An Entire Industry Was Duped By a Well-Spoken, Well-Dressed Silicon-Valley Tycoon; Here’s Why It’ll Happen Again

Elizabeth Holmes tricked investors out of millions by dressing in ‘Steve Jobs’ black and pitching health care technology that didn’t work. The risk management lessons from the Theranos fiasco are both scary and insightful.
By: | December 5, 2018 • 7 min read

We wanted to believe. A Stanford dropout created a world-changing product — a portable blood analyzer that ran nearly 200 vital tests using just a few drops from a finger prick.


We would soon test blood at home or at the local pharmacy. Results would come in minutes not weeks. People could monitor their own health and get warning signs for deadly diseases far earlier. No longer would we say goodbye to loved ones too soon. All thanks to Theranos.

The press and public ate it up. Theranos founder Elizabeth Holmes graced the cover of magazine after magazine dressed in “Steve Jobs black” — her blue eyes piercing through the page. She conquered the notoriously male-dominated Silicon Valley, and Theranos climbed to a whopping $9 billion valuation and had $900 million in investment capital.

We wanted to believe. But we were duped.

In the end, Theranos failed miserably after years of fraud, deception and outright lies. The technology could only perform a handful of tests, executives ignored erratic results and buggy technology, and finger pricks didn’t produce nearly enough blood for accurate testing, according to Bad Blood: Secrets and Lies in a Silicon Valley Startup by John Carreyrou.

Kevin LaCroix, executive vice president, RT Specialty

Inside Theranos, employees who raised concerns were marginalized or fired, while blind loyalty was rewarded. Its blue-blood board of directors treated Holmes like Silicon Valley royalty — and failed to look under the hood. It’s one thing to fudge the technological capabilities of a consumer product. It’s quite another to offer medical test results you know to be inaccurate.

The company even falsely claimed that the Department of Defense was using Theranos equipment in Afghanistan.

By 2018, Holmes and Theranos President Ramesh “Sunny” Balwani were indicted for running an elaborate, years-long fraud. Meanwhile, lawsuits piled up from all angles and regulators found major inaccuracies in the patient testing. Holmes and Balwani both eventually stepped down from the company. Once the world’s youngest female billionaire, Holmes could soon face criminal charges.

Much has been written about Theranos, but the risk management and business insurance implications haven’t been explored much. The lessons are clear: Always be skeptical, do your due diligence and be prepared — because this will happen again.

An Underwriting Nightmare

Theranos represents a nightmare scenario for underwriters. From the outside, the company looked rock solid. Its board of directors included former Secretaries of State George Schultz and Henry Kissinger. Holmes was touted as a genius and even spoke on a panel with President Bill Clinton.

Meanwhile, the company ran all but a small fraction of its tests on conventional machines, fudged results and had nowhere near the capability it claimed. Despite the outward appearance, an underwriter’s job is to be cynical and ask tough questions.

“There was a lot of packaging around the story and people thought they recognized the pattern of Facebook or Apple because of the narrative Holmes built,” said Kevin LaCroix, executive vice president of RT Specialty.

“I think there’s a lesson for everybody — D&O underwriters, investors and buyers of the product. You have to be skeptical, especially when there’s a lot of hype.”

A curious underwriter could have found that not a single venture capital firm with expertise in health care invested in Theranos, and that no board member had even basic knowledge of blood science.

Theranos was also stingy with stats showing that its technology actually worked — which should have made underwriters suspicious, said Kevin Dean, chief underwriting officer, liability products for IronHealth at Ironshore Insurance.

“We would never take the word of a startup if they couldn’t provide us with external testing data,” said Dean. “It’s not a low-impact device. Medical decisions will be based on the test results, so it’s crucial to know it works as advertised.”


A major red flag was that Holmes controlled all board voting.

“That’s D&O 101. That’s a problem,” said Peter R. Taffae, managing director of Executive Perils. “I’m not telling you that you can’t underwrite it or every single company that has a CEO who owns that much stock gets declined, but there were no checks and balances.”

Still, can you really put all the blame on underwriters? Try explaining to your boss that you turned down the next Apple.

“I can understand how saying ‘no’ to such a big account can be tough to explain up the chain of command,” said Dean, “but there really needs to be recognition that a premium is so large because there’s a real risk associated with it.”

Taffae isn’t as forgiving.

“Greed is the common denominator in all of this,” said Taffae. “I’m talking about the insurance underwriters, investment community, investment bankers, etc. When underwriters see a six-digit premium, they sometimes have greed, too. They want to believe in the account because if they bind it, it’ll be a big victory.”

There are medical malpractice implications as well. Such a policy would guard against false positives that could lead a patient to have an unnecessary medical procedure.

It would also guard against a false negative, which could lead a patient to let a serious condition go undiagnosed. Product liability coverage also comes into play — guarding against errors or malfunctions in the device design.

Kevin Dean, chief underwriting officer, liability products, IronHealth, Ironshore Insurance

But what happens when company leaders know that test results are inaccurate and the equipment was sure to malfunction? Would the insurers even be on the hook for any damages?

“There seems to be a level of intentional wrongdoing here,” said Dean. “Their lab techs allegedly knew they were giving out bad results, so there’s a big question about whether the coverage would be responsive in this situation.”

Regulators Duped

How could regulators have missed such blatant fraud for so long? When you’re the darling of Silicon Valley, things tend to work out in your favor. Bad Blood explains that Theranos changed its regulatory strategy from “waived” under the Clinical Laboratory Improvement Amendments to “laboratory-developed tests.” By using proprietary devices only within the walls of its own lab, Theranos could operate outside the purview of the FDA. Still, Lieutenant Colonel David Shoemaker, a regulation expert, raised concerns to the FDA in 2012.

Then came a surprise inspection by the Center for Medicaid and Medicare Services (CMS), followed by a vow that the technology was still under development and a strongly worded email from Holmes to General James Mattis — a board member who later became U.S. Secretary of Defense.

In the end, Shoemaker reluctantly agreed to stand down. Regulators backed off. Little did regulators know that inspectors hadn’t been allowed to see half of the lab.

Later, Theranos duped none other than Vice President Joe Biden. They led him through an entirely fake lab built just for his visit. He called it “the laboratory of the future” and even praised Holmes for proactively cooperating with the FDA.

“From the published reports, it seems like they figured out a way to pull the wool over the regulators’ eyes. It’s unnerving because underwriters rely on the integrity of the regulatory process when making decisions about risk acceptability,” said Mark Wood, president and CEO of LifeScienceRisk.

“We don’t have access to the information nor the technical background to second guess a regulator. That’s a pretty tall order to expect out of an underwriter.”

Regulators finally began catching on in 2015, around the time Carreyrou started breaking the story in the Wall Street Journal. The FDA forced the company to stop testing blood drawn from patients’ fingers and declared its nanotainer an “unapproved medical device.”


In January 2016, CMS said Theranos posed “immediate jeopardy to patient health and safety,” and that only 12 of the 250 tests on the menu were actually performed by Theranos’ Edison device, according to Bad Blood. CMS even cited Theranos data showing that tests produced wildly erratic results.

Soon after, CMS banned Holmes from the blood-testing business for two years. Investors sued. Walgreens sued. Patients sued. Indictments followed. The walls finally closed in but not before plenty of damage had been done and plenty of money was lost.

Be Ready: This Will Happen Again

The story of Theranos represents a story of greed and blind hope and should be a cautionary tale for risk managers and insurers. Underneath the shiny exterior lurked a massive fraud, and far too many went along for the ride.

Sadly, experts agree that fraud on such a massive, dangerous scale is bound to happen again. “History shows that this happens over and over again. Tell me how this is different from Bernie Madoff, Enron and other scandals?” said Taffae.

“There was a lot of packaging around the story and people thought they recognized the pattern of Facebook or Apple because of the narrative Holmes built. I think there’s a lesson for everybody — D&O underwriters, investors and buyers of the product. You have to be skeptical, especially when there’s a lot of hype.” — Kevin LaCroix, executive vice president, RT Specialty

“This has happened many times in the past and will happen many times in the future. The names will change but the specifics will not.”

Dean said that it’s not the first time, and it’s certainly not the last time.

“People have incredibly short memories,” he said. “They start forgetting, everything looks good again and people fall into the same patterns. I don’t doubt that this can happen again.” &

Jared Shelly is a journalist based in Philadelphia. He can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Exclusive | Hank Greenberg on China Trade, Starr’s Rapid Growth and 100th, Spitzer, Schneiderman and More

In a robust and frank conversation, the insurance legend provides unique insights into global trade, his past battles and what the future holds for the industry and his company.
By: | October 12, 2018 • 12 min read

In 1960, Maurice “Hank” Greenberg was hired as a vice president of C.V. Starr & Co. At age 35, he had already accomplished a great deal.

He served his country as part of the Allied Forces that stormed the beaches at Normandy and liberated the Nazi death camps. He fought again during the Korean War, earning a Bronze Star. He held a law degree from New York Law School.


Now he was ready to make his mark on the business world.

Even C.V. Starr himself — who hired Mr. Greenberg and later hand-picked him as the successor to the company he founded in Shanghai in 1919 — could not have imagined what a mark it would be.

Mr. Greenberg began to build AIG as a Starr subsidiary, then in 1969, he took it public. The company would, at its peak, achieve a market cap of some $180 billion and cement its place as the largest insurance and financial services company in history.

This month, Mr. Greenberg travels to China to celebrate the 100th anniversary of C.V. Starr & Co. That visit occurs at a prickly time in U.S.-Sino relations, as the Trump administration levies tariffs on hundreds of billions of dollars in Chinese goods and China retaliates.

In September, Risk & Insurance® sat down with Mr. Greenberg in his Park Avenue office to hear his thoughts on the centennial of C.V. Starr, the dynamics of U.S. trade relationships with China and the future of the U.S. insurance industry as it faces the challenges of technology development and talent recruitment and retention, among many others. What follows is an edited transcript of that discussion.

R&I: One hundred years is quite an impressive milestone for any company. Celebrating the anniversary in China signifies the importance and longevity of that relationship. Can you tell us more about C.V. Starr’s history with China?

Hank Greenberg: We have a long history in China. I first went there in 1975. There was little there, but I had business throughout Asia, and I stopped there all the time. I’d stop there a couple of times a year and build relationships.

When I first started visiting China, there was only one state-owned insurance company there, PICC (the People’s Insurance Company of China); it was tiny at the time. We helped them to grow.

I also received the first foreign life insurance license in China, for AIA (The American International Assurance Co.). To date, there has been no other foreign life insurance company in China. It took me 20 years of hard work to get that license.

We also introduced an agency system in China. They had none. Their life company employees would get a salary whether they sold something or not. With the agency system of course you get paid a commission if you sell something. Once that agency system was installed, it went on to create more than a million jobs.

R&I: So Starr’s success has meant success for the Chinese insurance industry as well.

Hank Greenberg: That’s partly why we’re going to be celebrating that anniversary there next month. That celebration will occur alongside that of IBLAC (International Business Leaders’ Advisory Council), an international business advisory group that was put together when Zhu Rongji was the mayor of Shanghai [Zhu is since retired from public life]. He asked me to start that to attract foreign companies to invest in Shanghai.

“It turns out that it is harder [for China] to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

Shanghai and China in general were just coming out of the doldrums then; there was a lack of foreign investment. Zhu asked me to chair IBLAC and to help get it started, which I did. I served as chairman of that group for a couple of terms. I am still a part of that board, and it will be celebrating its 30th anniversary along with our 100th anniversary.


We have a good relationship with China, and we’re candid as you can tell from the op-ed I published in the Wall Street Journal. I’m told that my op-ed was received quite well in China, by both Chinese companies and foreign companies doing business there.

On August 29, Mr. Greenberg published an opinion piece in the WSJ reminding Chinese leaders of the productive history of U.S.-Sino relations and suggesting that Chinese leaders take pragmatic steps to ease trade tensions with the U.S.

R&I: What’s your outlook on current trade relations between the U.S. and China?

Hank Greenberg: As to the current environment, when you are in negotiations, every leader negotiates differently.

President Trump is negotiating based on his well-known approach. What’s different now is that President Xi (Jinping, General Secretary of the Communist Party of China) made himself the emperor. All the past presidents in China before the revolution had two terms. He’s there for life, which makes things much more difficult.

R&I: Sure does. You’ve got a one- or two-term president talking to somebody who can wait it out. It’s definitely unique.

Hank Greenberg: So, clearly a lot of change is going on in China. Some of it is good. But as I said in the op-ed, China needs to be treated like the second largest economy in the world, which it is. And it will be the number one economy in the world in not too many years. That means that you can’t use the same terms of trade that you did 25 or 30 years ago.

They want to have access to our market and other markets. Fine, but you have to have reciprocity, and they have not been very good at that.

R&I: What stands in the way of that happening?

Hank Greenberg: I think there are several substantial challenges. One, their structure makes it very difficult. They have a senior official, a regulator, who runs a division within the government for insurance. He keeps that job as long as he does what leadership wants him to do. He may not be sure what they want him to do.

For example, the president made a speech many months ago saying they are going to open up banking, insurance and a couple of additional sectors to foreign investment; nothing happened.

The reason was that the head of that division got changed. A new administrator came in who was not sure what the president wanted so he did nothing. Time went on and the international community said, “Wait a minute, you promised that you were going to do that and you didn’t do that.”

So the structure is such that it is very difficult. China can’t react as fast as it should. That will change, but it is going to take time.

R&I: That’s interesting, because during the financial crisis in 2008 there was talk that China, given their more centralized authority, could react more quickly, not less quickly.

Hank Greenberg: It turns out that it is harder to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.

R&I: Obviously, you have a very unique perspective and experience in China. For American companies coming to China, what are some of the current challenges?


Hank Greenberg: Well, they very much want to do business in China. That’s due to the sheer size of the country, at 1.4 billion people. It’s a very big market and not just for insurance companies. It’s a whole range of companies that would like to have access to China as easily as Chinese companies have access to the United States. As I said previously, that has to be resolved.

It’s not going to be easy, because China has a history of not being treated well by other countries. The U.S. has been pretty good in that way. We haven’t taken advantage of China.

R&I: Your op-ed was very enlightening on that topic.

Hank Greenberg: President Xi wants to rebuild the “middle kingdom,” to what China was, a great country. Part of that was his takeover of the South China Sea rock islands during the Obama Administration; we did nothing. It’s a little late now to try and do something. They promised they would never militarize those islands. Then they did. That’s a real problem in Southern Asia. The other countries in that region are not happy about that.

R&I: One thing that has differentiated your company is that it is not a public company, and it is not a mutual company. We think you’re the only large insurance company with that structure at that scale. What advantages does that give you?

Hank Greenberg: Two things. First of all, we’re more than an insurance company. We have the traditional investment unit with the insurance company. Then we have a separate investment unit that we started, which is very successful. So we have a source of income that is diverse. We don’t have to underwrite business that is going to lose a lot of money. Not knowingly anyway.

R&I: And that’s because you are a private company?

Hank Greenberg: Yes. We attract a different type of person in a private company.

R&I: Do you think that enables you to react more quickly?

Hank Greenberg: Absolutely. When we left AIG there were three of us. Myself, Howie Smith and Ed Matthews. Howie used to run the internal financials and Ed Matthews was the investment guy coming out of Morgan Stanley when I was putting AIG together. We started with three people and now we have 3,500 and growing.

“I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

R&I:  You being forced to leave AIG in 2005 really was an injustice, by the way. AIG wouldn’t have been in the position it was in 2008 if you had still been there.


Hank Greenberg: Absolutely not. We had all the right things in place. We met with the financial services division once a day every day to make sure they stuck to what they were supposed to do. Even Hank Paulson, the Secretary of Treasury, sat on the stand during my trial and said that if I’d been at the company, it would not have imploded the way it did.

R&I: And that fateful decision the AIG board made really affected the course of the country.

Hank Greenberg: So many people lost all of their net worth. The new management was taking on billions of dollars’ worth of risk with no collateral. They had decimated the internal risk management controls. And the government takeover of the company when the financial crisis blew up was grossly unfair.

From the time it went public, AIG’s value had increased from $300 million to $180 billion. Thanks to Eliot Spitzer, it’s now worth a fraction of that. His was a gross misuse of the Martin Act. It gives the Attorney General the power to investigate without probable cause and bring fraud charges without having to prove intent. Only in New York does the law grant the AG that much power.

R&I: It’s especially frustrating when you consider the quality of his own character, and the scandal he was involved in.

In early 2008, Spitzer was caught on a federal wiretap arranging a meeting with a prostitute at a Washington Hotel and resigned shortly thereafter.

Hank Greenberg: Yes. And it’s been successive. Look at Eric Schneiderman. He resigned earlier this year when it came out that he had abused several women. And this was after he came out so strongly against other men accused of the same thing. To me it demonstrates hypocrisy and abuse of power.

Schneiderman followed in Spitzer’s footsteps in leveraging the Martin Act against numerous corporations to generate multi-billion dollar settlements.

R&I: Starr, however, continues to thrive. You said you’re at 3,500 people and still growing. As you continue to expand, how do you deal with the challenge of attracting talent?

Hank Greenberg: We did something last week.

On September 16th, St. John’s University announced the largest gift in its 148-year history. The Starr Foundation donated $15 million to the school, establishing the Maurice R. Greenberg Leadership Initiative at St. John’s School of Risk Management, Insurance and Actuarial Science.

Hank Greenberg: We have recruited from St. John’s for many, many years. These are young people who want to be in the insurance industry. They don’t get into it by accident. They study to become proficient in this and we have recruited some very qualified individuals from that school. But we also recruit from many other universities. On the investment side, outside of the insurance industry, we also recruit from Wall Street.

R&I: We’re very interested in how you and other leaders in this industry view technology and how they’re going to use it.

Hank Greenberg: I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.

R&I: So as the pre-eminent leader of the insurance industry, what do you see in terms of where insurance is now and where it’s going?

Hank Greenberg: The country and the world will always need insurance. That doesn’t mean that what we have today is what we’re going to have 25 years from now.

How quickly the change comes and how far it will go will depend on individual companies and individual countries. Some will be more brave than others. But change will take place, there is no doubt about it.


More will go on in space, there is no question about that. We’re involved in it right now as an insurance company, and it will get broader.

One of the things you have to worry about is it’s now a nuclear world. It’s a more dangerous world. And again, we have to find some way to deal with that.

So, change is inevitable. You need people who can deal with change.

R&I:  Is there anything else, Mr. Greenberg, you want to comment on?

Hank Greenberg: I think I’ve covered it. &

The R&I Editorial Team can be reached at [email protected]