In 2018, the U.S. Securities and Exchange Commission (SEC) charged Elizabeth Holmes with “massive accounts of fraud through false or exaggerated claims.”
For the unacquainted, Elizabeth Holmes was the founder and CEO of Theranos, a now defunct company that rose the ranks of Silicon Valley upstarts through compelling but false claims that it had revolutionized blood testing.
In 2004, the young entrepreneur (a generous designation) dropped out of Stanford’s School of Engineering to pursue her so-called innovation, which could purportedly obtain “vast amounts of data from a few droplets of blood derived from the tip of a finger.”
Her professors told her it could not be done, but nonetheless she persisted.
Hungry for a female CEO to display in their headlines and on their magazine covers, tech- and finance-centered media companies were quick to take Holmes at her word.
Forbes celebrated Holmes as the world’s youngest self-made female billionaire, ranking her #110 on the Forbes 400.
Wired regurgitated her claims, stating in a headline that “This Woman Invented a Way to Run 30 Lab Tests on Only One Drop of Blood.”
And Inc. and CNBC even ran headlines designating Holmes as “the next Steve Jobs.”
The mainstream media, though, as is too often the case, was way off the mark. Holmes, it turns out, was full of crap. So much so, in fact, that HBO released a documentary in March detailing her rise and fall: The Inventor: Out for Blood in Silicon Valley.
Holmes eventually settled her charges with the SEC in 2018 by paying a $500,000 fine and relinquishing her voting control of Theranos. She was also barred from serving as an officer or director of a public company for the next 10 years. She should have been barred for life.
The same year, a federal grand jury also indicted Holmes on wire fraud for distributing blood tests with falsified results to consumers. The case is proceeding in the U.S. District Court in San Jose, and Holmes is now facing up to 20 years in prison. She deserves to receive the max.
A Sand Shark in a Sea of Great Whites
The unconditional praise of Elizabeth Holmes should serve as a cautionary tale for investors, both private and public alike, because, despite the media’s obsession with this specific and highly public case, Theranos is far from a one off. Like it or not, fraud and misinformation are rife in modern markets, as CEOs are all too quick to exaggerate claims about the value and capabilities of their technology.
These exaggerated claims tend to exist largely in microcap companies and upstarts, as that’s where funding is needed most. Every so often, though, we see the marks of fraud spill over into larger companies, sometimes even those with tens of billions of dollars at stake.
Take Tesla (NASDAQ: TSLA) founder and “serial entrepreneur” Elon Musk for example. Arguably, these serve as the closest parallel to Theranos and Elizabeth Holmes today.
Now, anyone who’s read these pages over the years knows I’ve long been critical of Musk. I’ve received my fair share of “hate mail” from Musk fans for bashing their futuristic deity, but no matter. Tesla’s stock price peaked in 2017, and its downward spiral has so far proven my criticisms valid.
That same year, mind you, I published four articles, in addition to ongoing commentary on Twitter, regarding Musk’s fraudulent behavior. The thesis of those articles is clear enough by their headlines:
“Tesla’s (NASDAQ: TSLA) Fourth Quarter: Red Flags and Red Herrings”
“5 Major Risks Facing Tesla (NASDAQ: TSLA) Shareholders Today”
“Why Tesla’s (NASDAQ: TSLA) Stock is Going Down”
“Is Tesla (NASDAQ: TSLA) Overvalued? [Yes]”
Now, I don’t sweat the hate mail and reflexive reactions from Tesla’s cheerleaders. It’s a naturally polarizing topic because, like Holmes once was (albeit to a lesser degree), Elon is worshiped by a fandom that sees him as a symbol for progress.
Like Holmes, though, Musk’s luster is beginning to fade as the market wakes up to a pattern of constant deception. No doubt Musk has proven better at shifting the goalpost than Holmes ever could, but a house of cards is a house of cards, and eventually it will collapse.
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I’m sure I’ll receive some negative response to this article as usual from the pro-Tesla crowd for comparing Musk to Holmes, but the similarities are undeniable.
Like Holmes was once forced to do, Musk has recently settled with the SEC as a result of a propensity to spread misinformation. Musk’s punishment was a bit of a slap on the wrist, but he was removed from the company’s board and has already been forced to resettle once.
At the same time, Elon faces a barrage of other lawsuits and active investigations, including alleged labor violations from the National Labor Relations Board. More relevant, though, is that the company has had 38 securities lawsuits filed against it since 2010. For perspective, Ford has had four since 1994.
Following Tesla’s most recent investors’ call, I would honestly not be surprised to eventually see Musk indicted, as Holmes was last year. I say this because the company is officially shifting off it original promises in a way that simply cannot be undone.
You see, in Tesla’s most recent call, Musk made an entirely new proposition of Tesla’s value: The company’s autonomous driving software would skyrocket it to a $500 billion valuation and increase the value of Model 3 vehicles on the road today to up to $250,000 a piece.
Those claims aren’t just lofty; they also throw a wrench in what’s been the bull case for Tesla since the company’s inception: the notion that it will one day sell an affordable EV to the masses.
The economics here are simple enough… so simple, in fact, that it’s comical Musk didn’t seem to consider the following before making that brazen claim:
If the value of today’s Model 3s increases to $250,000 a unit, why would Tesla be selling those vehicles instead of hoarding the fleet? Why not exclusively lease the vehicles if you’re sitting on assets that you believe are going to appreciate by roughly 525%?
There are really only two explanations to this question. Either Elon is an utterly incompetent businessman, or he knows that this projection is flat-out false. The latter is infinitely more likely, but either way, it’s a dangerous situation for investors.
Barclays’ autos analyst Brian Johnson reflects a similar sentiment, pointing to the paradox Musk has created:
[The case] for a trillion-dollar market cap used to center around high-volume, high-profit auto sales… now it’s all in on autonomy. We believe the appeal of Tesla shares to growth investors may fade.
As much as I believe Musk deserves criminal indictment, my guess is he’ll make out with a softer fall than Elizabeth Holmes did. Money, power, and fandom will prevent the gavel from coming down too hard, but the day of reckoning is coming. It’s just a matter of when.
Until next time, Jason Stutman
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