the Theranos board.

"Fraud is not a trade secret. I refuse to allow bullying and the threat of a lawsuit to take away the right the First Amendment gives me to speak out against wrongdoing," Tyler said. The First Amendment to the U.S. Constitution guarantees American citizens freedom of speech, freedom of the press and other rights.

He said it because two partners at the law firm Boies, Schiller & Flexner had threatened him, demanding he name the Journal reporter he had spoken to about Theranos, and the paper's other sources.

After taking advice from his own lawyer, Tyler gave up nothing. He said he did all of it to protect public health and his grandfather's reputation.

In the end, Theranos tore Tyler and his grandfather apart

Had the Theranos scandal never come out, Tyler would have been at his grandfather's 95th birthday party, and nothing would have been wrong between them. As a boy he was often at his grandfather's house; even once he was at Stanford he kept dropping by.

But because of Theranos, a rift opened between them. At the start, the elder Shultz tried to shield Tyler from being sued by the company.

After Tyler learned that Holmes had gone to his mother, he went to see his grandfather. He found the old man and an assistant photographing and filing his emails with Balwani. As Tyler put it, the elder Shultz seemed only half to believe what he was being told.

Later the elder Shultz tried to convince Tyler that there was nothing wrong with Theranos's test data, and told him to let the whole thing drop. Tyler agreed at first. But as he turned up more and more problems at the company, he stopped doing what his grandfather asked.

In March 2015 a Wall Street Journal reporter found Tyler through LinkedIn. A few weeks later Tyler called him on a prepaid phone, and in May 2015 the two met at a beer garden in Mountain View.

Within a few weeks Theranos knew what Tyler had done: the elder Shultz had called the company himself to say he suspected his grandson had already told the reporter something.

At his grandfather's house, Tyler met Theranos's lawyers — Michael Brille and Meredith Dearborn, two partners at Boies, Schiller & Flexner. That was the meeting where Brille and Dearborn pressed Tyler with court documents and the elder Shultz threw them out.

By then the elder Shultz was trying to do two things at once: keep his grandson from becoming a defendant in a Theranos suit, and keep him from talking about what was wrong at Theranos.

He wanted Tyler to sign a written statement, drafted by the Boies firm, saying he had never given any related information to any third party, the Journal included. At the end of the document the elder Shultz added a line: Theranos would not sue Tyler for two years.

Tyler did not sign. His parents stood by him the whole way. "What Tyler did is exactly the person we hoped to raise. We could not be prouder of him," they said in a statement.

To prepare for a suit from Theranos, the family was ready to sell their house to raise money. They had already paid more than US$400,000 in legal fees.

An assistant to the elder Shultz said it was not a convenient time to comment, but added: "I hope you know that he loves and respects his grandson Tyler deeply, is proud of everything Tyler has done and will do, and knows Tyler to be a person of great integrity…"

In July this year Tyler went to see his grandfather; they had not spoken for more than seven months. He also skipped the 95th birthday party, because Holmes had organized it.

"As your grandson I am begging you to do the right thing." Tyler was disappointed that his grandfather had not backed him more, and asked him to distance himself from Theranos in public.

George Shultz, along with Kissinger and William Perry, no longer appears on the Theranos board list. But grandfather and grandson have not seen each other since that meeting in July.

Cover image from: Wikipedia