The Theranos Case: Example of a Tactic that Regulators Deploy Against the Companies They Target

To protect itself, a company needs regulatory advice from a lawyer who knows how a government agency would view its activities.

Like a pro football team, regulators who bring an enforcement action against your company are rarely playing the first game of their careers. So there should be little, if anything, in their playbooks that lawyers who’ve tangled with a particular agency haven’t already seen.

Your company needs an attorney(s) with sound grasp of what’s up the sleeves of those bureaucrats who might decide to attack your business.

A decade ago I gave a speech in Washington, D.C. to a group of regulatory lawyers.

Afterward I found myself in conversation with three who’d each been Director of the Division of Corporate Finance in the Securities & Exchange Commission — one under each of the last three U.S. Presidents. Having worked on S.1’s and other SEC filings as a young associate at a Wall Street law firm, I appreciated the enormous power these individuals had wielded over businesses registered with the SEC.

Thinking about a new area of enforcement that Congress had recently passed and that the federal bureaucracy was about to implement (the subject of my speech), I asked these three former senior federal enforcement officials:

“How do you get those you regulate to take a new rule seriously?”

Immediate answer: “A public hanging!”

The other two laughed knowingly and loudly.

Many times I’ve negotiated with a public official over some regulatory violation (real, or imagined by the agency), the “public hanging” motive has featured prominently in the background.

Even when — especially when — I’ve appealed to a regulator for leniency based on my client having made an honest mistake which did not result in any real harm:

“Yeah, but how’s would leniency look to others in this situation if we give your client a pass?”

On March 14, 2018 the SEC announced a “public hanging” of Theranos, Inc. and its founder-CEO Elizabeth Holmes.

In announcing its lawsuit against the company and founder-CEO, the agency simultaneously announced a tough settlement: Founder-CEO Holmes would be stripped of her majority voting control, forced return of millions of shares, and was banned for 10 years from serving as an officer or director of a public company.

It’s not typical for the SEC to sue a privately held company for securities fraud (that’s a move usually left to individual investor who believed they’ve been misled). And the SEC implicitly acknowledged the “public hanging” technique in explaining its actions in Theranos. As Reuters’ Alison Frankel (for my money, one of the shrewdest commentators on corporate law) put it:

The SEC doesn’t often exercise its power to bust private companies for violating federal securities laws, but its officials said they wanted to send a message to Silicon Valley entrepreneurs, whose startups can be valued at more than a billion dollars before they ever go public. Theranos is an especially vivid example.”

Call me cynical. But I believe that it’s simple prudence to be realistic about a government agency’s view of your company.

More often than not I’ve found regulatory bureaucrats to take an adversarial pose with the companies under their jurisdiction.

We are at all times bound to obey the rules, and treat respectfully all those who enforce those rules.

But obedience to law and respect of authority don’t call for naïveté about agencies’ intentions and possible prejudices.


In saying that Theranos is an example of the “public hanging” technique, I don’t mean to criticize the SEC’s action. Holmes and her colleagues appear to have done substantial damage by alleged outright deception of Theranos’ investors.

My point is simply that regulators enforcing a statute wield great power. And the average business executive’s sense of proportion would often be outraged by (what I view as) excessive punishment by a government agency in many cases where the violations were the result of an honest mistake rather than evil intent.

In my next post I address an important aspect of how plaintiffs’ lawyers thinking results in creative — and arguably just plain nonsensical — legal attacks on the companies that they target.

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