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SAN JOSE, California — In 2014, Dan Mosley, a lawyer and power broker among wealthy families, asked entrepreneur Elizabeth Holmes For Theranos audited financial statements, blood test initiation. Theranos never produced, but Mr. Mosley still invested $6 million in the company – and Wrote a gushing thank-you email to Mrs Holmes for the opportunity.

Bryan Tolbert, an investor in Hall Group, said his firm invested $5 million in Theranos in 2013, but didn’t get a detailed grasp of the startup’s technologies or its work with pharmaceutical companies and the military.

Lisa Peterson, who oversees investments for Michigan’s wealthy DeVos family, said Theranos did not visit test centers at Walgreens stores, call any Walgreens executives, or hire any outside experts in science, regulations, or legal issues to verify the new venture’s claims. . In 2014, the DeVos family invested $100 million in the company.

The humiliating details of bad investments like Theranos are rarely so prominently displayed to the public. But in recent weeks they have emerged in the case of Ms. Holmes, 37, who is facing a dozen electronic fraud and conspiracy to commit electronic fraud; pleaded not guilty. He and Theranos fell out of favor – the investor’s money evaporated and company is closing In 2018 – after claims about blood test technology were shown to be false.

Now in its ninth week, Ms. Holmes’ case has presented a particularly clear picture of the many ways sophisticated investors have fallen into hot start-up hype, ignoring the red flags that seem obvious in hindsight. This behavior still resonates today, as investors compete to pour money into Silicon Valley start-ups that are in crisis. crazy record breaking situation Donation.

With many new investors flock to startupsdue diligence is sometimes so minimal used as punch line, investors said. Shirish Nadkarni, a longtime entrepreneur, investor and author, said an overheated market “certainly created an environment for people to make more inflated claims” and could even encourage them to lie.

Throughout his life, Theranos exemplified this dynamic. The company has raised $945 million from famous venture capitalists such as Tim Draper, Donald Lucas and Dixon Doll; wealthy heirs to the founders of Amway, Walmart and Cox Communications; and powerful tech and media moguls like Larry Ellison and Rupert Murdoch.

And as investors testified in Ms. Holmes’ trial, a central tension arose around due diligence. Could these investors have avoided disaster if they had done better research on Theranos? Or are they ruined because their research is based on lies?

Prosecutors provided a growing list of examples in support of the second argument. For example, Theranos Added pharmaceutical company logos according to evidence and testimonies, to verification reports that pharmaceutical companies have approved their technology, even though they have not. Theranos also claimed in late 2014 that it would generate $140 million in revenue that year, when it wasn’t, according to evidence and testimonies. At the start fake demos From blood test machines to investors, witnesses testified.

In response, Ms. Holmes’ lawyers overlooked Theranos’ investors, aiming to convince the jury that the investors were at fault for not investigating Ms. Holmes’ claims.

Attorneys pushed lately Wade MiquelonThe former chief financial officer of Walgreens admitted that he did not know if his company had taken one of Theranos’ devices into their offices for testing before entering into a partnership. The lawyers also had Mr Mosley admitted that he did not directly ask Ms. Holmes whether a pharmaceutical company had written the verification report.

The strategy sometimes turned into contempt. This was evident last week when Ms. Holmes’ lawyer, Lance Wade, asked Ms. Peterson, an investment specialist, if she was familiar with the concept of due diligence.

“Do you understand that it’s typical to invest?” said.

Investors backed off by announcing that they were acting on false information provided by Ms. Holmes.

“You’re trying to gauge how advanced we are as an investor when we’re not given full information,” said Ms. Peterson. Mr. Wade asked the judge to remove the comment from the record.

Still, testimonies from pharmaceutical company executives who interacted with Theranos showed that it was possible to see at least some of Ms. Holmes’ grandiose claims.

Constance Cullen, a former director of Schering Plow, said this week that she was responsible for evaluating Theranos’ technology in 2009. He said he was “not satisfied” with Ms. Holmes’ answers to his technical questions, calling them “caged” and implicit. He said he had stopped responding to emails from Miss Holmes.

Shane Weber, an executive at Pfizer, studied Theranos in 2008 and concluded that the company’s responses to technical questions were “slanted, deflected, or evasive,” according to a note used as evidence. He advised Pfizer to stop working with Theranos.

But investors did less research, especially when Ms. Holmes appealed to their egos. His visionary personality, supported by magazine cover stories and personal quirks, created the feeling that supporting Theranos was a special and outstanding opportunity.

Statement and evidence showed that Ms. Holmes protected business-related information by labeling it a trade secret. Telling the investors that he is looking for wealthy families who do not want to see the return on their investments in the near future, he made them feel special with the official invitations. And it tightly controlled the company, with “controller” shares worth 100 times the strength of other shares.

“He has a firm grasp on the company, no mistake,” Theranos investor Christopher Lucas said in a conversation with other investors recorded and played in court. “It will have the right to fire investors.”

Mr. Lucas’ firm, Black Diamond Ventures, has invested approximately $7 million in Theranos, despite not accessing its financial information or examining all of its corporate records. Mr. Lucas testified on Thursday, but Ms. Holmes told him the information was sensitive because a leak “could give competitors a chance to crush the company”.

This secrecy has been extended for due diligence. Ms. Peterson expressed fears that if Theranos delved deeper into the details of her business, she would exclude Ms. Holmes’ firm from the deal.

“We were very careful not to go over things and upset Elizabeth,” he said. “If we had done too much, we wouldn’t have been invited to invest.”

Mr Nadkarni, a longtime investor, said such behavior sounds familiar. He said he’s observed a slackening of rigor in the deals he’s been involved in over the past year.

That didn’t cause many problems when times were good, but he said “if something happens to the economy, then everybody will have a toast.”