Equal Justice Under Law?

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Pediment, US Supreme Court Building

Any child of five has a well-developed sense of “fairness.” If you give his sister two cookies and him only one, you will hear loud complaints until the situation is rectified.

So it is with democracies.  The expectation that citizens will be treated equally is right up there with “life, liberty and the pursuit of happiness” for Americans.

If only it were so.  In the last two weeks, the press has reported on the resolution of three cases of financial mismanagement.  It is hard to square the results with the concept of equal justice.

Elizabeth Holmes
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Holmes, 34, founded Theranos, a Silicon Valley company devoted to a great idea — that a single drop of blood gathered by the prick of a pin could be used to perform 90 percent of the blood tests done by traditional medical laboratories.

In 2013, she claimed she had the machines to do it.

For a while, Theranos was a big, big deal.  Investors poured $700 million into its stock.  Its board included former US secretaries of state, former senators and corporate and legal luminaries.  Thereanos’ valuation climbed to $9 billion.

Then it all went south.  A 2013 contract with Walgreens ended with the drugstore company suing Theranos.  The company’s 2014 revenues of $100,000 came in 1,000 percent shy of its $100 million forecast.

The whole thing was a fraud.  The company did not have the technology.  The tests it processed were done on other firms’ machines.  Holmes and the company president leveraged good press, fudged documentation and many lies — and perhaps the appealing story about a woman-led tech unicorn — to keep things going as long as they could.

But it was not to be.  By mid 2016, Theranos was described as a “zombie company.”  It is limping along at the moment, but basically Theranos is over.  If you invested, you were sold a bill of goods.

What distinguishes Theranos from the many other failed Silicon Valley startups is the level of outright lying and fraud that were employed to raise money and suspend disbelief as it failed to deliver on its early promise.

Holmes has left the company, of course.  The Securities and Exchange Commission has fined her $500,000 and told her that she may not be an officer of any public company for 10 years.

The director of the SEC’s San Francisco Regional Office said this to a Bloomberg reporter.

 “Innovators who seek to revolutionize and disrupt an industry
must tell investors the truth about what their technology can do today,
not just what they hope it might do someday.”
All true, but so far there has been no move by the Justice Department to press criminal charges.  Maybe there is no appetite to prosecute a fallen tech icon who happens to be a woman and who has powerful friends. Or maybe it’s a San Francisco thing.

 

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Across the country in New York City, prosecuting outrages is a spectator sport.  Two prominent politicians — Rudy Giuliani and Eliot Spitzer — launched their careers by prosecuting financial executives.  In addition, the city must have more news bureaus than anywhere else in the world, which tends to amplify the volume.
Two much-publicized prosecutions were wound up in the city in the last 10 days.
—–


Martin Shkreli

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This is an arrogant guy with a famous smirk on his face.  He started two hedge funds that did not do well and, to pay back investors, he opened a pharmaceutical company, Turing, that acquired the rights to manufacture a little-used pharmaceutical drug called Daraprim.  Overnight, he raised the price of the drug from $13.50 a pill to $750.

Shkreli, now 34, was condemned nationally for this, but what he did was legal.  And, strategically, it was smart.  Daraprim, a generic drug, is prescribed so seldom that it made no financial sense for another manufacturer to go through the not-trivial FDA approval process to gain the right to manufacture its own Daraprim and perhaps compete on price.

(Valeant Pharmaceuticals used the same business plan on a much greater scale — acquiring drug companies and manufacturing rights and then marking up prices to extremes, typically for much more broadly used drugs.  Another company, Mylan, used its exclusive auto-injector rights to bid up the price of EpiPens by 500 percent; no one knows how many people rely on EpiPens, but the number of Medicare patients is more than 200,000, which suggests the affected patient population is very large indeed. These companies’ price increases cost the healthcare system much, much more than Shkreli’s did.)

Shkreli ultimately did right by his investors, all of whom made money.

But then there was that obnoxious smirk.  So federal prosecutors went after the guy for shifting money around among his funds.  There was an expensive trial on eight charges; the jury acquitted on five and found Shkreli guilty of three.

He has been sentenced to seven years in prison; in federal prisons, paroles are not awarded until 80 percent of a sentence has been served.  He also was assessed more than $8 million in fines.

Maybe that’ll wipe the smirk off his face.  Maybe that was the point.

Billy McFarland

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McFarland is a good salesman who likes celebrities.

He and a rap star partner decided to throw a fancy multi-day music event, called the Fyre Festival, on an empty island in the Bahamas.  The idea was that the whole thing would be super-deluxe and attract a more upscale crowd than, say, Coachella.

If you ever have thrown a large dinner party, you would shrink from organizing such an elaborate event.  The logistics of food, water, lodging, power supply, sound systems, star bookings and whatnot would challenge even the most experienced event planner.

McFarland, 26, probably never had thrown a large dinner party.  His family is prosperous but not wealthy, and his parents no doubt saw to such matters when he was growing up.

In addition, his previous project, Magnises, had not gone so well.  It was an elite black metal credit card, priced at $450 and pitched to upscale millennials.  By last year, the price had been reduced to $250, the metal had been switched out for plastic and the promised access to exclusive events had not materialized as advertised, prompting complaints from cardmembers.

Given all that, it’s surprising that New York investors, thought to be a savvy bunch, ponied up money for this newbie’s first rock festival — that they didn’t examine his financial documents or his business plan with greater skepticism.  But they did not.  Caveat emptor and all that.

Fyre was a flop, and a very prominent one because many celebrities were burned.  It was covered by virtually every publication and internet site in the country and no doubt by international news media as well.

McFarland was jailed, bailed and charged.  In a plea deal, he admitted to two counts of wire fraud.  In exchange for this, the federal prosecutor cut the prison recommendation from a potential 40 years to between 8 and 10 years.  (I have read that a typical fraud sentence is closer to two years, except for Bernie Madoff.)

Plus McFarland must pay his creditors $26 million.

Conclusion

Let’s be honest.  None of these three deserves a citizenship award, but a true justice system should deal with them in a manner proportionate to their offenses. 

Here’s a quick comparison of the results of the three cases.  If you can justify the relative “fairness” meted out in these situations, please drop me a line.

 

Elizabeth Holmes Martin Shkreli Billy McFarland
Charges No admission of wrongdoing Five acquittals, three convictions Guilty pleas, two wire frauds
Loss to Investors $700 million No loss $26 million
Fines $500,000 $8.36 million $26 million
Prison sentence No sentence 7 years 8-10 years

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