2. The Enforcer

Previously on The Dropout, we met Elizabeth Holmes, a Stanford dropout with less than two years of college under her belt, who launched her blood testing company Theronos at just 19 years old. "I actually originally did not intend to drop out a Stanford, but I wasn't going to any classes and I was spending all of my time talking to VCs, and so then logistically it just seemed like a waste of money." Obsessed with Apple and Steve Jobs, she'd started wearing black turtlenecks and recruiting heavily from her heroes company. But one by one, those Apple recruits, including Avi Tivanian, Steve Jobs' right hand guy, had been dropping like flies. So you were done with Theronos. "I had seen so many things that were bad go on. I would never expect that anyone would behave the way that she behaved as a CEO and believe me. I worked for Steve Jobs. I saw some crazy things." The business was also running out of cash. But Elizabeth was about to find a solution to all of those problems. From ABC Radio and Nightline, this is The Dropout. Episode 2. The Enforcer. "I wondered Sunny Bellwani joined the company." "I thought in about September of 2009, or August of 2009, it's from memory." In 2009, Elizabeth Holmes found herself in a precarious place. Her company was now a few years old. She had an office and employees, even though many of the Apple recruits had left, and a big mission to fulfill. What Elizabeth didn't have was the money to make it happen. She says she was considering at this point going out and doing an equity raise, essentially trying to find new investors to buy into her company. The trouble with that was timing. This was in the midst of the great recession. Even companies that had been around for generations were struggling to get loans, and many were going out of business. It was something I was covering regularly for CNBC, like the day Lehman Brothers went under. "I would stand the test of time through two world wars, through the great depression, and that now a credit crisis has brought it to its knees." But unlike so many others, Elizabeth had an ace up her sleeve. A white knight with deep pockets. So a company was low on the cash, and I knew this mission, and what the company was trying to do was paramount. So I offered to help the company, and I ended up giving a $13 million dollar personal loan. And it was interest-free. It was a good faith loan. That's Ramesh Balwani. He goes by sunny. He's a former software executive who sold his company just before the.com bubble burst and made millions. He'd worked at Lotus and Microsoft. And in mid-2009, he cut Theranos a massive check. But sunny wasn't just offering a lifeline. He was also joining Theranos as an employee. "After that six months later, when I had decided that I'm going to stay here for the long term and board said, 'Absolutely, you must. They made me the president and CEO." "Did you have any qualifications in the lab testing business?" "You did not." "Or in pathology or anything like that." "Not to acknowledge." So sunny begins showing up to work every day at Theranos. Like Elizabeth, sunny had his own kind of uniform, a white button-down shirt, jeans, and expensive loafers. He always smelled of cologne and became known for his flashy tastes. Sunny drove two cars, both with vanity plates. A black Lamborghini with license Vita Vici, as in Vaini Viti Vici, a reference to Julius Caesar's I came, I saw, I conquered. On a Porsche 911 with plates that paid homage to Karl Marx's anti-capitalist manifesto, DOS Capital, he was a very striking figure around the office, but his presence confused a lot of employees, like Michael Craig, a senior software engineer. "I always wondered why he was there. If she had this vision of really impacting the world, I was like, 'Why did she pick him then?' Phil reported directly to Sunny." He was terse, and he was a bit of a hothead for what I could see. There was one level, this need to assert dominance, and another level, I don't think he ran terribly deep. For instance, I remember at one company party, he had these set of samurai swords in his office for a long time. I finally was like, 'So what's your interest in those swords and stuff?' I'm pretty interested in a lot of that stuff. He basically said that no, it was just a thing. I was like, 'Whoa, there's not even a story there. There's just some object that you just put there.' So he has that need to prove himself and also pretending like he's above everything. Sunny became the most important person at the company after Elizabeth. These remember they would frequently see the two conducting meetings in their big windowed office at the end of the hallway. The two were a tag team. Elizabeth would focus on the board and big picture ideas, while Sunny, despite his lack of scientific experience, would manage the day-to-day with employees and business partners. I would generally do the first meeting or two and talk about the vision, and then he would follow up on any questions that they had from a diligence perspective and provide them with that information. And Sunny wasn't afraid to get involved in the lab. Again, he had no real scientific training, but he would come in, roll up his white button down shirt sleeves, and start working. 'When there was shortage of people on weekends and I also could train me, I'll do it. And you wonder how to do all that, yes. Life in a startup, right?' Sunny was a hard worker, but employees say he was also developing a reputation as a bully, someone with a menacing presence. There's Erica Chung, who works for him in the lab. Initially, he would be fairly nice, but then through email, he frequently would get really upset about different things. And it was like, 'This is unacceptable,' or, 'You guys don't know what you're doing,' was always sort of firing back at people and blaming people for different things that were going on and was always unsatisfied with what people were doing and how they were doing it. And it got to a point where it was almost hard to work for him because he would just get so angry and get so upset and was not very well versed in the medical diagnostic world and wasn't really well versed in the sciences. So would frequently say things that were just inappropriate, became very clear to the entire department, so that he didn't understand really what was going on. Tyler Schultz, another colleague of Erica's, says Sunny earned a nickname around the office. It was just pretty well known that Sunny was kind of the enforcer of what. Of kind of like the intimidation tactics, yes. According to former employees, Sunny's management style caused many people to leave the company. Again, here's Michael Craig. Did he ever get angry with you? Just asking me to do something out of the blue and then looking at whatever I did, which generally speaking, I poured my heart into and then be like, 'Oh, this is not at all what I asked for.' And you're like, 'What?' Would he yell? I mean, he was loud. It's like barking at people, basically. And even Elizabeth, under oath, tried to distance herself from this behavior. Were there areas in which you disagreed? Yes. What were those areas? We disagreed all the time about a lot of things. We're very different leadership styles. So what was keeping this millionaire with so little relevant experience who was making waves inside the company in such a powerful role? There's one detail Elizabeth wasn't exactly sharing that might explain the whole thing. Were you in Sunny, Balwani ever engaged in a romantic relationship? Yes. When? Over a long period of time. Did you live together? We did. Did you ever tell investors that you and Mr. Balwani had a romantic relationship at the time that you were asking them to invest in fairness? No. Have you told me? Elizabeth, nearly 20 years younger than Sunny, was not just his boss. She was also his girlfriend. Even employees like Michael Craig had no idea. Now, when I heard that they had been in a relationship, I still am like, 'Well, I had.' Really? Were they flirtatious? No. Did you ever see them in a car together? No, she was home or anything like that. She was really stoic about just in general, Pearl. She was monk-like. They kept it mostly under wraps. From investors, the press, even from some board members. You think it was intentional that they hit it? I was absolutely intentional. John Kerry Rue is a Wall Street Journal reporter and author of Bad Blood, Secrets and Lies in a Silicon Valley startup. He's been covering Theranos for many years and was astounded by this twist. Well, one of the first things that raised my eyebrows was when I had my first long conversation with the lab director and he told me that Sunny and Elizabeth were an item. and I was stunned by that. In fact, much of the publicity surrounding Theranos made it sound like Elizabeth didn't have a personal life, something her mother openly worried about in a New Yorker article. In the same profile, Henry Kissinger, who was on the board of directors, even suggested he'd been trying to settle Elizabeth up on dates. In reality, Elizabeth and Sonny were very much together. They had met several years before Theranos when she was about 18. Sonny was 37 at the time. I met Miss Holmes in 2002 in China. We were in the same Stanford program at Beijing University. The entire department knew about her Chinese skills. And so when I first met her, I'm like, oh, you must be the Elizabeth Holmes. Elizabeth and Sonny stayed in touch. Elizabeth's brother Christian Holmes remembers her talking about Sonny when she returned from China. I don't know how do we qualify romantic versus personal, but as soon as she came back from China, she mentioned they had a friendship. Eventually, that friendship developed into something more. According to public records, Sonny and Elizabeth, at one point, even shared a residence on Channing Avenue in Palo Alto, about four miles from the Theranos office. Back at that office, they would work long hours. And together in early 2010, Elizabeth and Sonny were going after their biggest collaboration yet. Theranos was trying to land a partnership with Walgreens. They were hoping to put Theranos' technology in more than 8,000 stores, basically within a few miles of almost every home in America. This would be a huge break, and it would mean a lot of money for Theranos. We were interested in partnering with Walgreens because of the retail footprint. Here's Wall Street Journal reporter, John Kerry Roo. So you can imagine that the Theranos blood test would have been available at almost every street corner. In their first pitch to Walgreens in 2010, Walgreens says that Theranos claimed they had developed small point-of-care devices that, for the first time, could run any blood test in real time. Basically, what Theranos was promising, according to Walgreens, was a device that patients could use right at a Walgreens store to get an accurate result for any blood test from STDs to the earliest appearances of cancer. They also promised they could do this for less than half the cost of central lab tests. And all you'd need is a single finger prick of blood. Elizabeth would become a master salesman, later boasting about the massive deal with Walgreens on the conference circuit. What we're doing in just pricing the way that we are for Medicare and Medicaid is saving Medicare and Medicaid hundreds of billions of dollars on an annual basis. Access for every person means rolling this out, ultimately, within five miles of every person's home. So our work is making it possible to do any lab test from a tiny drop of blood from a finger, instead of having big needles stuck in your arm and tubes and blood taken out. On March 22, 2010, a few months after that initial email, Elizabeth and Sunny flew to the Walgreens headquarters in Deerfield, Illinois. They sat down with Walgreens executives, including the CFO, and made a very compelling PowerPoint presentation. At this initial meeting, Walgreens says that Elizabeth and Sunny made the claim that the technology was, quote, "viable and consumer-ready," and that there are no systems were validated under FDA guidelines. They said that the fingerstick technology would be ready to launch to consumers later that year. Walgreens also says that Elizabeth and Sunny even claimed their technology had been used by the US military and foreign government operations. Years later, when Elizabeth was pressed under oath about this claim, it would come to light. It was absolutely not true. It was a Theranos manufactured device ever deployed in the battlefield. Was it ever deployed in a meta-backed helicopter? Was a Theranos manufactured device ever deployed in a patchy helicopter? No. But in 2010, Walgreens had no idea and was intrigued. They struck an initial deal with Theranos. Before putting the technology in stores, Walgreens wanted to make sure everything was on the level. So they put together a team and brought in a lab consultant, an expert named Kevin Hunter. Kevin? Hi, Rebecca. How are you? Kevin and I recently spoke on the phone. When I was born, my family had a small chain of drink stores and I'll be in New York. And my father ran one. My grandfather ran another. It was interesting. It goes full circle. And I wound up working with the largest pharmacy chain in the world a couple of years later, right? And what specifically were you supposed to do for Walgreens? They specifically asked us to get involved and help them vet this opportunity with Theranos. And to give them guidance about the legitimacy of the test and its ability to be reproduced and all those types of things. Kevin says they called it project beta. We all had shirts made up. Everybody got a nickname and I was called the expert. By the time he joined, he says he'd already heard some impressive stories about Theranos. That they had been wildly successful. They're the technology who's being used on the battlefield with Department of Defense that they were doing in home testing for people. And that also, we're working with either 7 of 10 or 8 of 10 of large pharmaceutical companies in the world. In August 2010, Kevin is working with Walgreens. And he and some executives flew out to Silicon Valley for a meeting at the Theranos headquarters. From everything he'd heard, he was expecting to be seriously wowed. That certainly was one that we'll remember a long time. We arrived. And the first thing you see is that Sonny had a Lamborghini that was parked right up front. And he was very proud of the fact that he'd been successful in other technology businesses. And that was his car. The building was locked by key cards and all that kind of stuff. We were met at the ground floor immediately taken upstairs to a conference room where we only met with Sonny and Elizabeth. And when, like, for example, we would break to go the restroom, they would literally walk us to the restroom and then walk us back. So we weren't allowed to look around or talk to anybody or anything like that. When you say they-- Who's they? It was Sonny. Sonny would literally walk me to the restroom. Was he standing there? Yeah, it was kind of crazy. You literally would wait outside the restroom door flying and then walk me back. And so that was unusual. I asked where the laboratory was. They said it was located downstairs. I asked when we're going to get to see it. And they said after lunch, and then after lunch, it turned to what we really don't want to show you the laboratory. I kept asking to speak with a chief medical officer or the scientist that was working on the test development or things like that. And they said they want to be keep the conversation at a high level and not bring anybody into it yet. Kevin says he requested other things in this meeting, too. For example, he asked everyone to take a Theranos blood test, right then and there. And I said, let's all get our blood drawn. And let's run some very basic tests here. And let's go around the corner to Stanford and have them run our tests as well. And they refuse to do that. And when I asked Elizabeth, why she wouldn't let us do it, she said that she didn't trust Stanford's results. And I found that really ironic for somebody who supposedly dropped out of Stanford and fought very highly of the university to not believe their laboratory results. According to Kevin, the whole meeting felt like one big dodge after the next. But when it came to pomp and circumstance, Elizabeth and Sonny knew how to put on a good show. >> They presented the CFO of all-greens with the flag that had flown over Afghanistan. >> Knowing what you do now, do you think that flag really flew over Afghanistan? >> [LAUGH] >> That's a really good question. I mean, it was certainly framed and was presented like you would see. But I have no clue. >> After the lab visit that would never come to be, they went out for dinner. But even that seemed a little off. >> We did go out to dinner at like three o'clock in the afternoon, it was kind of bizarre. We were not allowed to ride, you know, we weren't allowed to follow them. We had to just meet them in a back room. We get to this restaurant. There's no one there yet we still meet in the back. You know, Elizabeth, got her standard kind of green protein shake that she got and was dressed in all black. And Sonny got sushi or something like that. But we're not allowed to talk to each other by name. Yet Sonny drives his Lamborghini. So if you were concerned about people following you or seeing you or something like that, you know, why are you driving around Palo Alto in a black Lamborghini? It just didn't add up. >> Did they ever show signs of affection towards each other in front of you? >> No. >> You never shared any more green shake with him? >> No. >> [LAUGH] >> No, he did not. >> The more Kevin saw, the more questions he had. He wanted to know exactly how Theranos planned to run. all these tests. Did Walgreens believe that the Theranos technology would let you run multiple tests with the finger prick of blood? Yes, that was that was what was proposed to us. Their position all along was the fact that, you know, that it would be one drop of blood and, you know, one of the documents that that I have shows that they said it could do 250 tests. And, you know, and that was two that that was August the 2010 on their letterhead. And was that possible? No, no. And this is -- I never saw anything that would give any credibility to the fact that the instrument didn't anything at all. Anything at all? Yeah, I mean, on my desk, sat one of the Edison instruments, one of their early instruments, because we bugged them forever to say, we bugged them in the instrument, so where we could, you know, we could run tests on it and those types of things. And I begged them to let me crack it open and take a look and see what was going on inside the instrument. And, you know, it was like a computer had a little tape on the the tamper-evident tape on the back. And they just didn't want to do that. And it would run for a little while and then have an error or shut down or something. And then, you know, you know, it would run for a little while. And then, you know, it would run for a little while. And so, the Walgreens people got those results. And thought, wow, this works. Theranos employee Tyler Schultz says many inside the company saw this behavior. There were even jokes about it. Like, during demonstrations, the joke was that they would put the cartridge into the device and there was a glove there that would take it and go run it somewhere else because they knew that the demo wasn't going to work. That was a pretty common joke. In fact, back before the Walgreens deal came together, there were experts inside of Theranos who said they knew something was up and were flabbergasted by Elizabeth's claims. Experts like Ian Gibbons, he was named the chief scientist at Theranos in 2005. An extremely bright guy with a bunch of Cambridge degrees and nearly 200 patents to his name. Tall with blue eyes and reddish hair with refined English accent. And the head of the company, he was a great actor with refined English accent and style. Ian was recommended by Channing Robertson, Elizabeth's number one cheerleader, her old Stanford professor and a Theranos board member. Ian and Channing had worked together many years before. And I worked with Ian from the early days of biotrak. So maybe 25, 30 years. And I worked with him closely at Theranos. When did you first learn about Theranos? I think it was like 2002 and Ian started consulting for Channing Robertson. That's Rochelle Gibbons, Ian's wife. She's in her early 70s with brown curly hair. She's soft-spoken but sure of herself. Rochelle says Ian's job was making the Theranos technology actually work. No easy task. If anyone could do this technology, Rochelle, who was a scientist herself, as well as a patent attorney, says her husband was initially apprehensive to talk about work because of the secretive environment at Theranos. Elizabeth was isolating him. Probably everyone else too, but he didn't know that. Most scientists are really social. And they can't wait to when you get a good result. You're all over the place with it. You know, you want everyone to know. And there was none of that at Theranos. Rochelle says Ian knew, as Theranos was closing in on its deal with wall grains, that none of the Theranos technology worked yet. The machines, quite simply, weren't giving accurate results. She was talking about how she was improving on current technology. And we couldn't figure out what that technology she was talking about. It just became falter and falter. Elizabeth may have been selling a fully realized product, but Rochelle says that pitch was more fantasy than reality. Regardless, Ian went to work every day trying to make it work, while Elizabeth would frequently be out of office, peddling her product to investors, marketers, and board members. Rochelle says the more Ian saw, the more he thought the company was misrepresenting itself, committing fraud in his eyes, even putting people's lives at risk. Ian felt like people's lives were on the balance, and along with his own scientific integrity. So he was just deeply distraught. And he went to talk to Channing and in confidence. And he told Elizabeth about it, and she fired him on the spot. Channing told Elizabeth. Yeah. And she fired Ian on the spot. Rochelle says oddly enough, Ian was almost immediately hired back, but he was demoted, and he took it hard. What she had him doing was evaluating people, people's CVs that came into the company, and he hated that. In an alien people. Yeah, that's not what a scientist, a scientist, and that was true of other scientists. One of the scientists, who is no longer there, was was in charge of building maintenance. This was a scientist, senior level scientist. - That's spending a fair amount of money to employ somebody and not use them. Why do you think Elizabeth would do that? - I think they were window dressing. Because, I mean, Ian was figured on the website as a principal, right? And he really does have a brilliant reputation. And she needed scientific credibility and Ian gave her scientific credibility. - According to Rochelle, there was another thing bothering Ian around this time. While all of this alleged deception was going on, Theranos was the plaintiff in a big patent lawsuit. Ian was subpoenaed by the defense to provide testimony that would potentially put Theranos in a bad light. He was incredibly anxious about it. He couldn't imagine himself up in front of a court. He faced either purgering himself and defending the company or openly admitting the technology didn't work. - He told me that he didn't believe Elizabeth, you know, just because she's pathological liar. So he really didn't want to testify. Because he was over a barrel. They would fire him if he didn't go along with the company's story. And they knew that they didn't want him to testify. He was actually subpoenaed. So he had to testify. - Even when he started at Theranos, Ian had struggled. He'd been diagnosed with cancer in his early days and had looked to the Theranos opportunity as a bright new chapter. But Rochelle says the lies and the treatment he saw set him further and further back. According to Rochelle, the pressure of the trial and Elizabeth's relentless intimidation tactics put him over the edge and he started showing signs of depression. - His big problem was that he didn't want to be an unemployed, even if it was at Theranos, but he hated Theranos. So he was stormy because he really hated it. Didn't want to be there, but he didn't want to be unemployed. About Elizabeth, at that stage, he was totally negative at her. He didn't have anything good to say about her at all. He just hated her. She's a bully for one thing. She bullied him. She made him feel bad all the time. And I used to say, why does someone like you give it? About why someone like Elizabeth treats you like this? And he didn't really have an answer for it. I don't know. One evening, Ian came home filled with dread, sitting in the family room of their sprawling ranch-style house with two enormous heritage oaks out front. Ian Rochelle had a long conversation. She says Ian was supposed to meet with Elizabeth the next day. He expected to be fired and he wanted to confront her. - He told me how upset he was. He told me he'd never been as upset and sure enough. - I thought things were gonna be fine because we'd see the doctor in the next day. It's get him treated for the depression. - Then a horrific shock. Rochelle woke the next morning to find Ian had attempted suicide. Rochelle called the office to let them know he wouldn't be showing up for his meeting with Elizabeth. What made you make that phone call? - Well, because Ian wasn't gonna show up at the meeting, I know it's a little bit stupid, perhaps I shouldn't have done anything. But just to let him know that he was in the hospital wouldn't come to the meeting. - Ian was rushed to the hospital. A week later, he died with Rochelle by his side. He was 67 years old. When Theranos reached out, Rochelle says it was in the form of two letters. - One was the email demanding all the intellectual property. And any other lab books or things, the computer. And then the other one was a letter from Therano, warning me against telling anyone what happened to Ian. - How many years had he worked at Theranos? - Since 2003, from 10 years. - 10 years he worked at Theranos. - Yeah. - Did they send flowers? - No, I expected. I fully expected something from them. And they didn't do anything. And then the other thing was a surd that was that they could thought they could sue me for talking about Ian. They couldn't. I guess they were trying to scare me, intimidate me into thinking they were gonna get me for defamation. But the defense, the defamation is truth. And so, I'm telling the truth here. Not lying about Theranos. - What has this done to your life? - It's at the worst it's come close to ending it. But I mean, it's a. I can't. People like that should be in jail. They should not be allowed to destroy. People's lives. - Rochelle says Ian's warnings would never be heard outside of Theranos. He would die just months before the partnership with Walgreens came together. Before the first Theranos Wellness Center would open in Palo Alto. And before the company would set out on a massive ad campaign, tapping the expertise of the most famous documentarian in the world. Errol Morris. - All right guys, let's do this, camera's ready. Here we go, lock it up please. - Here we are at the ground floor of something that is revolutionary. And we're part of it here from the tip of your finger. - Whoa. Oh, I'm gonna try it? - Yep. - No. - They're waiting for that moment of shock, the moment of horror. And it doesn't happen. - Yeah, exactly. - On the next episode of The Dropout, Elizabeth becomes a full-fledged star. - I also heard she was traveling with four bodyguards, carrying guns, packing heat, and traveled in a private jet. - As her technology is launched to the public, and real patients' lives are now potentially at risk. (upbeat music) - Being able to somehow justify her mind, it was okay to put all these people potentially in harm's way. I don't understand how someone does that. I'm just an unable personally to comprehend it. - Elizabeth Holmes, Sunny Bellwani, Tyler Schultz, Christian Holmes V and the V, Noel Holmes, Channing Robertson, and Errol Morris, did not respond or declined to comment for this podcast. Some material, including court depositions, were edited for clarity and time. The Dropout is written and produced by Taylor Dunn, Victoria Thompson, and me. Our editors are Chris Heroube and Evan Viola, who also created our theme song, "Additional Editing on this Episode by Nick McCity." Our researchers are Victor Ordinette's and Lane Wynn. Our artwork is by Teddy Blanks at Chips & Y. The Dropout is a production of Nightline ABC Radio and ABC's Business Unit. Jenna Millman is the supervising producer and Stephen Baker is the executive producer. Eric Avram runs ABC's Specialized Units. Thanks to the team at ABC Radio and to the Wall Street Journal's John Kerry Rue, author of Bad Blood, who's investigative reporting first exposed this remarkable story. Be sure to subscribe to the Dropout podcast and if you like what you heard, leave us a review. Listen to new episodes every Wednesday.