Fake it Until You Make It

“Faking it ’til you make it” is a Silicon Valley maxim.  Unfortunately, “faking it” at times means committing fraud, though determining what is “fraud” is complicated … especially when the alleged fraudsters are Elizabeth Holmes and Elon Musk … and even when we consider convicted fraudster Bernie Madoff.  All of them followed the maxim of “faking it,” but only one “made it.”  The phrase accordingly has far broader implications than its Silicon Valley origins might suggest.

Wait a minute!  Bernie Madoff?  He was a bad guy.  Musk, on the other hand, is a successful entrepreneur and Holmes merely an unsuccessful one.  Madoff perpetrated a massive Ponzi scheme.  He stole people’s money.  Billions of dollars!  He knowingly lied to them.  That’s fraud … right?  In fact, it’s both civil and criminal fraud!  The victims deserved to get their money back …, and Madoff, the perpetrator of that massive fraud, deserved to go to jail for a long time, right?

Not so fast.

Sometimes perpetrators of fraud deserve to be jailed, and sometimes they don’t …, and sometimes victims of fraud deserve to get their money back, and sometimes they don’t.  There were a great many Madoff victims who knew that his performance was fictitious.  Were they willing victims … or co-conspirators in his ongoing fraud?  All were financially sophisticated.  All were greedy.  All chose to go along with the unsavory reality … or, at the least, with an unsavory possibility.  Sure, a gullible minority undoubtedly were under the illusion that they somehow had discovered a Golden Goose – though isn’t that an Aesop fable?  Although the majority may not have known exactly how they and Madoff were gaming the system, they knew that the system was being gamed.  Perhaps they deserved to get some of their money back … and perhaps not …, but how much punishment did Madoff deserve for gaming the gamesters?  How much of an ongoing danger to society was he that required his being locked up for the rest of his life?  How much retribution was appropriate?  How much did prosecutors weigh the risks of a free Madoff against the economic costs of housing Madoff, potentially for decades?

Not so simple, is it?  Madoff pleaded guilty and that was that.  Unlike Musk and Holmes, he didn’t pursue expensive PR.  They locked him up – and the media’s public’s appetite was sated.  The media portrayed him as He was an apparent sociopath without regret …, as some in the media also have portrayed Musk and Holmes.  A critical difference with Madoff is that his vilification followed the Great Financial Crisis (GFC) when all of Wall Street’s denizens were castigated as villains …, and he was branded as the worst of them.  Musk and Holmes have operated in a a far more benign environment.

Investing is a form of gambling, whether in the stock market or venture capital.  That is the fact on Wall Street as well as in Silicon Valley.  A Silicon Valley wager is a longer-term bet that accordingly may require … embellished promotion.  Wall Street bets generally are short-term and don’t fit the “fake it until you make it” mold.  For Silicon Valley start-ups, however, and even for Silicon Valley unicorns,[1] making it is a crapshoot and the risks – of losses and of fraud – are a significant part of the bet.  Because promises made to Valley investors are aspirational, the innovative technology being touted often is referred to as “vaporware” – it doesn’t yet exist except in the promoter’s mind.  “You makes your bet and you takes your chances.”  It’s Las Vegas California style!  With an existing pool of rich investors ready to take outsized risks for the potential of outsized returns, Silicon Valley has become a capitalist petri dish where the warning caveat emptor has found renewed meaning.  BUYER BEWARE – the government is not about to dedicate resources to ensure your safety!  Since overpromising is integral to Valley marketing (a practice also pursued, though on a more limited basis, on the East Coast), if the venture – whether a Ponzi, a private equity fund, or a proposed technology, product or medical device venture – eventually fails, well, that was the risk.  Right?

No.  Not really.  Not if investors are being purposefully misled.[2]

Fraud is “an intentional deception with the goal of securing an unfair or unlawful gain.”  It can be a violation of civil law – for which victims can sue to recover monetary damages – or criminal law – which would enable the government to prosecute, imprison and/or fine the perpetrator.  Either way, it has toxic effects on society and commerce.  In uncovering and prosecuting fraud, it’s often difficult to determine when a lie is purposeful and when it is merely ha, ha an exaggeration.  (“Truthiness,” after all, has become a 21st Century way of life (a subject previously discussed by TLR here).)  When, then, should a fakester be criminally prosecuted for fraud?

Madoff became an all-too-easy face-of-criminal-fraud because of his GFC timing and quick capitulation coupled with historically successful Ponzi fraud prosecutions (although pyramid schemes, like Amway, are perfectly legal – 🤫).  Ponzi fraudsters can’t “fake it ’til they make it” because they can never “make it.”  (But didn’t Madoff, a successful Wall Street trader of the 1980s, originally intend to make money for his investors?  And wasn’t it only after he failed to do so that his scheme evolved into a Ponzi?  Did it then become a legal? pyramid scheme?)

Elon Musk’s Tesla promotion took years to reach fruition.  He promised investors the sun, the moon and Mars …, but, since his scheme ultimately succeeded, Musk can’t now be accused of fraudulently faking it (though …, what if he’d failed?).  But the fraud inquiry doesn’t end there.  Musk formerly was Tesla’s Chairman as well as its CEO.  He was forced by the SEC to resign his Chairmanship for lying to investors – that is, he had committed securities fraud.  He was fined $20 million – a HUGE penalty – and agreed that he would not again tweet about Tesla without obtaining legal pre-clearance (discussed by TLR here) …, but in a subsequent 60 Minutes interview, he taunted the SEC by stating that he would not pre-clear his tweets and, true to his word, shortly afterwards tweeted that Tesla would produce 500,000 cars in 2019 when the truth was that Tesla aspired to a production goal of  500,000 cars … in 2020.  Ha, ha SEC (picture a smiling Elon Musk)!  That tweet purposefully misled Tesla investors – who included ordinary investors (not only the rich, sophisticated ones).  What was the SEC to do with such a successful, politically-connected CEO who was reveling in exceeding testing the limits of legality?  Apparently …, nothing.  The SEC’s forbearance decision to not enforce America’s securities laws has encouraged Musk (as well as others) to further push legal limits.  For Musk, the SEC’s hands’ off regulatory approach allowed him to broaden his enjoyment of manipulating markets engaging in legally-questionable tweeting.  He has manipulated touted stocks in which he has no financial interest (“Gamestonk!”) and unregulated cryptocurrencies in which he and Tesla do indeed have an interest (Bitcoin) as well as those in which they apparently don’t (Dogecoin).  His reputation for saying outlandish stuff apparently has allowed him to tweet a bit of securities fraud here, issue a few humorous libelous tweets there, and manipulate the crypto market everywhere!  His defense?  He tweets for fun, ha ha.  He’s just a wild and crazy guy!  And no one should take what he says literally.

Really?  Since many do take Musk seriously, should his sense of humor frivolity reputation for telling lies saying outlandish things constitute a successful defense against fraud when his faking injures markets or investors?

The SEC apparently thinks so …, at least for the moment, even if this lenient approach applies only primarily to successful American entrepreneurs.  If the government’s standard for fraud has been raised, how then should Elizabeth Holmes’ alleged frauds be treated?

Holmes was the CEO of Theranos, a failed medical device company.  Theranos was a Silicon Valley darling unicorn that as recently as 2015 was graced with a valuation of $10 billion.  It’s now worthless.[3]  In 2014, Holmes was ranked the 110th wealthiest person on the Forbes 400 list and lauded as the world’s youngest self-made female billionaire.  That changed when she was indicted for fraud in 2018 because she had pathologically lied faked it …, and knew she was lying faking it …, throughout her stint at Theranos.  As a result, investors – almost all of whom were rich and sophisticated – lost their money … and the doctors and their patients who had relied on the truthfulness of her fraudulent statements and the purported benefits of her innovative technology were physically, mentally and reputationally damaged.

Holmes was a Stanford dropout who, at the age of 19, founded a company that she claimed would soon be producing a blood testing process that would be cheaper, more accurate and less intrusive – requiring only a single drop of blood to test for … everything –, than any other laboratory procedure.  She stuck to that aspiration, and continued to fake it …, until Theranos failed.  Over the course of ~13 years, she raised $900 million, an astonishing amount for a college dropout without any experience in medicine, or chemistry, or business who promised the impossible to create something that experts in those fields said couldn’t be created, a technology that well-funded competitors had been unable to produce.  In retrospect, it’s incredible that so many sophisticated investors, fiduciaries (including members of Theranos’ illustrious Board of Directors), employees, doctors and businesses would fall for such a scam.  Yet they did.  They apparently believed in Holmes and in the “metaphysical certainty” that she had expressed for Theranos’ future success.

There are material differences in the types of frauds committed by Madoff, Musk and Holmes.  Defrauding investors may be acceptable to the SEC – at least with respect to Celebrity CEOs under certain circumstances –, but defrauding unknowing medical patients should not be.  Of the three, only Holmes did so and only she therefore should face criminal sanctions (aside from the fact that, as a result of her lies, her investors lost 100% of the money they invested).  On the other hand, bad though his actions were, Madoff should not have been incarcerated for life.  His victims, to the extent they were in fact victimized, were both highly sophisticated and suffered only modest financial losses.  Musk also should not face criminal prosecution for his Tesla promotion.  To the extent his faking lost money for investors, they have had and continue to have recourse to civil lawsuits.  (A most interesting commonality among the three is that neither Madoff, Musk nor Holmes apologized for their lies.  Holmes, for example, continues to insist, against all reason, that Theranos would have mastered “one-drop” blood-testing.)  Madoff went to jail for fraud and Holmes may be headed there, but Musk built a successful company.  He gets a temporary pass because although he faked it …, he made it.


[1] A “unicorn” is the term for a private company, most often in the tech space, having a value of more than $1 billion.  The term was coined in November 2013 by Aileen Lee in a TechCrunch article.  Unicorns have been able to raise capital from sophisticated investors without having to incur the time and expense of an initial public offering, which enables them to avoid the scrutiny required of public companies by the SEC, stock exchanges, inquisitive reporters, retail investors and a battery of class action lawyers.

[2] Criminalizing destructive lying is persuasively advocated in Liars, by Cass Sunstein.

[3] For those interested in the details, the story is documented in the best-seller, Bad Blood, and in the HBO biopic The Inventor:  Out for Blood in Silicon Valley.

Finally (from a good friend)

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