What lessons should retailers take from the Theranos fraud debacle?

Discussion
Photo: Getty Images/JasonDoiy
Oct 14, 2021

Testimony in the criminal trial of Theranos founder Elizabeth Holmes paints a picture of major retailers willing to take a vendor’s word without engaging in the type of due diligence required to vet those claims.

Ms. Holmes has been charged with nine counts of wire fraud and two counts of conspiracy to commit wire fraud as part of a case brought by the Justice Department. The government alleges that Ms. Holmes and Ramesh “Sunny” Balwani, the former president and COO of Theranos, engaged in a multi-million dollar scheme to defraud investors, doctors and patients with the promise of new laboratory testing processes for drawing and testing blood and interpreting patient data.

The startup in 2010 was trying to bring major retailers on board with its promise of a revolutionary step forward in testing.

Executives at Safeway and Walgreens were excited by Theranos’ claims after outside experts  gave the thumbs up, even though they did not have access to the equipment used in the testing. The chains also failed to independently test Theranos’ devices. If they had, they would have found that what sounded good in theory did not work.

In the end, Walgreens engaged in a pilot program with Theranos before filing a 2016 lawsuit against the company. Safeway never made it to the pilot stage after encountering issues that indicated the tech was not as advertised.

Wade Miquelon, chief financial officer at Walgreens from 2008 to 2014, traveled in 2010 for a meeting with Ms. Holmes and Mr. Balwani where he was told that Theranos could run about 95 percent of conventional lab tests on its own devices with results coming back in around 15 to 20 minutes.

The Wall Street Journal reports that Mr. Miquelon said in his testimony that the drugstore giant was drawn to the claims made by Theranos because it meant that small testing devices could be placed inside of pharmacies or clinics to quickly provide results to patients rather than having to be sent out to labs.

Ms. Holmes told Walgreens that three pharmaceutical companies had done their due diligence on the Theranos devices and confirmed their claims.

“This was one of the most exciting companies that we had seen, maybe not just in lab but in general,” Mr. Miquelon said.

DISCUSSION QUESTIONS: Did the retailer vetting process work in the Theranos case? What responsibilities do you think retailers need to take for the products they sell and the services they offer?

Please practice The RetailWire Golden Rule when submitting your comments.
Braintrust
"Both Theranos and WeWork are huge cautionary tales about the importance of due diligence and the power of seduction that a 'too good to be true' story can have."
"I think retailers know the message: don’t oversell to Wall Street, go low."
"Proper vetting or not, the underlying problem is lying by Theranos. Majority of white collar crimes are not done in malice to others, but in ones own delusions of grandeur."

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11 Comments on "What lessons should retailers take from the Theranos fraud debacle?"


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Mark Ryski
BrainTrust

Ultimately, Theranos misled these retailers (and investors), and so they have liability for their actions. However these retailers simply did not do their due diligence and, ultimately, it’s their responsibility to ensure that the products they offer their customers are safe and deliver as promised. It’s not hard to see how these retailers got caught up in the Theranos narrative – it was wildly compelling – but you must check your work, and they didn’t.

Neil Saunders
BrainTrust

Clearly the retailer vetting process did not work, hence the massive scandal that eventually ensued! There are some lessons that come out of this. The first is to not be awed by technology without first understanding how and if it works: there are so many technology solutions being sold to retailers – some of them are absolutely excellent, some of them are not. The second is to cut through the fluff and bluster of the financial community: so many companies are overhyped and overvalued, but those values are supported by little more than warm words. All that said, we must not forget this was an (alleged) act of fraud: retailers were the victims here as they were deceived and duped like so many others. They should have done better due diligence, sure, but those who orchestrated this are the real culprits.

Jeff Sward
BrainTrust

Both Theranos and WeWork are huge cautionary tales about the importance of due diligence and the power of seduction that a “too good to be true” story can have. In reading the post mortems of both scenarios it’s tough not to mutter, “how was any of this even possible — for as long as it unfolded?” Smart customers and investors were outmaneuvered by smarter con artists. Tech and digital solutions are going to give us some amazing leaps in productivity and efficiency, but a little skepticism along the way can serve us well.

Jeff Weidauer
BrainTrust

While retailers ultimately are responsible for what they offer to customers, the level of fraud wasn’t something anyone was looking for or expecting – typical due diligence practices didn’t catch it. It’s a hard lesson, but I suspect it’s a lesson that will be well-learned.

David Spear
BrainTrust

Clearly retailers should have conducted deeper due diligence but, even today, we see many companies hungry for that next shiny penny. New technology can be highly alluring to executives who want to make a mark, but there is no substitute for a rigorous vetting process. Did Theranos commit crimes? Absolutely — and they should be held accountable — but retailers also have a responsibility to their consumers.

Georganne Bender
BrainTrust

I have to admit that I am slightly obsessed with the Theranos story, it’s so over the top unbelievable it’s amazing to me that it actually happened.

While Elizabeth Holmes assured Walgreens that three pharmaceutical companies had done their due diligence on the Theranos devices, Walgreens did not do its due diligence on Theranos. The retailer hired a knowledgeable consultant who frequently told Walgreens’ powers that be that there were problems with the machines but they did not listen to him.

If something looks too good to be true it usually is, yet people – smart people – threw money at Elizabeth Holmes without ever checking to see if she was for real. Theranos was secretive and never provided real data. Walgreens customers weren’t having blood drawn via finger prick as Theranos promised, some had vials of blood drawn the old fashioned way. How could Walgreens miss that? I’d say the vetting process in both retailers failed miserably. My heart goes out to the people who received wrong diagnoses because of Theranos’s incompetence and faulty equipment.

Lee Peterson
BrainTrust

I think retailers know the message: don’t oversell to Wall Street, go low. The message for investors is: if it sounds too good, it is.

Patricia Vekich Waldron
Staff

“Let the buyer beware” has never gone out of style.

Craig Sundstrom
Guest

What vetting process? The fact that a Chief Financial Officer seems to have been the lead contact for considering the adoption of (what purported to be) medical technology tells us all too well the thinking that went on here … or really the lack of it.

The lesson is obvious: if retailers want to play doctor, they will have the same responsibilities. Period.

Mark Ryski
BrainTrust

Good points Craig. The higher up the executive ranks a decision goes, the faster you can get to a “yes.” Paradoxically, if the CEO/C-level have a strong strategic rationale, then they can (and do) cut corners — perhaps thinking that their brilliance/vision/judgement are good enough. After all, if you made $17M annually, (which incidentally is what Walgreens’ CEO 2020 pay package actually was), you might also think your judgement was good enough.

Rachelle King
BrainTrust

Clearly, partner vetting failed in this case. Especially unusual for a drugstore. A top source of revenue in the medical field is labs. Every time labs are outsourced, money goes to a third party. You can see why Walgreens and other retailers with health services found this appealing.

Proper vetting or not, the underlying problem is the lying by Theranos. Majority of white collar crimes are not done in malice to others, but in ones own delusions of grandeur. The belief that you can get away with it has fueled many breech of ethics and has warmed many prison cells. Theranos executives will not get away with it. The fact that people rarely do is still, however, not a deterrent for the next ethics breech-in-waiting.

wpDiscuz
Braintrust
"Both Theranos and WeWork are huge cautionary tales about the importance of due diligence and the power of seduction that a 'too good to be true' story can have."
"I think retailers know the message: don’t oversell to Wall Street, go low."
"Proper vetting or not, the underlying problem is lying by Theranos. Majority of white collar crimes are not done in malice to others, but in ones own delusions of grandeur."

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