From Ken Lay to Elizabeth Holmes
When a CEO defendant takes the stand in a case involving fraud they should think twice before attempting to pass the buck. Elizabeth Holmes was not the first head of a major company to be convicted of fraud, nor will she be the last. On the witness stand, Ms. Holmes tried to deflect blame onto her former vice president, her former lab director, her former board of directors, and her former boyfriend (President and COO of Theranos) Ramesh Balwani. Jurors never like it when a defendant appears to be dodging responsibility for something, and are even more repelled when the person attempting to sidestep responsibility is the former head of a billion-dollar company.
The reality is a jury panel will strongly believe that if someone is a CEO of a major company it is their responsibility to know what is going on. Jurors find it difficult to reconcile remarkable business savvy and corporate success on the one hand with ignorance, detachment and unawareness on the other. It does not compute at any level but especially not a visceral one. Jurors did not think Elizabeth Holmes climbed the ultimate ladder of corporate success by delegating and letting others make big decisions. On the contrary, she controlled everything. If something happened at the company, it was either at her directive or right before her eyes. After her trial, one of the jurors said Ms. Holmes’ claim that she was abused by Mr. Balwani amounted to a sympathy ploy, and had nothing to do with what she was being charged with. Another juror said, “Everything went through her, she had final approval.”
Roughly 15 years ago, former Enron executives Ken Lay and Jeffrey Skilling were convicted of securities and wire fraud, both testifying on their own behalf. Just prior to the verdicts against Ken Lay and Jeffrey Skilling, my firm conducted a survey of 400 jury-qualified people, inquiring about SEC-related issues. For most securities-related cases, we found that the percent of respondents who thought executive level defendants might be innocent hovered consistently around 3%. The specific results for Ken Lay and Jeffrey Skilling were even worse, as only 2% thought they might be innocent, and 67% were sure they were guilty. The Enron jury felt there was no way Ken Lay and Jeffrey Skilling did not know about the fraud that led to the downfall of Enron. Jurors concluded the defendants were arrogant, defiant, and would not have been in their positions if they did not know about what was taking place on their watch at their company.
Ex-WorldCom CEO Bernie Ebbers’ defense was that he delegated large parts of his job and was not ashamed of his ignorance. The jury disagreed and felt Mr. Ebbers had to have known about the conspiracy to cook the books. The jury foreman said Mr. Ebbers lacked credibility and was defensive and evasive. Four major CEOs interviewed by USA Today all said the chances a company could commit a major fraud without the boss knowing is almost zero. Playing dumb simply does not work because it’s not believable.
High profile defendants in fraud cases have to deal with seemingly unending media coverage which has turned the accused into corporate villains and in many cases eroded any trace of innocent until proven guilty. One silver lining for such defendants is that jurors often initially root for the innovativeness and entrepreneurship that occurred prior to the alleged wrongdoing. As one juror in the Elizabeth Holmes case said, “It’s tough to convict somebody, especially somebody with such a positive dream. We respected Elizabeth’s belief in her technology, in her dream.” This reminded me of a juror quote from Ken Lay’s trial who admired much of the work Lay and Skilling did in building Enron. This juror, said, “I wanted to believe very, very badly what they were saying.” Fifteen years from now, I could likely update this blog with Elizabeth Holmes playing the role of Ken Lay and Jeffrey Skilling.