Thursday, November 29, 2018

Observations from a Financial Regulation Academic on Carreyrou's Bad Blood

I’d like to thank the Business Law Prof Blog for the opportunity to be a guest blogger!  In this first post, I build on a subject of previous posts (here, here, and here): Theranos, a now defunct Silicon Valley health-care start-up.

I rely heavily on the Financial Times to follow developments in one of my main research areas: financial market clearing and settlement (I’ll plan to report next week on the upcoming December 4th meeting of the Market Risk Advisory Committee, sponsored by CFTC Commissioner Rostin Behnam).  The FT recently announced that Wall Street Journal investigative reporter John Carreyrou’s book, Bad Blood: Secrets and Lies in a Silicon Valley Startup, had been named the FT/McKinsey Business Book of the Year 2018.  Having immensely enjoyed reading past winners, I wasted no time in ensuring that Amazon Prime speedily delivered it to my doorstep. 

Bad Blood is a riveting tale of Theranos’ spectacular rise and fall, and well-worth the reader’s time.  A fun fact is that a pathologist blogger, Adam Clapper (founder of the former Pathology Blawg), tipped Carreyrou onto the Theranos story (Chapter 19).  Additionally, in the months after Bad Blood’s publication, its founder and CEO, Elizabeth A. Holmes, and former COO, Ramesh “Sunny” Balwani, were charged by the Justice Department with wire fraud.    

I know little about the health-care industry.  Yet in reading Bad Blood, I was struck by links to and concerns shared with the financial industry (an area about which I know more).  Below, I make a few observations and invite reader comments on their importance in these and other industries.

Post-financial crisis, rock-bottom interest rates acted as a “key ingredient” to a new Silicon Valley boom (p.82).  Similarly, these low rates have also been a key ingredient for the many years of increasing stock market prices post-financial crisis.  Indeed, recent equity market declines made at least a temporary rebound yesterday after comments by Federal Reserve Chairman Jerome Powell at the Economic Club of New York.     

The increasing expansion of private markets enables companies such as Theranos to “avoid the close scrutiny” (p.178) to which public companies are subject (nevertheless, Theranos and Holmes settled fraud charges with the SEC).  Given current regulatory structures, it also risks severely limiting retail investment opportunities.  And it adversely impacts financial journalists’ access to information!  

When I teach Banking and Financial Institutions Law, the term “regulation-induced innovation” tends to amuse students.  The Theranos tale demonstrates, however, that such practices aren’t a laughing matter.  For example, its business strategies appeared to include: maneuvering in regulatory “gray zones” between the FDA and Centers for Medicare and Medicaid Services (p.88), exploiting “gap[s] spawned by outdated statutes” (p.125), and “operat[in]g in a regulatory no-man’s-land” (p.260).  Such practices can be troublesome enough in financial markets.  However, in Theranos’ case, the stakes (patient health) were much higher.    

Finally, who doesn’t love a good story?  Carreyrou, a two-time Pulitzer Prize-winning journalist, is an expert storyteller.  His portrayal of Holmes suggests that she too profoundly understood the power of stories, and that she had a bewitching talent for telling them.  Clearly, untruthful, non-fictional narratives are generally unethical and, depending upon the context, might also be illegal.  However, taking a cue from Holmes on the importance of stories and honing one's ability to tell them could assist financial market policymakers.  Indeed, several years ago, the FT’s Gillian Tett wrote an opinion piece entitled, “Central bank chiefs need to master the art of storytelling.”  Enhanced storytelling capabilities could also assist academics researching financial market regulation.  For both, the ability to compellingly communicate with the public about issues in financial markets and their broad-based importance is critical.  Even so, constructing a fascinating narrative about clearing and settlement along the lines of Bad Blood would be no small feat!

Books, Current Affairs, Entrepreneurship, Financial Markets | Permalink


I enjoyed this post, Colleen. The story of Theranos is in so many ways a riveting one. I look forward to reading the book.

Your post reminds me that the Seventh Biennial Conference on Applied Legal Storytelling is coming up next year. I will try to remember to post on that. The deadline for priority submissions is in January, as I recall. Business law storytelling is a less frequent topic at this conference, but there is so much storytelling that is uniquely the province of (for example) corporate finance, as your post suggests.

Posted by: joanheminway | Nov 29, 2018 10:43:40 AM

I tend to view Citizens United and related cases as in large part driven by competing stories about what a corporation is, so I always appreciate hearing about concrete examples of the market moving power of narrative. Thanks!

Posted by: Stefan Padfield | Nov 29, 2018 12:09:38 PM

Thanks for this post Colleen. Bad Blood was a favorite book for me this year, and I agree that it was well-written and eye-opening. While an unbelievable number of well-known, respected, and bright people fell for Elizabeth Holmes’ pitch, I did find it telling that she didn’t appear to have major investors or board members who truly understood the science. Think it was Warren Buffett who was credited with warning against investing in companies you don’t understand.

Posted by: Haskell Murray | Nov 29, 2018 4:08:51 PM

Joan, thanks for your kind words! Am looking forward to learning more about the Applied Legal Storytelling Conference!

Stefan, thanks for your interesting comment! It's going to reinforce my determination to place additional focus on narrative in my work.

Haskell, thanks for your comments! Yes, I agree that who decided not to invest in Theranos was very telling. Apparently the quote is "Never invest in a business you cannot understand."

Posted by: Colleen Baker | Nov 29, 2018 6:51:06 PM

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