To put it another way, Holmes received more than a decade in prison over just about 10% of what Theranos raised.
“The numbers in Silicon Valley are so out of whack with reality that these guideline sentences become enormous,” said Jeff Cohen, a former federal prosecutor who now teaches at Boston College Law School. “If she were running a widget factory by the same conduct, she would have received much less.”
While other Silicon Valley executives have been accused of wrongdoing, Holmes is the first CEO of a major tech firm to be criminally prosecuted and sentenced to prison.
That means she is the first in the industry to learn that raising hundreds of millions of dollars will not just send a startup’s valuation soaring, but if convicted of fraud in federal court, it could make serious prison time all but inevitable — potentially a warning to other imploded tech firms now under scrutiny, like Sam Bankman-Fried’s cryptocurrency exchange FTX.
Federal sentencing guidelines consider the amount of money drained the most significant factor in punishing fraudsters because it allows authorities to target organized drug rings and large-scale institutional fraud, according to former federal prosecutor Bill Portanova.
“For Silicon Valley, if at the end of the day, the music stops and there’s not enough chairs for everyone, the guidelines point to serious punishment,” said Portanova, who is now a defense lawyer in Sacramento, Calif.
Holmes’ punishment does come amid signs of a tech sector becoming less frothy. Both Big Tech companies and startups are laying off staff, new $1 billion companies are becoming harder to spot and venture capital firms are warning of a tough road ahead. Has the tech bubble burst, or is it about to burst? That determination, experts say, is easier made in hindsight.
“Tech bubbles don’t pop in the way a bubble pops from chewing gum,” said David Kirsch, management professor at the University of Maryland who wrote a book about bubbles and crashes. “Investment bubbles tend to deflate slowly.”
A long prison sentence for ‘a gross lie’
Holmes made patients, pharmacies and savvy investors believe Theranos could revolutionize the way blood tests detect diseases when it could do no such thing.
Why did she do it? It’s a question even Davila mused over from the bench before announcing her punishment.
“What was it that caused Ms. Holmes, regrettably, to make those decisions that she did?” Davila said. “Was there a loss of moral compass here?” he said. “Was it hubris? What caused that? Was it intoxication with the fame that comes with being a young entrepreneur?”
Whatever drove her, as soon a jury convicted Holmes, she faced serious prison time.
The sentencing guidelines, after a multitude of factors are considered, spits out an offense level. Holmes’ level was 33 — 24 points of that was from the amount of money she defrauded.