Our collective ears at Shared Assessments perk up when “third party” is mentioned as evidence in a court room. A high-profile jury trial is unfolding in San Jose, California, and testimony has pointed to the use of third parties in concealing the fraud.
Theranos, a failed Silicon Valley blood-testing start-up founded in 2003, attempted to develop rapid blood tests that could, as described by the New York Times, “perform thousands of tests faster, cheaper and more accurately than traditional lab tests, using only a finger stick of blood.”
Theranos’s founder Elizabeth Holmes (who at the time of launching Theranos was a 19-year-old Stanford dropout at one point crowned “the world’s youngest billionaire”) has been accused of lying about the efficacy of Theranos’ blood testing technology.
In 2015, the Wall Street Journal reported that Theranos’s technology did not work, and that the company was performing “only a few blood tests on its own machines while doing the rest with traditional blood analyzers.” These “traditional blood analyzers” were third parties that Theranos relied on to deliver test results due to shortcomings in their own technology. Shortly after the Journal’s exposé, Theranos crumbled amid lawsuits and the criminal investigation.
Disgraced founder Elizabeth Holmes has pleaded not guilty to conspiracy and fraud. James Mattis, retired four-star general and secretary of defense under President Trump, took the stand yesterday as a former member of Theranos’s board.
Mattis testified he was blindsided to learn third parties were used in the majority of Theranos’s testing processes. Mattis claimed knowledge of Theranos’s use of third party technology “would have tempered my enthusiasm.” After learning about third party involvement in Theranos’ product, the Theranos board “scrambled to gauge the report’s accuracy.”
Reflecting on the trial, Shared Assessments’ Vice President Ron Bradley speculates “if a TPRM program were in place, perhaps it could have lessened the impact of the fraudulent activities. Then again, that could be pure speculation considering a fraudster has the potential to lie about virtually anything to achieve their goal, including the presence of a TPRM program.”
In response to Bradley, Shared Assessments Senior Adviser Bob Jones cautions that “virtually all our work speaks to the outsourcer’s need to conduct due diligence on prospective providers. Here, though, the outsourcer was the bad actor. In order to avoid its massive fraud it had to hide the existence of those third parties since acknowledging them would have been an admission that its technology just didn’t work. And that revelation would have closed the private equity spigot.”
Thinking about the board that included former secretaries of state Henry Kissinger and George Shultz in addition to James Mattis, Bob Jones considers that “the [Theranos] board recruited directors for their names, not their technological prowess, thus making them passive, unknowing participants in a corrupt organization.”
Shared Assessments’ mantra “trust, but verify” is applicable to this instance of fraud. Had Theranos’s board applied a “TPRM lens” they might have understood sooner that technology was being outsourced, that the delivery of test results depended on a shady supply chain.