Elizabeth brings on an unexpected character as her right-hand man at Theranos and it turns out they are hiding a big secret. They strike a monumental deal with Walgreens that could potentially put millions of lives at risk while insiders say a culture of fear and intimidation at the company leads to incredible tragedy.

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00:00:00are you hiring indeed you can post a job in minutes set up screener questions than zero and on your short list of qualified candidates using an online dashboard get started today at indeed.com / podcast that's indeed.com podcast
00:00:17previously 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 theranos it just 19 years old do not intend to drop out of Stamford but I wasn't going to any classes and I was spending all of my time talking to be seized and so they would just agree to just seems like obsessed with apple and Steve Jobs she started wearing black turtlenecks and recruiting heavily from her Heroes company 15,000 shares of Apple but life continues on the recruits including Avi tevanian Steve Jobs right-hand guy had been dropping like flies so you are done with their nose
00:01:01I have seen so many things that were bad go on I would never expected anyone would behave the way that she behaved as a CEO and believe me I work for Steve Jobs I saw some crazy things the business was also running out of cash on cash but Elizabeth was about to find a solution to all of those problems
00:01:36from ABC radio in Nightline this is the Dropout episode 2 The Enforcer
00:01:45when it's sunny balwani joined the company I thought in about September of 2009 or August of 2009. That's from them. 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 have left and a big mission to fulfill what Elizabeth didn't have was the money make it happen she said she was considering at this point going out and doing an equity raise essentially trying to find new investors to buy intercompany 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 the test of time
00:02:45but unlike so many others Elizabeth had an ace up her sleeve a white night with Deep Pockets and what 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
00:03:10Hamilton just read a good faith loan goes by Sunny he's a former software executive who sold his company just before the.com bubble burst and made Millions work at Lotus Microsoft and in mid-2009 he cut their nose a massive check wasn't just offering a Lifeline he was also joining their noses an employee 6 months later when I 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 Judy any qualifications in the lab testing business or in pathology or anything like that note to my knowledge
00:03:54soap Sunny begin showing up to work everyday at their nose like Elizabeth. He had his own kind of uniform a white button down shirt jeans and expensive loafers you always smelled of cologne became known for his flashy tastes so he drove two cars both with vanity plates a black Lamborghini with license vidi vici as in veiny vidi vici a reference to Julius Caesar's I came I saw I conquered and a Porsche 911 with plates that pay dommage Karl Marx's anti capitalist Manifesto. Capital he was a very striking figure around the office what is presents confused a lot of employees like Michael Craig a senior software engineer
00:04:38I always wondered why he was there you know if she was actually had this this held this vision of really impacting the world I was like why did you pick him then Michael reported directly to Sunny he was terse and he was a bit of a hothead from what I could see there was one level this need to assert dominance in another level I don't think he ran terribly deep like for instance I remember at one company party he had these set of samurai swords in his office for a long time and I finally was like so what's you're interested in those swords and stuff cuz now I'm pretty interested and in a lot of that stuff and he basically said that I was just a thing I was like well like there's not even the story there this just like some object that use but they're so he has like that that need to prove himself and also pretending like he's above everything
00:05:39Sunny became the most important person at the company after Elizabeth employees remember they would frequently see that you conducting meetings in their big windowed office at the end of the hallway that you 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 generally do the the first meeting or two and talk about the vision and then he would follow up on any question that they had from the 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 on weekends and I'll tell can train me I'll do it
00:06:29anyone know how to do all that was a hard worker but employees say he was also developing a reputation as a bully someone with a menacing presence here is Erica Jong who works for him in the lab initially he would be if you'd be fairly nice but then through email you he frequently would get really upset about 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 work frequently say things that we're just inappropriate became very clear to entire departments that it was hit even understand really what was going on
00:07:30Tyler Shultz another colleague of Erica's so Sunny earned the nickname around the office what kind of like this seems like intimidation tactics I guess according to former employees Sonny's management style caused many people to leave the company again here's Michael Craig did he ever get angry with you just like you know asking me to do something out of the blue and then looking at whatever I did which you know generally speaking of poured my heart into and then be like all this is not at all what I asked for you know in like you like what would he yell my name is loud dog barking at people basically and even Elizabeth Underoath tried to distance herself from this Behavior where there are areas in which he disagreed
00:08:20yes what were those areas
00:08:23weave with the screen all the time about a lot of things were very different leadership styles
00:08:33so what was keeping this millionaire with so little relevant experience who is 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 for you and play balwani ever engaged in a romantic relationship
00:08:52when did you live together
00:08:59did you ever tell investors that you and Isabel lying had a romantic relationship at the time that you were asking them to invest in fairness Elizabeth nearly 20 years younger than Sonny was not just his boss she was also his girlfriend even employees like Michael Craig had no idea he had been in a relationship I still in like will it really snow in a car together and she was only stomach
00:09:38about 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 had absolutely intentional John Kerry was a Wall Street Journal reporter and author of Bad Blood secrets and lies in a Silicon Valley startup he's been covering their nose for many years and was astounded by this Quest well one of the first things that you know what's a raise my eyebrows was when I had my first long conversation with the Lambs director and he told me that sunny and Elizabeth were an item and I was stung by that in fact much of the publicity surrounding Elizabeth didn't have a personal life something her mother openly worried about in The New Yorker article in the same profile Henry Kissinger was on the board of directors even suggested he'd been trying to set Elizabeth up on dates
00:10:36reality Elizabeth and sunny were very much together they had met several years before theranos when she was about 18 Sunny was 37 at the time in 2002 in China
00:10:55the entire department knew about her Chinese have skills and so when I first met her I'm like oh you must be the place becomes Elizabeth Elizabeth's brother Christian Holmes remembers her talking about sunny when she returned from China by romantic vs. personal but as soon as she came back from China and she mentioned they had a friendship eventually that friendship developed into something more according to public records sunny and Elizabeth at one point even shared a residence on Channing Avenue in Palo Alto about four miles from the theranos office
00:11:34back at that office they would work long hours and together in early 2010 Elizabeth and sunny were going after their biggest collaboration yet their nose was trying to land a partnership with Walgreens they were hoping to put their nose technology in more than 8000 stores basically within a few miles of almost every home in America this would be a huge break it would mean a lot of money for their nose were interested in partnering with Walgreens because of the retail footprint years Wall Street Journal reporter John Kerry real so you can send it that their nose blood test would have been available at almost every street corner in their first pitch to Walgreens in 2010 Walgreens says that their nose claimed they had developed small point-of-care devices that for the first time could run any blood test in real time
00:12:29basically what their nose 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 need is a single finger prick of blood
00:12:54Elizabeth would become a master salesman later boasting about the massive deal with Walgreens on the conference circuit we're doing and just pricing for Medicare Medicaid in steaming Medicare and Medicaid under the billions of dollars on an annual basis and access for every person means rolling this out ultimately within 5 miles of every person's home so so our work is making it possible to do any lab test from a tiny drop of blood from the finger instead of having big needle stuck in your arm in tubes and tubes of blood taken out
00:13:40on March 22nd 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 the Elizabeth and sunny made the claim that the technology was quote viable and consumer ready and if there are no systems were validated under FDA guidelines they said that the finger-stick technology would be ready to launch to Consumers later that year
00:14:14Walgreens 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 explain it would come to light it was absolutely not true was a third as a factor device ever deployed in the battle Battlefield was ever deployed in a Medevac helicopter
00:14:43was a scientist named after device ever deployed in a an Apache helicopter
00:14:49but in 2010 Walgreens had no idea and was intrigued they struck an initial deal with their nose 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 consulted an expert named Kevin Hunter Kevin my family has small Tina drug stores in Albany New York and my father ran one my grandfather and another working with the largest world's clearest later right and what specifically were you supposed to do for Walgreens in to give them guidance about you know the legitimacy of the of the cast and then its ability to be reproduced and all the types of thing
00:15:49we all had shirts made up everybody got a nickname and I was told the expert by the time he joined he says he's already heard some impressive stories about their nose always successful you know the technology was being used on the battlefield with Department of Defense that they were doing in-home testing for people in that also they were working with either 7 of 10 or 8 of 10 of largest pharmaceutical companies in the world and their nose headquarters from everything he'd heard he was expecting to be seriously wowed arrives in the first thing you see is that Sunny had a Lamborghini that was parked right up front and he was very proud of the fact that you've been successful another technology businesses
00:16:49that's that was his car the feeling was blocked by key cards and all that kind of stuff we were met at the ground floor immediately taken upstairs for conference room where we only met with sunny Elizabeth and when I come sample we would break to go to the restroom they would literally walk us to the restroom and then walks back so we weren't allowed to look around or talk to anybody hear anything when you say they who's they want me back in so that was unusual you know I asked for the laboratory was it said it was located downstairs and they said after lunch and then after lunch if you know if the week to turn to but we really don't want to show you the laboratory I kept asking to speak with like the chief medical officer or the scientist that was work
00:17:49the cast of all Network or things like that and you know they said they wanted to keep the conversation of high-level and not bring anybody into it yet sampled Yost everyone's take a theranos blood test right then and there just as well and they refused to do that and when I Elizabeth has to to why she wouldn't let us do it she said that she didn't Stanford's results and I found that really ironic for somebody who supposedly dropped out of Stanford and and you know thought very highly of those of the university to not believe their laboratory results
00:18:38according 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 CFO of Walgreens with the with a flag that has flown over Afghanistan
00:18:57knowing what you do now do you think that flag really flew over Afghanistan
00:19:04that's a really good question I mean it was certainly framed and you know it was was was presented like you would see but I 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 were not allowed to ride in a we weren't allowed to follow them we had to just meet him in a back room we get to this restaurant there's no one there that we still meeting the back in Elizabeth that are standard agreeing protein shake that she had and was dressed in all black and sunny Got Sushi or something like that but they're not allowed to talk to each other by name yet son has Lamborghini if you were concerned about people following you or seeing you or some like that you know why you driving around Palo Alto and black Lamborghini
00:20:04no never shared any of my green shake with him
00:20:09no he did not the more Kevin stop the more questions he had he wanted to know exactly how their nose plan to run all these texts
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00:21:15if you want to drop out if you like great investigative journalism if you like taking a headline and then getting the real story and check out start here it's a daily news podcast from ABC News biggest stories of the day in 20 minutes from politics yes we are witnessing a crisis it's just not the one that president is talking about biggest investigations hello Robert Mueller Michael Cohen, Becca Jarvis yes Rebecca from this podcast explaining the business World in a way that actually makes sense not too hot not too cold that's exactly what the FED is going for here from ABC News in my mission is simple to get you smart fast to start here listen on Apple podcast over ever you're listening now
00:22:01did Walgreens believe that the third eye was technology would let you run multiple test with a finger prick of blood. Their position along with the fact that you don't set it would be one drop of blood and one of the documents that that I have shows that they said 250 tasks and 2010 on our way
00:22:33and was that possible
00:22:36no no I never saw anything that would give any credibility to the fact that the instrument did anything at all
00:22:45anything at all on my desks at one of the Edison instruments one of the early instruments sweet bug them forever to send us an instrument so we can run tests on it and and I begged and I begged them to let me crack it open and take a look and see what's going on inside the instrument and you know it feels like a computer had the tape on the the tamper-evident tape on the back and and they just didn't want to do that and it would run for a little while then have an error shut down or something I never got it to do anything that I could turn a test result that could be correlated with any deception was incredible
00:23:28what would you say are the biggest deceptions was just so you know one of the things I tried to explain to them was that you know cuz I found some it's a book I understand you know the tech startup environment you can breathe air out here in Palo Alto yeah you think it till you make it to a certain extent but you know what you're talkin about testing people and people taking these lab results making life decisions based upon the results you give them you need to make sure that they're right and they just pulled off
00:24:09Kevin says he didn't think Walgreens should work with their nose and for a moment even looked like the deal was dead but suddenly Kevin says it was back on Elizabeth had convinced Walgreens to stay in it? Or a business in those are for those aren't for me with the laboratory industry those are the two 800-pound gorillas and then again it was just so badly that
00:24:47they were willing to come to take people's word for some of the stuff it was just it was kind of bizarre the Walgreens team continue to move forward Kevin says he was nervous and needed to get out why did you leave ultimately
00:25:05I really felt like at some point in time either could be some guilt by association if you know word got out that I spent a year-and-a-half working on this project with them you know that I almost was by his me continue to stay involved that was almost a door sing it and and I didn't want that to damage my reputation when Elizabeth a few years after he left even Kevin's own wife wondered if his instincts were wrong need to know if you're just wrong on this one you think you can see the forest for the trees I said you know what I guess I'll go to my grave knowing that you know that this wasn't legit and I said if they not be today. Be next week or next year but the truth will come out eventually it did but that wouldn't be for a number of years
00:26:02in January 2012 Walgreens says Elizabeth and Sonny said they were on the right track with regulatory approvals and claims their revolutionary technology was advancing and would require 99.9% less blood and the traditional blood testing services already on the market
00:26:21Elizabeth and sunny according to Walgreens promised their nose would be the nation's lowest cost and highest quality laboratory provider
00:26:31by late 2013 they started rolling out their nose wellness centers inside of Walgreens 2 years later they had 41 of them across California and Arizona
00:26:43you might be asking yourself how did Walgreens a company with thousands of employees that serves millions of customers a day not see this coming
00:26:54I talked to read Catherine a lawyer who later stood there and I was on behalf of investors should Walgreens be held responsible here they were full to they had Executives that had their blood tested and rooms with the machines sitting there by their side and they'd have their blood test and then they go off and have lunch and in the background and there were a few tests that they could run one at a time on up there and knows machine but they but they basically made it look like it was being run on this machine and the room but they were actually doing it by hand in the lab and so the Walt that Walgreens people got those results and how this works theranos employee Tyler Schultz says many inside the company saw this Behavior there were even jokes about it during demonstrations that joke was that they put it they would put the
00:27:54cartridge into the device and there was a glove there that would take it and go run it somewhere else cuz they knew that the demo wasn't going to work that was a pretty common joke before the Walgreens deal came together there were experts inside of their nose 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 their nose in 2005 an extremely bright guy with a bunch of Cambridge degrees and nearly two hundred patents to his name tall with blue eyes and reddish hair with refined English accent and style
00:28:34and was recommended by Channing Robertson Elizabeth number one cheerleader hurled Stanford professor and a theranos board member an enchanting had worked together many years before
00:28:47and I worked with Dan for from the early days of biotrack so maybe 25-30 years and I worked with him closely at it there knows you first learn about their nose I think it was like 2002 and Ian started Consulting for Channing Robertson that's Rochelle Gibbons his wife she's in her early 70s with brown curly hair she's soft-spoken but sure of herself
00:29:17Rochelle says Ian's job was making the theranos technology actually work no easy task that anyone could do this technology was here Rochelle who is 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 he most scientists are really social and they can't wait to do 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 it at their nose Rochelle says Ian new as their nose was closing in on its deal with Walgreens but none of the theranos technology worked yet
00:30:09the machines white simply weren't giving accurate results to his talking about how she was improving on current technology and we couldn't figure out what that technology if she was talking about it just became Foster & Foster Elizabeth may have been selling a fully-realized product or Rochelle says that pitch was more fantasy than reality regardless and went to work every day trying to make it work while Lizabeth would frequently be out of office pedaling her product to investors marketers and board members
00:30:46Rochelle says the mauryan saw the more he thought the company was misrepresenting itself committing fraud and his eyes even putting people's lives at risk in felt like people's lives were on the balance and
00:31:02along with his own scientific integrity
00:31:07so he was just deeply distraught and he went to talk to Johnny in confidence and
00:31:16he told Elizabeth about it and she fired him on the spot Channing told Elizabeth and she fired Ian on the spot Rochelle says oddly enough and was almost immediately hired back but he was demoted and he took it hard but she had him doing was evaluating people people CDs that came into the company and I hated that that's not what I signed a director of assay development as
00:31:49and that was true of other scientists one of the scientists who is no longer there was in charge of building maintenance this was a scientist senior-level science that 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 the end was figured on the website is a principal right and he has that you really doesn't have it had a brilliant reputation and she needed scientific credibility and Ian gave her scientific credibility
00:32:33according to Rochelle there was another thing bothering en around this time we'll all of this alleged deception was going on their nose was the plaintiff in a big patent lawsuit and was subpoenaed by the defense to provide testimony that would potentially put their nose in a bad light he was incredibly anxious about it he couldn't imagine himself up in front of a court he face either perjuring 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 a pathological liar
00:33:11so he really didn't want to testify because he was over Barrel they would fire him
00:33:19if if he didn't go along with the company story and
00:33:25they knew that they didn't want him to testify he was actually subpoenaed so we had to testify even when he started at their nose and had struggled he'd been diagnosed with cancer in his early days and it looked to the theranos opportunity is a bright new chapter but Rochelle says the lies in the treatment he saw set him further and further back according to Rochelle the pressure of the trial in 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 in unemployed even if it wasn't there somebody hate it there and so is he was storm 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 about her but he didn't have anything good to say about her at all
00:34:21he just hated her
00:34:23she's a bully for one thing she bullied him she made him feel bad all the time
00:34:34and I used to say why does someone like you give it about twice someone like Elizabeth Elizabeth treats you like this
00:34:47and he didn't really have an answer for it I don't know what evening and came home filled with Fred sitting in the family room of their sprawling ranch style house with two enormous Heritage Oaks out front here in 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
00:35:14tell me never been as upset and sharing that
00:35:21I thought that things were going to be fine because we had see the doctor the next day and get him treated for the depression
00:35:30then 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
00:35:47you didn't wasn't going to 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
00:35:59and was rushed to the hospital a week later he died with Rachelle by his side he was 67 years old
00:36:09when Cyrano's 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 are things the computer and then the other one was letter from their lawyer or warning me against telling anyone what happened to you yet how many years have you worked at there now since 2003 from 10 years 10 years he didn't get there in the house yet did they send flowers know I expected I fully expected something from them
00:36:46and they didn't do anything and then the other thing was said that was that they could think they thought they could sue me
00:36:56for talking about it
00:36:59you know they couldn't I guess they were trying to scare me intimidate me into thinking they're going to get me for defamation but the defense to defamation is truth
00:37:14and so you know I'm telling the truth here not lying about their in this what has this done to your life
00:37:25at the worst it's come close to ending it
00:37:31I mean
00:37:40people like that should be in jail they should not be allowed to destroy people's lives
00:37:54Rachelle says he has warnings would never be heard outside of their nose he would die just months before the partnership with Walgreens came together before the first their nose 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 here we go. Can I please see we are at the ground floor of something that is revolutionary and we're part of it here for the tip of your finger and now they're waiting for that moment of shock the moment of Horror
00:38:37it doesn't happen exactly
00:38:42on the next episode of the Dropout Elizabeth becomes a full-fledged star I also heard she was traveling with four bodyguards carry guns packing heat and travel in private as their technology is launched to the public and real patients lives are now potentially at risk
00:39:04being able to somehow just to find her mind it was okay to put all these people potentially In Harm's Way and I don't understand how someone does that I just am unable personally to comprehend it
00:39:17Elizabeth Holmes Sunny balwani Tyler Schultz Christian Holmes 5th and 4th 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
00:39:35the Dropout is written and produced by Taylor Dunn Victoria Thompson and me or editors are Chris kirubi and Evan Viola who also created our theme song additional editing on this episode by Nick Bissett are researchers are Victor Ordonez and Lane when are artwork is by Teddy Blake sat chips and why
00:39:55dropped as a production of Nightline ABC radio and ABC's business unit Jenna Millman is the supervising producer and Stephen Baker is the executive producer of Rome runs ABC specialized units thanks to the team at ABC radio and to the Wall Street Journal is John Kerry Roop author of Bad Blood was investigative reporting first expose 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
00:40:26hey so when the New York Times named 8 News podcast worth listening to they went straight to start here I'm dried milky from ABC News I work alongside Rebecca Jarvis and every day I'll get you up to speed in 20 minutes flat start smart with start hear the daily podcast from ABC News listen now wherever you get your podcasts are you hiring set up screener questions than zero in on your short list of qualified candidates using an online dashboard get started today at indeed.com podcast that's indeed.com / podcast

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