It’s been a wild week in
Washington. I could write about any
number of important events. March for
Our Lives and David Hogg. John Bolton. Trade wars.
The Omnibus budget. Putin
poisoning Any one of these topics could fill a post or column.
But I’m going to skip all of the
shenanigans in Washington this week and instead turn my attention to the
private sector. And this week was a week
in which the mighty have stumbled.
Elizabeth Holmes, the young
darling of biotech, who some compared to Steve Jobs, was accused by the SEC of
a “massive fraud,” and reached a settlement with the agency (a separate DOJ
investigation may be ongoing). Holmes
raised more than $700 million from private investors for her company, Theranos,
a biotech company which purportedly
developed blood testing equipment.
Holmes at one time had such board members as George P. Shultz, David
Boies, and General Mattis, all of whom will acquire some taint as a result of
this crash (Shultz in particular will suffer a black eye as he actively
promoted Holmes and her company). The young, blonde and attractive Holmes headed
a technology company in a male dominated sector, so the SEC charges were a
shock to a world regularly coming under criticism for not fostering enough
women in leadership positions. Not only
did she defraud investors with resulting job loss, the Holmes story is even
more appalling because of the cold, inhuman way in which Holmes treated the
family of Ian Gibbons, Theranos’s chief scientist who committed suicide when he
though he would be fired for challenging the accuracy of the test results by
the company.
The SEC charges against Holmes
trigger a flurry of issues. Is the
desperate desire for more women in STEM causing standards to be lowered? Did investors go easy in due diligence
because of her gender? Holmes raised hundreds of millions without having to
provide investors audited financial statements.
Holmes settlement required her to pay a $500,000 fine, divest her stock,
and refrain from being a director of an officer or director of public company
for 10 years. Given that petty drug
dealers on the South Side of Chicago, the consequences of her fraud seem paltry
given the harm she inflicted (including the death of her chief scientist) and
could have inflicted. A massive fraud
committed with respect to results around diagnostic equipment could have put
the lives of thousands at risk. That
Holmes will skate without jail time is a massive miscarriage of justice to go
along with the massive fraud.
The Holmes fraud is even more interesting
because it was perpetrated by a woman. In
his book on white collar crime, Why They Do It, Eugene Soltes of Harvard University asserts that white
collar crime is almost always the purview of men. This
is simply not true. Kelly Richmond Pope, an accounting professor at DePaul
University, produced the film All the Queen’s Horses, which recounted the story
of the fraud perpetrated against the backwater town of Dixon, Illinois by a
female controller. Rita Crundwell
drained over $50 million from the town over a period of years to finance her
lavish lifestyle. Crundwell’s fraud was
amazingly uncomplicated. Like Holmes,
Crundwell was able to get away with this massive fraud simply because no one
was asking critical questions. In the
last few years of her fraud, Crundwell was able to pilfer $5 million in each
year out of a city with a budget of $9 million.
The fraud of Holmes and Crundwell along with smaller frauds perpetrated
by women like Patricia Lapinski at Chicago based law firm Vedder Price ($7
million) demonstrate that Soltes is not
correct in his assessment (another female entrepreneur Lynn Tilton beat back a
multi-year SEC fraud claim last year, although her fund is now in bankruptcy). Fraud is no longer a boys only game.
Then there was Bill Voge,
managing partner of Latham & Watkins.
Lathan & Watkins, for a time was the largest billing law firm in the
country (now surpassed by Kirkland & Ellis). Voge was forced to step down as managing
partner and retire after an electronic extramarital relationship went
sour. Voge and this woman evidently got
connected through a Christian group, New Canaan Society. Their communications became sexual, but then
apparently went south after Voge invited her to his hotel room. The rancor escalated when she engaged in
cyberstalking and Voge threatened her and her husband with jail. The mess ended a Horatio Alger career of a
man that went from Iowa farm boy to leading one of the most successful and
powerful law firms in the world.
The Voge story is a puzzling one
and one full of ironies and twists.
There is the obvious irony of meeting this woman through a Christian
group dedicated to Christian reconciliation.
Voge’s downfall as a pious Christian echoes of Upton Sinclair’s Elmer
Gantry. Still, Voge committed no
crime. The woman was not connected to
the firm in any way. She was not a
client or an employee. He never met her
in person; his interactions were all electronic. You can’t help but think that if every
partner in every major law firm that had a messy personal life and/or was
discovered to have engaged in extra-marital relationship was forced to step
down, probably about 25% of the nation’s lawyers would be out of work. Voge’s scandal raises a number of serious questions. Can one commit an act of infidelity if the
act is solely electronic? If there has
been no coercion and the other person has no relationship to the firm, should
it cost you your job? Would this ugly
dispute have cost him his job if it involved a property dispute or a
debtor/creditor dispute, or some other disagreement? Would Voge have lost his job 25 years or so
ago under similar circumstances, before electronic communications preserved a record
of it, if he had met her in person, whether or not the relationship had been physically
consummated?
Then there was Facebook. A few months ago Mark Zuckerberg’s star had
risen so far that some were even throwing his name around as a presidential
contender. What began as a platform for
college kids connect blossomed into a $9 billion enterprise with 2.2 billion
users across the globe.
We’ve all grown accustomed to
sharing personal information on social media, lulled into a false sense of security
about our private information. The
risks first came to light a few years with the Ashley Madison hack a few years
ago, which as I predicted, receded from the news pretty quickly. The Yahoo hack affected all 3 billion email
accounts. Then came the hack of Equifax, which impacted
almost 150 million Americans.
And now comes Facebook and the
disclosure that Cambridge Analytica had improperly obtained information on
Facebook users. Zuckerberg’s response
was viewed by many as inadequate, slow and tepid, and has triggered an FTC
investigation into the matter. Now we
are learning that Facebook scraped text and call data from certain phones. He will be hauled up to congress for hearings
on the matter. Zuckerberg and his other
star Sheryl Sandberg disappeared from view for days after the disclosure and
are now engaged, prompting headlines such as “Sandberg Leans Out. “We didn’t realize the gravity of the data
issue,” Sandberg said. Whoaa! Data is your product, Ms. Sandberg.
The Facebook crisis is only the
beginning of a serious review of privacy issues. The readers of my posts know that lighter
government regulation is my default setting, but the latest Facebook crisis,
taken together with some of the other massive breaches, the proliferation of
fake news, and the potential distortions of information and the effect that it
may have on our political system lead me to believe that the establishment of a
Digital Protection Agency is worth considering. I need to think about how an agency such as
that would operate, but I’m coming around in my thinking on this.
As these stars come crashing to
earth, they have raised many questions and many issues as we move into the
digital age and how untoward human behavior, lust, greed and fraud interfaces with
technology.
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