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To some, Theranos lawsuit shows scary side of buying stock in private companies

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    AP Photo/Jeff Chiu/File
    FILE – In this Nov. 2, 2016, file photo, Elizabeth Holmes, founder and CEO of Theranos, speaks at the Fortune Global Forum in San Francisco. Theranos was hit with a rare pre-IPO securities class action lawsuit Monday. (AP Photo/Jeff Chiu, File)
    By MARISA KENDALL|mkendall@bayareanewsgroup.com
    PUBLISHED:December 8, 2016 at 12:00 am| UPDATED:December 8, 2016 at 10:30 am
    PALO ALTO — Removed from the volatile world of the public stock markets, private startups are usually safe from the investor lawsuits that plague Silicon Valley companies every time their shares plunge.

    But in a rare case, embattled blood-testing startup Theranos was sued last week by investors claiming that the Palo Alto company conned them out of hundreds of millions of dollars.

    The securities class action, filed before Theranos has even hinted at plans for an initial public offering, highlights the increasingly risky legal environment private companies must navigate and showcases the dangers investors face when dealing in private securities. Theranos is an egregious example — shareholders accuse the company of lying and knowingly peddling a product that didn’t work — but experts say more startups could face these types of suits as the market for private securities continues to expand.

    “What you’ve seen over the last four or five years — particularly around the unicorn phenomenon — is people buying shares in these companies with little to no information, largely driven by hype and hope,” said Robert Ackerman Jr., founder of Allegis Capital, a venture capital firm with offices in San Francisco and Palo Alto. “And then, when the facts reveal themselves, or when they get more information, they’re surprised.”

    Buoyed by floods of venture capital money that have poured in over the past few years, startups such as Uber and Airbnb are putting off IPOs while simultaneously tempting investors with valuations reaching tens of billions of dollars. Meanwhile, employees at these companies have bills to pay, so they’re cashing out by selling their shares on largely unregulated private markets. And investors, excited by the “unicorn” hype — the glowing aura that seems to surround private companies with valuations of $1 billion or higher — are snapping up those shares.

    http://www.mercurynews.com/2016/12/...s-scary-about-buying-stock-private-companies/
     
  2. Their due diligence was, other VCs and well known angel investors had invested before them...
     
  3. classic example of blind leading the blind
     
  4. Venture Capital Fund= Throw some shit at the wall, and see what sticks.
     
  5. The fact that Theranos grew as much as it grew before the truth came out is incomprehensible to me. Were there no independent peer reviews of the tests they did?
     
  6. Look at Snapchats valuation on the secondary market....
    Hahaha....

    Another fools paradise.....
    $20+ billion for a lame app that kids use....
     
  7. It's actually their stated model and it works pretty well. The herd mentality is definitely strong in that industry, which is funny since they all see themselves as so cutting edge. But by and large the model works, you don't see any funds that were particularly hurt by this because they build in the idea that most if their investments are going to fail.
     
  8. I agree that Snapchat is overvalued, but beware when you start disparaging things simply because kids use them. That way leads to grumpy old man syndrome always yelling about "kids these days" while missing out on everything developed after whatever date one decided to check out on keeping up.
     
  9. This sort of thing escapes detection, I suppose, due to the cycle in the marketplace...Most of the famous cases of fraud occur AFTER the major bull market and during the 'scapegoat phase' of the cycle..i.e. the Enron's, Worldcom's and of course Madoff and other assorted stuff that is "uncovered" when the sentiment shifts to assigning blame for the sudden plunge in market prices...

    The "bull market" hides all of the skeletons in the closet.
     
  10. So what is the point of this thread (beside being an interesting theme), are we supposed to feel bad for poor VC?
     
  11. You're right. I was talking about the science side of things though. Didn't Theranos fail because of faulty tests? Shouldn't have those tests been under more scientific scrutiny to begin with?
     
  12. Yes, they should have been, but we are in an age of "cronyism". The well-connected and powerful are "above the law" in many instances. Those who dare speak out are crushed by the full weight of the system.
     
  13. What age and what universe has that not been the case? I'd argue there is far less cronyism and far more transparency than any time in history, anywhere.
     
  14. Completely disagree, but I have no interest in arguing with you.
     
  15. No need to argue, just point out the time and place when there wasn't any cronyism and you've made your point. If you can't defend a point why bother making it, especially when it's a rather outrageous claim.
     
  16. Outrageous claim.
     
  17. "cough" Tesla/SCTY/SpaceX "cough"
     
  18. Which law was Elon Musk above in the case of these companies, exactly? We will use your example to make my point however. We all knew every possible detail about the SCTY/Tesla merger and all it's warts from any of dozens of sources that we could all read for free online. You can find out any number of minute details about SpaceX and how it's doing by reading any of dozens of comments and blogs from people who work there. That is an unprecedented level of transparency that you simply didn't have even 20 years ago and certainly not 50 years ago. In those days an investigative reporter had to both be interested enough in something and know enough about it to do some digging and you had to pay for a WSJ subscription to find out details about anything that didn't make the regular paper news. Now a dozen electric car experts, storage experts, and solar experts can dig into a merger like that and we can all get their analysis real-time from anywhere.
    The internet has revolutionized information dissemination, and to claim that we're in some age of cronyism that is somehow different or worse than what we've seen in the past is not only hyperbole but just plain incorrect. Sure there is cronyism and rich people who get away with things they shouldn't. That's happened since the beginning of recorded history. There's certainly no evidence that this is somehow worse today than in the past, certainly nothing that I've seen presented here despite asking several times. I'd argue that the opposite is true, certainly I have much more visibility on what powerful people are doing than I did 20 years ago and if you don't I'd be happy to show you how easy it is to get that information.
     
  19. It was an example for cronyism (all 3 companies are inter connected family businesses) and transparency (using non GAAP accounting, showing subscriber numbers only when it is going up, etc.)

    But since I am a good sport, how about Elon insider trading SCTY stocks? He loaded up of them when he knew there was going to be a merger, but the board smartly rejected the idea first, then after the money raise voila! the board mysteriously changed its mind? Insider trading at its best...
     
  20. Which was all reported per SEC regulations, you could have simply mimicked his buys which were publically reported and had pretty much the same gains. And I'd argue that the transparency was definitely there, if you followed those stocks it was common knowledge and very apparent how they were reporting their numbers, no-one was surprised by it. I'm no fan of Elon or at least one of those companies, but if/when they blow up it's not going to be because of anything that I couldn't tell you about right now. Again, it would have been a very different story just 20 years ago, so I'm not denying that these things aren't problems just pointing out the fallacy of this whole "the world is going to hell in a handbasket" grumpy old man mentality.
     
  21. Some examples of "cronyism".

    Former federal employees who migrate to lobby the same government agencies that formerly employed them.

    http://freebeacon.com/issues/427-former-members-of-congress-moved-to-lobbying-or-similar-work/

    Employees of investment banks who migrate to positions inside the Treasury Dept, Federal Reserve, SEC, NFA and other agencies that issue rulings, monetary policy to benefit their former employers.

    https://newrepublic.com/article/120967/wall-street-pays-bankers-work-government-and-wants-it-secret

    Members of the press who collude with one political party (going so far as to sending articles for approval to members of said political party for "approval").

    http://www.salon.com/2016/11/10/don...-i-got-caught-cheating-with-debate-questions/

    Predictably, Sig will reply that "this has always existed". In other words, he will agree that cronyism has always been a part of the economic landscape. Next, he will argue that the above examples are some improvement over prior economic periods...Over the 1890's and 1920's perhaps, but certainly it's a trend back towards consolidation and a "merger" of business and state.
     
  22. I don't know what 1980's you were living in my friend, and although it was before my time the 1970s and 1960s had exactly what you're describing but more from contemporary descriptions. Again, I'm happy to show you how to use the internet to your benefit, I know some older folks aren't really fully aware of the power available to them.
     
  23. Nice dodge and some petty passive-aggressive insults thrown in there to boot. So which is it? More of your contradictions: I'm either not old enough to remember the 80's or too old to use the internet.

    Show us the proof that the 1960's and 1970's had exactly what I outlined above.
     
  24. Just what I thought, "Sigmund Fraud"...
     
  25. Wow, you get a 15 minute response window and that's it with this dude! God help you if you're not retired and actually just check in for entertainment purposes from time to time.

    Every single one of the items you listed has always been endemic. Rumely v. United States in 1952 is the seminal lobbying supreme court case litigated because there was so much concern at the time about lobbying. Let's look at some cabinet members, George Shultz, Secretary of Treasury from '72 to '74, then President of Bechtel from 74-82, then Secretary of State from 82-89. Tell me that isn't a revolving door! An how about Casper Weinberger, in Nixon's cabinet, then went to work for, wait for it... Bechtel, then back as Secretary of Defense for Reagan. Again, you want to talk cronyism and revolving doors that's pretty much the definition. We can find a dipshit reporter leaking info in any era, no need to litigate your political grievances on the biased press here.
    If you don't realize the increase in transparency the internet has brought then you clearly don't know how to use the internet, how's that for just being blunt. I'm happy to help you come up to speed on it, that's being nice in most people's book. Your Eeyore gloom and doom lense really just impacts your enjoyment of the world, but if you like being pissed off about how everything is screwed these days and that's what keeps you going then I guess whatever floats your boat, just don't expect everyone to buy into it as an accepted fact.
     
  26. The concept that transparency has reduced cronyism is unfounded.
     
  27. Sig, what we are trying to tell you is that nothing has changed. And you talk too much...
     
  28. He is the guy who will scream "you're wrong", then spend the next fifteen minutes making your point for you...

    Or as most people refer to them "a pompous windbag".
     
  29. You have a great night too. And don't let discussions get your blood pressure up too much, at the point you start calling people names you're probably impacting your health.
     
  30. Sorry, thought it was a discussion board. My bad.
     
  31. Ah yes, I should just stick to "passive-aggressive" digs like yourself. I'm just waiting for the "angry white male" meme from you...

    btw, odds are I'm within a year or two of your age, but don't let the facts get in the way of your little narrative.
     
  32. I see nothing scary about that. There is this thing called due diligence and then investing always involves considerable risk, so you should do it only with the money you can afford to lose. Stick to that and you will do fine. Investing or trading is not for everyone and that explains why 90% of people do so poorly at it. Index funds (or timing them) is the best option for most.
     
  33. What are the odds Feathermaker you have multiple aliases and you work for the man?
     
  34. What are the odds that you are a goat humper?
     
  35. Like I said, blood pressure. If you're really my age it's a real concern.
     
  36. passive-aggressive.
     
  37. Angry, high blood pressure and no dough, must really suck to be you.
     
  38. Nah, that's just you projecting your own predicament...
     
  39. What are the odds that you're AAAintheBeltway? Why not just stick with your original handle?
     
  40. Did you spend the past hour doing keyword searches Sigmund Fraud?

    Too bad you suck at playing Columbo...
     
  41. Thanks for confirming that. Actually it took about 2 minutes; when you repeat "passive aggressive" several times it a row it's clearly a term you've quite proud of so you can't resist posting it regardless of which handle you happen to be using. Then pick two or three other unique phrases and it's crystal clear. Again not sure what you're getting out of it, seems like rather juvenile behavior, although so is the middle school name calling so I guess it's just how you roll.
     
  42. I didn't confirm anything Sigmund. I simply knew that you were so "worked up" that anybody would challenge your enormous ego that you just HAD to try and figure out which "right wing" guy you were talking to...

    Also thanks for confirming that the only reason you stuck your fragile little neck into this whole conversation is because you are a left coast liberal who has a real problem with anyone who disagrees with you and your "morally superior" views on everything...

    (back to the name calling...so you take no ownership of the "age-ism", the references to "not knowing how to do an internet search", "high blood pressure"...) the bottom line is that you start shit and then run to your safe space the second someone fires back...
     
  43. "high blood pressure", "too old to figure out the internet"...Yeah, you're so mature, Sigmund.
     
  44. You're right, my middle schooler is generally concerned about high blood pressure and helping people who were passed by the internet revolution. Of course he's a little more mature than your typical middle schooler, he doesn't make up names to call people and post under multiple handles, sometimes even talking to himself.
    Listen, you've clearly got some issues and apparently we've hit a nerve here with these rants about safe spaces and left coast liberals and lord knows what else that has nothing to do with anything we've been talking about. Don't take life so seriously dude.
    How about you go back to being AAAintheBeltway, and as it looks like he keeps to the politics section that's probably a good place for you. I'll be sure to remind you that you've forgotten who you are when you pop up the W.J. Feathermaker III alias on any thread I happen to be participating in. Deal?
     
  45. Oh yeah, here we go with more of that "projection". I'm the one with high blood pressure? but you spent an hour digging thru a bunch of keywords to try and uncover this "conspiracy" that I am AAAintheBeltway...You really aren't that clever, Sigmund...In fact, I would have given you "props" if you were correct, but alas, you aren't.

    And no, I will not "stay away" from whatever threads you are participating in...Did that "trigger" you?
     
  46. Venture Capitalist price a company, investors value a company.
     
  47. I'd actually say VCs value a team, investors value a company. That's why they fall for the social proof of other investors who do seed and A rounds. It works most of the time, Elizabeth Holmes just managed to fool them all.
     
  48. Draper is still trying to spin it.
     
  49. Way too many unicorns out there....all that extra fun money from the printing press had to go somewhere and some of it went to Theranos....ooops
     
  50. That then can be construed as FOMO investing or SILO thinking. Of-course this happens on Wall St too.
     
  51. ""
     
  52. No different than us traders?
     
  53. Similar to Taleb's model on options trading hunting for Black Swan.
     
  54. How is it even possible??? Their product is a fraud that did not work.
     
  55. In fact the term "real options" is used quite a bit in that industry and the thinking is very much as you describe. Heck, your analogy is good on a couple levels because the industry is also full of brilliant people you can learn from who can be unnecessarily arrogant, obnoxious assholes at times!
     
  56. I am not familiar with this company but are you sure their products did not work?

    Perhaps they just did not work well consistently or did not work in all cases? Is it that different from a FDA approved cancer drugs that could extend life by a few weeks or months for selected patients only?
     
  57. I followed the story very closely as I love such rare success stories. But it was all fraud. She claimed to invent the device that could run all kind of blood test from just a little bit of blood drawn from finger tip. They ended up producing hoards of incorrect results, and then tried to cover it up by doing conventional blood test, all along lying to everyone about their "fake" product. It baffles me that she is not in jail.
     
  58. And they are getting more financing/funding?
     
  59. In general, I think alarm bells will ring in the science community any time they hear about a college dropout inventing paradigm shifting and ground breaking technology that PhDs have been working on and studying their entire life to try to achieve. Even if such geniuses were Stanford dropouts. There is a lot of knowledge and technical know-how involved with the STEM field. You can't just wing shyt. You have to put in the time to learn this stuff. Also, things either work or they don't. This is real life science/engineering we're talking about. It's not like financial analysts where you can wear a suit and go on TV to yammer on and on about yields or say generic stuff like "this still looks attractive" and look like you know what you're talking about.

    Also, the medical and scientific community rely on peer review and data to determine effectiveness of a novel method or a technology. Nobody will go by your word. If people have to go by your word, then that's another red flag.

    In an unrelated note, wasn't there a former pharma CEO somewhere without a science background who holds patents on drugs? Must be a jack of all trades. Businessman, trader, inventor, scientist.
     
  60. Exactly, according to an earlier post 100mil of new funds. What can one say???
     
  61. Shkreli, but he bought the patents...
     
  62. Sure, Edison's name is on 3000+ patents, because he as the boss put his name on everything what his scientists invented.
     
  63. Also founder of AXON was a hedge fund manager.
     
  64. The question was not about him, but a non-science CEO of a pharma company, who owned their own researched and developed patent. He never developed any patent as a scientist, he was a business CEO. Nothing wrong with that, but the asker wanted to know similar CEOs to Theranos' boss. He came the closest although I don't know other CEOs...
     
  65. I think this new financing is similar to buying up Madoff claims 20-30 cents on the dollar hoping that the payoff will be bigger. (it was)

    "the company reportedly told investors it had secured the money from Fortress Investment Group, a New York-based private equity firm that was acquired by Softbank earlier this year."

    Some firms have just too much money and they can afford to throw a few hundred mill here or there hoping to hit a 10 bagger.
     
  66. Then it makes sense.
     
  67. But she did not invent the "product" either did she?
     
  68. Right..... I think you're missing the rhetorical tone in what was said.

    No, I don't think he's some mad scientist genius inventor when he has a business background and none in biochemistry.

    So we're in agreement.
     
  69. I forgot the whole story, but I think she does have some claim to helping the invention process. She left college to work on the project.
     
  70. But it was snake oil though?
     
  71. Yes. I wonder if she actually knew it (scammer) or believed in it (stupid)?