Investor to Theranos: Give us back our $96 million

[fuzzyfungus]

I certainly don’t mean to overstate the benevolence of hedge funds; but unless this one is actively irrational, in addition to being lawful evil, it is hard to take their lawsuit as a good sign for Theranos or the honesty of its people during the applicable funding round.

According to the article on Ars, this particular fund has never previously litigated in this way during their 12 years of operation; so if it is a strategy it’s a new one.

More importantly, if they put 100 million in comparatively early, they presumably have a decent stake in the company. Filing suit is obviously not going to improve confidence in Theranos, and clearly endangers whatever value that stake in the company might have. Again, assuming rational decision making, a lawsuit only makes sense if they both suspect that the company is doomed enough that whatever part of it they own is worthless or seriously under water even if they keep their mouths shut or make optimistic statements about how everything is still OK(as a number of other investors have been doing); and they have some evidence of fraud/deception/etc. compelling enough to give them a shot at getting their money back; rather than merely being stuck in the line of creditors receiving pennies on the dollar when the company is sold for scrap.

Obviously, they’d love to play ‘heads I win, tails you lose’ every time; but the circumstances of this case just don’t reward a lawsuit unless fairly specific conditions are met: if the company isn’t crashing and burning, their best bet is to just shut up and offload their purchase on the next Greater Fool who wanders by; and even if the company is crashing and burning; they need some fairly juicy proof of fraud to have a chance at getting enough money back to even cover the legal expenses, since Theranos’ operating costs have presumably consumed much of the cash and there are other investors who would also like their money back if possible.

If they have nothing aside from ‘we made a risky investment’, they are just accruing legal fees and hastening the demise of the company they invested in; without any particular advantage over all the other creditors who want a scrap of whatever is left. Unless they are just idiots; they must believe that they were defrauded to a greater degree than at least some of the other investors for this strategy to make any sense.

I have no way of knowing whether they are correct in that belief or not; but without it their behavior is irrationally self destructive.

[fuzzyfungus]

There doesn’t seem to be a terribly elegant rule of assignment, or a nice bright line; but the line between ‘should have done your due diligence’ and ‘victim’ is an arguably legitimate one; and based on a number of factors:

How mandatory is the interaction? An American interacting with a health insurance entity, say, is fighting a war of necessity, not of choice. At best, they might have a modest number of other insurers to choose from; at worst only one option is remotely financially viable. A hedge fund(or an individual) looking for a cool-but-risky tech company to invest in, by contrast, has lots of options. Aside from just walking away and putting it in an index fund, there are hundreds or thousands of hungry startups who might make it big or might flame out.

How asymmetric is the information? If you have a supply of accountants and lawyers; and the leverage that being a major investor provides, you should be able to get a look at the books and a nice tour; and be able to ask some pointed questions. If you are one of ITT Tech’s target ‘customers’, you are likely to be in a much weaker position to evaluate what you are buying.

How reasonable is the expectation of sophistication? In order to get by, we all have to do a wide variety of things; and can’t be experts at all of them. Someone who gets screwed during a trip outside their area of expertise tends to be more sympathetic than someone who gets screwed while doing what is supposed to be their job/area of skill. The secretary falls for a phishing email? Unfortunate; but those things are pretty convincing. The network manager or the IT security person falls for a phishing email? You Had One Job!

I agree that the standards are less cut-and-dry than one would like; but there are real distinctions to be made in terms of how hapless a given victim is.

There is also the question, distinct from the victim, of what markets/activities we think risk should be acceptable in and what ones we think should adhere to baseline safety conditions.

Investing in tech startups, say, is generally considered to be a risky business; and that is generally considered to be a good thing. Possibly crazy, possibly brilliant, ideas and products have a shot at getting funded, investors who are able to absorb the loss; but looking for a potentially lucrative win, get a variety of high risk/high yield options.

Buying vitamins or renting an apartment, by contrast, are circumstances where risk is a less obvious virtue. The buyer is generally deemed to be better off if they can trust that they are getting what the label says they are; rather than cutting out the regulatory costs and getting a slightly cheaper but vastly less predictable result.

Again, no conveniently bright lines; but it’s not just a random pick based on how sympathetic we find the victim to be.

[lolipop_jones]

The two examples that come to mind from articles here on BB are (1) the nursery monitor cameras which send you pix of your sleeping child to you via the “cloud” and (2) celebrities…no, anyone…who take nude photos of themselves and store them anywhere where someone who is not themselves can access them.

I have no expectation of security for anything where the access is not controlled by me. Frankly, the idea that my investment accounts are accessible on line via two-factor authentication gives me the heebie jeebies.

[Enkita]

@phuzz

I think something is wrong with me, I think I fancy Elizabeth Holmes.

You may have put your finger on how she got the job in the first place.

Unfortunately psychological research has shown that physically attractive women are perceived as being more intelligent than less attractive ones. For every Dr. Merkel there’s a Sarah Palin. It is not an easy problem to fix, given the business environment (as exemplified by Trump).