Bottom Line Ethics

I am following with great interest one of the most significant fraud trials of the past decade, that of Elizabeth Holmes, the CEO of biotech startup Theranos. The company’s central product was a machine known as the Edison, which was supposed to provide a wide range of blood tests on just a few drops of blood taken by pricking a finger. It had the potential to revolutionize the blood testing industry, and the intent was to roll the machines out in pharmacy settings, including at Walgreens. Holmes’s vision and persuasiveness were sufficient to enable her to raise nearly a billion dollars in capital to support the dream, and no one ever asked for audited financial statements. As it turned out, there was a giant disconnect between what Holmes advertised and the actual performance of the machines.

John Carreyrou of The Wall Street Journal broke the story through a series of articles beginning in 2015, eventually resulting in his book, Bad Blood. The whistleblower in the case, Tyler Shultz, is the grandson of former Theranos board member, George Shultz, who was Ronald Reagan’s Secretary of State. The younger Shultz was employed by Theranos after graduating from Stanford, and he quickly became aware of the inconsistency of the company’s testing and of the willingness of upper management to cover it up from outsiders. He captivated my Accounting Ethics students this spring as he told his story.

Elizabeth Holmes is not your everyday felon. As she battles for her freedom in the eighth week of her fraud trial, she portrays the quiet resolve of someone who has always, in the end, won. And this may indeed happen for her again.

There are several reasons why Ms. Holmes may never go to prison for her actions as CEO. Her trial, which began over two months ago, has devolved into a grind for a jury pool that is rapidly shrinking. The sheer number of witnesses going over similar facts about who knew what, and who was responsible, would be a lot for me to bear, and I am fascinated by cases like this one. For the average Californian who has a job and a family, and who is being called aside to do this as a civic duty, the requirements to focus must be unimaginable. One juror has been dismissed for working on Sudokus while the trial was going on. Another juror was allowed to leave after expressing to the judge that she could not send Elizabeth Holmes to prison because her religion believes in forgiveness.

In addition, there is the looming specter of the trial following hers of Sunny Balwani, her former partner and Theranos’s chief operating officer. In some senses, the defense has tried to make the current trial a trial of Balwani, holding him up as insulating Holmes from things that were nefarious, so that she never knowingly signed off on anything fraudulent. Balwani’s reputation as a bully certainly helps Holmes’s case. Without any resolution from a previous trial, the defense has significant opportunities to introduce reasonable doubt into the jury’s mind about what Ms. Holmes knew when.

In the entrepreneurial world, many celebrate the concept of “Fake it till you make it,” and those who perhaps exaggerate their progress early in the startup process are lionized as heroes once the company is a stable success. Holmes went beyond the normal startup founder,

captivating a broad audience with her persona and the back story of a teenage Stanford dropout who was just wasting her time taking classes when she already knew what she wanted to do. In addition, she was able to recruit investments from, and fill board seats with, a cadre of influential investors and politicians, earning her the title at one point of the youngest U.S. female billionaire. It also landed her on magazine covers and on stage at prominent business conferences.

It is easy to become jaded and wish for the worst for those who fall prey to their own hubris. And I would probably be the last person anyone in these cases would want on their jury. But at this point in my life I wonder, what if she had just accepted that they had failed in their attempt at greatness and offered disappointing news to her investors, and then tried again? Today she would likely be CEO of Theranos or of something greater. And when she holds her mother’s hand, it would be to walk her little boy around the block, not to go in and out of the courtroom.

And what exactly do I tell my students? All of them are looking for people to inspire them to do great things; my students want to be like these accomplished people. Should I turn my students into cynics because these people cross lines? My students sometimes have trouble settling for being really good, and they are only okay if they are the very best. The same has been true in amateur and professional sports, where numerous athletes have taken steroids to get an advantage.

Elizabeth Holmes fans in line for day one of her trial

The interesting thing to me is how many of these people are extraordinary without crossing the lines. Multiple Hall of Fame quality baseball players are not in the Hall simply because they took steroids. People like Barry Bonds and Roger Clemens were amazing before they broke the rules. The same is true of Elizabeth Holmes. What makes them willing to risk it all rather than fall short of being transformative?

I assume that ego is part of the answer. But I also have to recognize that many of us, including me, love to believe the unbelievable. And we invest ourselves in those who can make things seem possible. Sometimes it is just hero worship, and sometimes it is our money, but when those heroes fail, we are ready to burn the whole thing down. Perhaps we should recognize that we feed the flame as well.

In the meantime, in the next month or two, Elizabeth Holmes will learn her fate. Twelve good people will set the direction for her life. And this piece that I have written will fade into the dust of memory.

But if I could say one thing to my students, regardless of the trial’s outcome, it would be this: You are enough as you are. Dream big but tell the truth—to yourself and to others.

And if you are going to invest your money in your heroes—ask for audited financial statements.

Helen Sharkey is a felon. That sentence seems in every way to be wrong, even as I write it. Helen Sharkey is a mom of Tae Kwon Do twins, a loving wife, a faithful friend. She is a diminutive dynamo, energetically expressing truth, thoughtfully responding to questions. She is a star, a top accounting graduate of Southwestern University with a Big 4 pedigree who had a rising career in the energy industry. But, there it is again. Helen Sharkey is a felon.

In perhaps, the most eloquent expression of remorse that I have heard in many years, Ms. Sharkey told the story in my Ethics class of her fall from grace at Dynegy a decade ago. She spoke of the people who influenced her, of the pressures she felt, of the key turning points when failing to “listen to her gut” diverted her life in ways she could never have imagined. She became, with her decisions, what in retrospect is the one thing she never wanted to be: Googlable.

And that Googlability is what triggered the introspection necessary to allow her to speak about her experience to a broader audience. Since she got out of federal prison in late 2006, she has quietly raised her children with her husband and led a “normal” life out of the public spotlight. She has established the connections that have allowed her to flourish, perhaps influenced by a reticence to trust broadly that comes both from being “perp walked” and from watching others more involved in your crime never get indicted.

But her eyes were opened to the fact that in a fully searchable world, her sons were quickly coming to the age where she would have to explain that, in her own words, “Mommy is a felon.” This not only permitted introspection, it made that process urgent. Ms. Sharkey needed to understand her story so that she could explain it to two boys coming of age. And the result of walking through that process is a lucidity to her message that few people can match.

Being in that room was like watching a match dropped on dry tinder. In the midst of a draining week, I was locked on each word of her story, as was virtually everyone in the room. She spoke in measured tones, but she was able to convey the changing emotions of each stage of her ordeal in her voice and in her eyes. Standing behind a podium meant to protect her, she opened her heart and her life to a group of students I am asking to examine theirs. And she opened them to me as well.

She did not have to dramatize, because the room was walking with her through her boss’s detachment from correspondence related to the structured finance transaction that was her downfall, and through the New York meeting that sealed the deal when her boss did not backstop her. Her stomach in knots, she said, “For the first time in my life, I gave up on myself.” We could feel the impact of the Wall Street Journal article revealing the transaction, the subsequent criminal investigation, the tightening noose of the indictment, with the U.S. attorneys referring to her as “smart and articulate,” as an “alchemist.” What followed—Dynegy cutting off legal funding, losing her job at Chevron, being alongside of her father as he died of cancer—are the things that make any reasonable person shudder. She did not have to serve the five-year sentence that could have been her fate based on her guilty plea. But she felt the incalculable pain of leaving her twin babies to walk into a federal prison.

It was hard to pull the students away from her after class. I heard one say that she would stay all day if she could. Until she came to my class, I had never met Helen Sharkey. I have dealt with these issues professionally for many years. I am not purely clinical, because I care deeply about people’s outcomes. I am always rooting and praying for my students to avoid these paths. But, if they walk down them, I want to be a redemptive voice who gives them hope that there is more to life than their failure.

I have never known how to do that effectively. But I know someone who does. Her name is Helen Sharkey.

Barry Minkow’s career has largely paralleled mine, and he has always been to me one of the most interesting personalities to intersect with my profession. His audacious ZZZZ Best fraud still stands as one of the preeminent examples of creating something out of nothing. Perhaps 80 percent of the sales for his public company were completely made up, and he managed to fool auditors and investors long enough that at one time the company had a market capitalization of over $240 million. When they liquidated the company, the total assets brought less than $60,000.

What fascinated me was the fact that Minkow did not slip quietly into oblivion, as so many fraudsters do. While he was serving seven years in federal prison, he was interviewed by Joe Wells, who founded the Association of Certified Fraud Examiners. That interview has been watched by tens of thousands of accounting students, including many of mine. Minkow was completely transparent about the ways he deliberately manipulated audit partners and their spouses to believe a lie and to embrace his media personification as a “boy wonder” entrepreneur. The video is instructive, and it has helped to better calibrate the professional skepticism of many people.

In the 1990’s, after his release from prison, Minkow rebuilt his life on the foundation of a conversion to Christianity and the pursuit of fraud performed by others. I followed this next chapter with interest as well, particularly as it seemed to validate the story of redemption which seems so central to men continuing to have hope after their inevitable failures. While spending 14 years as a pastor, Minkow also founded the Fraud Discovery Institute, and he worked undercover in multiple situations to root out fraud being committed by other companies. The judge who sentenced him was so impressed by the work that Minkow did that he removed all the conditions from his federal parole. Minkow worked closely with law enforcement and gained a reputation for his insights into fraudulent dealings. He even taught fraud courses for the FBI.

The one consistency across the years as a business owner, felon, and fraud detective has been Minkow’s tendency toward self-promotion. Never afraid of a camera, a willing story teller who seems to revel in revelations, he was never far from a press release or YouTube clip. In fact, a major motion picture biography of his life has been made recently, starring James Caan and Mark Hamill (Luke Skywalker of Star Wars fame). The movie’s release and, in fact, its ultimate ending, are uncertain now.

Last week The Wall Street Journal and The Washington Post reported that Minkow has agreed to plead guilty to a securities charge that could land him in prison for five years. He has been accused of falsely citing homebuilder Lennar Corp. with producing fraudulent financial statements, depressing the price of the stock, at the same time he was betting against the stock in the market on supposedly nonpublic information.

Many will write this off as the story of a man who never changed, but there seems much more to it than that. For my young auditors, I would warn them to always be professionally skeptical, and especially of those who tend to promote themselves or focus on themselves. You should not be surprised that these things happen, but you do not need to be cynical about people as a result. Many lives turn, stay turned, and finish well.

What I take to heart for my own life is that we are all vulnerable. Every indication is that Barry Minkow’s spiritual conversion was genuine, and that he has been a mentor to many men, as well as being a good husband and father. The price he will pay in his personal life, what he will have to give up, is much higher now than it was the first time. I need people to watch my back, and to point out to me when I am making myself vulnerable to a fall. I need to be accountable.

Finally, I need to be careful if I find myself drawn to the limelight. If what I want is approval and applause, the price can be very high. That siren call will draw my students as well, and I need to find ways to let them know in advance.

I am sorry to say that, until I become a better lighthouse, the wreckage of Barry Minkow’s ship on the rocks will have to be warning enough.