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Fraud Talk: Understanding the Art and “Science” of the Theranos Saga

In this special episode released during International Fraud Awareness Week, Chris Ekimoff, CFE, CPA/CFF, director of financial investigations and dispute services at RSM and co-host of the inSecurities podcast, and Mandy Moody, CFE, ACFE communications manager, discuss the latest and greatest highlights from the trial of former Theranos CEO Elizabeth Holmes. Chris and Mandy provide background and analysis on the many facets of the Theranos tale, review the implications of the previously-settled matter with the SEC in 2017 and discuss common issues with the legal system regarding allegations of fraud.

In the excerpt below from episode 114, Chris and Mandy touch on affinity fraud, and how Theranos benefited from their wonderkid image. Download the full transcript in PDF form or listen to the episode at the bottom of this post.

Mandy: Yes, the biggest one and you touched on this. In everything you just said, I could pick out what contributed to the biggest one, which was that larger than life, grandiose, cover story, young female hype Silicon Valley going to change the world, you had a very beautiful illusion and you had a lot of inherent trust, just because of what it looks like, and the façade. That’s something we see a lot.

We saw that with Madoff. It was someone you didn’t question, he had a lot of trust with people because he had a lot of power. She earned the same thing. She was a darling, she got investors by meeting with them in their living room, and convincing them of her vision and then she really sold it. I think there was a lot of privilege involved, but I also think she built up a very, very strong narrative.

Chris: Yes, and one of the things I know the ACFE touches on, Mandy, is what’s called affinity fraud and Madoff is a prime example of that. That’s where the social, spiritual-religious network of the Jewish community in New York and Palm Beach relied on each other to validate Madoff as a potential investment source.

Usually, you’ll see affinity fraud based in smaller groups like that or with a religious community or a social network in a neighborhood or a town. Here, you just touched on it. That social network was almost that that privileged investor class in the healthcare space who thought they could do no wrong and thought this was the next best thing, that beautiful illusion you just talked about was the driving force behind what might not be a traditional affinity fraud but all of those elements were in play as well.

Mandy: Yes, and she, along with Sunny and the PR team, really, really built up that FOMO of you do not want to miss out on this. You do not want to miss out on changing the world and making it affordable. It’s for everybody. She used the narrative how she was deathly afraid of needles, and this was going to change that. It would cost 2.99. It’s not just for people who have insurance.

She really had a lot of great talking points and what we, you and I can immediately see was, okay, well, how did she back it up? What’s sad is that a lot of investors didn’t even get to that point. They didn’t even– some of the board they didn’t even get to show me the data, show me the books, show me how it’s working, take my blood, or even just the due diligence.

Download the Transcript SOURCE: ACFE Insights – A Publication of the Association of Certified Fraud Examiners

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