USA v. Holmes: Why Lawyer-Directors Are a Bad Idea

By C. Evan Stewart

October 5, 2021

USA v. Holmes: Why Lawyer-Directors Are a Bad Idea


By C. Evan Stewart

I have long cautioned against lawyers serving as directors of public companies.[1] Many of the issues previously flagged have now raised their hand(s) in a longstanding corporate debacle that is culminating in a very prominent criminal trial that began just as this article is being written: USA v. Holmes, Case No. 18-cr-00258-EDJ-1 (N.D. Cal).[2]

A Little Background

On September 21, 2018, James B. Stewart published an article in The New York Times entitled “David Boies Pleads Not Guilty.”[3] Prompted by a best-selling exposé on the Theranos scandal by John Carreyrou – “Bad Blood: Secrets and Lies in a Silicon Valley Startup[4] – Stewart (no relation) had interviewed Boies at length about his involvement with Theranos and its CEO, Elizabeth Holmes, as well as his representation of Harvey Weinstein (the now-convicted sexual predator).[5]

As recounted by Stewart, Boies began representing Theranos in 2011, having been very impressed by a presentation Holmes made to him regarding the claim that the company could accurately make medical diagnoses from a single blood prick of a person’s finger. Boies was so impressed that he agreed to take half of his firm’s fees in Theranos stock (approximately 400,000 shares; worth approximately $7 million at the company’s high watermark). That constituted issue one – the wisdom of taking a financial stake in a client; does it affect a lawyer’s independent/objective judgment? While there is no hard and fast rule against that practice, many “old line” firms prohibit it (at the same time a number of firms with large venture capital practices, especially in the Silicon Valley area, allow it). Well-known NYU Law Professor of Ethics Stephen Gillers has opined that the practice is “not categorically forbidden, but it has to be monitored closely to protect the client.”[6] For his part, Boies was not agnostic: “Anything that gives you an incentive to put the client’s interest first is good for the client.”[7]

Four years later, Boies agreed to join the Theranos board of directors, having been told that “a difficult period [lay ahead] where both Theranos and Ms. Holmes would need the advice of a seasoned lawyer.” [8] This constituted issue two – Boies, as a director, now owed a fiduciary duty to Theranos’s stockholders, while also representing the interests of the company and its management. This conflicts problem – highlighted in my earlier article[9] – is not expressly forbidden by the profession’s rules of ethics. The ABA, however, has discouraged this practice, warning about the pitfalls of lawyers serving as directors, and many firms prohibit partners from joining public boards for precisely this reason(s).[10]

In that same year (2015), Carreyrou – a Wall Street Journal journalist – had begun his investigative reporting on Theranos. Boies and his law partners took offensive steps to make life difficult for Carreyrou. Besides having his partners send letters to suspected company leakers/sources threatening lawsuits, Boies wrote a 23-page letter to the Wall Street Journal about Carreyrou’s investigative work. Boies, who says he has a policy of not suing media companies (or even threatening to sue them), claims that his letter did not threaten to sue the Journal; Carreyrou expressly disagrees. Suffice it to say the letter demanded that the Journal retain any and all materials that “would doubtless be highly relevant in any lawsuit.”[11]

Notwithstanding Boies’s efforts, Carreyrou’s first article on Theranos – a “bombshell,” raising very serious doubt about the efficacy of the finger pricking results, lab research, and methodology – was published in October of 2015. Boies, in response, asked Holmes to have an independent third party verify Theranos’s technology and work processes. As the new year started, however, there was no progress on that front. In addition, Holmes started looking for counsel beyond Boies’s law firm; she also fired the company’s general counsel – a former partner at the Boies firm.[12]

By midsummer, Boies felt increasingly isolated and wanted to resign from the board. Not only did other Theranos directors ask him not to, but (according to Stewart) Boies’s “own outside lawyer advised that as a director, he couldn’t resign in a way that might damage shareholders.”[13] That advice, of course, highlights the tricky conflicts problem that Boies embraced by going on the board in the first place.[14]

Then in August of 2016, Holmes made a rosy presentation to Theranos shareholders without consulting Boies. Boies responded by telling her he could not continue to represent her if she did not follow his advice: “If we are going to risk being at the scene of a serious accident, we want to have the steering wheel in our hands. . . . Because of the very public role we have taken in defense of the company, [my] firm’s own credibility is at stake.”[15] Within a matter of days thereafter, Boies resigned as counsel. He nonetheless remained as a Theranos director until February of 2017, a month before the SEC charged both Holmes and Theranos with a fraud on shareholders costing more than $700 million.

No Privilege in the Criminal Trial

The SEC was just the beginning for Holmes;[16] as indicated above, she was subsequently indicted for the same alleged conduct. A pretrial ruling on Holmes’s right to assert attorney-client privilege in the criminal trial highlights another problem inherent in Boies wearing two hats.

But even before we get to that ruling, Boies’s director hat had already caused a privilege problem. As numerous courts have held, because of a lawyer/director’s fiduciary duties to shareholders, there is no privilege as to certain communications between the lawyer, his firm, and the corporation.[17] As such, a fair amount of the “advice of a seasoned lawyer” was already fair game, and Boies was always going to be a factual witness based upon his director status.

This problem became further complicated when the government made a pretrial motion to have 13 Theranos corporate documents be deemed admissible for trial against Holmes. She opposed the motion on the ground that the materials were confidential, subject to her individual attorney-client privilege. On June 3, 2021, a federal magistrate judge granted the government’s motion, with the 13 documents admitted for trial.

As recounted by the magistrate judge, the Boies firm began its representation in 2011 of both Holmes and Theranos in an intellectual property dispute. Thereafter, the Boies firm broadened that dual representation to “a variety of legal services in relation to Theranos’ patent portfolio, press interactions, and inquiries from government agencies and departments.” Notwithstanding, there was never an engagement letter executed between Holmes and the Boies firm, nor were there “any formal guidelines describing the scope of [the firm’s] legal representation” of Holmes.[18] The magistrate judge then noted that “Holmes believed that [Boies and his firm] were her attorneys up to the point when she retained separate counsel to represent her in the Securities and Exchange Commission and Department of Justice investigations into Theranos in 2016.”

The legal issue before the magistrate judge was whether to apply a subjective belief test (i.e., what did Holmes believe) or a test enunciated by the Ninth Circuit in Graf.[19] The magistrate judge opted to follow the Graf test.[20] Having decided to go that route the outcome was a foregone conclusion because the Graf test is virtually impossible for a corporate insider to meet.

The magistrate judge ruled that, out of the five Graf prongs, Holmes failed on the second, fourth, and fifth. The second prong is that Holmes could not demonstrate that she made it clear to Boies that she was seeking his legal advice as an individual rather than as the CEO of Theranos. Key to the magistrate judge’s determination was the fact that there was no Holmes-Boies engagement letter.[21] The fourth prong is that Holmes could not demonstrate that her communications with Boies were confidential because the 13 documents reflect communications “between Holmes or other senior Theranos employees, Theranos in-house attorneys, and [the Boies law firm].” And the fifth prong is that Holmes could not demonstrate that the communications “did not concern matters within. . . . the general affairs of the company.” Based upon those determinations, and the fact that the entity now in charge of Theranos (the “Assignee”) was waiving the corporate privilege,[22] the documents were ruled admissible.

As noted above, once the Graf test was ruled to be applicable, the outcome was not in doubt. And this author takes no issue with the magistrate judge’s determination on the fourth and fifth Graf prongs. As to the second, however, especially as it ties into the third Graf prong – unanalyzed by the magistrate judge – the author does take issue; moreover, it highlights yet another ethical issue made complicated by the two hats worn by Boies.

The third prong is whether Boies communicated with Holmes in her individual capacity, knowing that a possible conflict could arise. Missing completely from the magistrate judge’s decision is whether Boies in any way met his ethical duty to inform Holmes that Theranos – and not she – was his only client and that any privilege that would attach to their communications would be owned by Theranos, not her. This ethical duty, mandated by Rule 1.13, is properly known as the Corporate Miranda Warning.[23] Such a warning would have been particularly important (i) given that Holmes, in light of her CEO position and her total control of Theranos stock, really was the company, and (ii) given that this warning has been the subject of well-publicized litigation in the Ninth Circuit (case law which was even cited by the magistrate judge).[24] The absence of any record of Holmes being given this warning at any time between 2011 and 2016 is (at a minimum) problematic and gives pause as to whether the magistrate judge was right in not giving sufficient weight to Holmes’s subjective belief (in the absence of the Rule 1.13 warning).[25]


Many (but not all) of the foregoing miscues (ethical and otherwise) could have been avoided if Boies had not put on a director hat. But he did, and now he is one of the government’s key witnesses against the former CEO of his client (who thought he was her lawyer). We will find out if the trial reveals what benefit(s) accrued to Theranos and Holmes from the “advice of a seasoned lawyer.”

C. Evan Stewart is a senior partner in the New York City office of Cohen & Gresser, focusing on business and commercial litigation. He is an adjunct professor at Fordham Law School and a visiting professor at Cornell University. This article appears in a forthcoming issue of NY Business Law Journal, a publication of NYSBA’s Business Law Section. For more information on the Business Law Section, please see WWW.NYSBA.ORG/BUSINESS.

[1] See Ethical Issue for Business Lawyers: Lawyers-Directors: Just a Bad Idea, NY Business Law Journal (Spring 2009).

[2] Holmes’s trial began on August 31, 2021. See C. Weaver & S. Randazzo, Theranos Patients at Core of Fraud Case, Wall Street Journal, A1 (Aug. 8, 2021).

[3] See The New York Times, B1 (September 21, 2018) (Business Section).

[4] Published by Alfred A. Knopf (May 21, 2018).

[5] This article will focus only upon the issues arising from Boies’s representation of and involvement with Theranos and Ms. Holmes.

[6] See supra note 3.

[7] Id. How this response addresses Gillers’s point is not self-evident (at least to this author).

[8] Id.

[9] See supra note 1.

[10] The American Law Institute has also issued similar warnings. See supra note 1, notes 2, 3 & 4.

[11] See supra note 3.

[12] Whenever this happens (not unlike the firing of an outside auditor), outside counsel for a company should be careful because, if not a per se “red flag,” it surely is a very dark, yellow flag.

[13] See supra note 3.

[14] See supra note 1.

[15] See supra note 3.

[16] Theranos settled with the SEC on March 14, 2018. Holmes separately settled with the Commission on the same day, paying $500,000 without admitting or denying the fraud allegations; she also agreed to be banned from public company roles for 10 years, return 18.9 million Theranos shares, and relinquish voting control of Theranos.

[17] See, e.g., AOC Ltd. Partnership v. Horsham Corp., 1992 Del. Ch. LEXIS 110 (Del.Ch. 1992); Deutsch v. Logan, 580 A.2d 100 (Del. Ch. 1990); S.E.C. v. Gulf & Western Ind., Inc., 518 F. Supp. 675 (D.D.C. 1981); Valente v. PepsiCo, Inc., 68 F.R.D. 361 (D. Del. 1975); U.S. v. Vehicular Parking Ltd., 52 F. Supp. 749 (D. Del. 1949).

[18] Presumably there was an engagement letter between the Boies firm and Theranos (i) because New York requires one (22 N.Y.C.R.R. Part 1215) [although California does not]; and (ii) Theranos consented to the stock-fee arrangement in writing, which should have been encapsulated in the engagement letter. See supra note 3. The magistrate judge, however, did not reference any Theranos-Boies engagement letter.

[19] U.S. v. Graf, 610 F. 3d 1148 (9th Cir. 2010).

[20] Graf requires the person seeking to assert individual privilege to satisfy all of the following factors to establish a joint representation: First, they must show they approached counsel for the purpose of seeking legal advice. Second, they must demonstrate that when they approached counsel they made it clear that they were seeking legal advice in their individual rather than in their representative capacities. Third, they must demonstrate that the counsel saw fit to communicate with them in their individual capacities, knowing that a possible conflict could arise. Fourth, they must prove that their conversations with counsel were confidential. And fifth, they must show that the substance of their conversations with counsel did not concern matters within the company or the general affairs of the company. 610 F. 3d at 1160.

[21] The magistrate judge also pointed to the fact that Holmes did not separately compensate the Boies firm, although he did take note (in a footnote) that Theranos had a corporate obligation to pay Holmes’s “legal fees in connection with joint representation.”

[22] See Commodity Futures Trading Com. v. Weintraub, 471 U.S. 3737, 349 (1985).

[23] See C. E. Stewart, Thus Spake Zarathustra (and Other Cautionary Tales for Lawyers), N.Y. Business Law Journal (Winter 2010). This warning is sometimes called an Upjohn warning, purportedly derived from the Supreme Court’s ruling in U.S. v. Upjohn Co., 559 U.S. 383 (1981). In my view, this represents a misunderstanding of Upjohn, which (i) has nothing to do with lawyers’ ethical duties, and (ii) stands for the proposition that all corporate employees are covered by the corporation’s attorney-client privilege (i.e., the opposite message of the Rule 1.13 ethical warning).

[24] See U.S. v. Nicholas, 606 F. Supp. 2d 1109 (C.D. Cal.), rev’d sub nom. U.S. v. Ruehle, 583 F. 3d 600 (9th Cir. 2009). This decision was at the center of my prior article on the Corporate Miranda Warning. See supra note 23.

[25] In Ruehle, the CFO’s subjective belief – in the absence of a Corporate Miranda Warning – was a critical factor in the district court’s decision as to the law firm’s ethical failure (an issue which was not part of the appeal to the Ninth Circuit). Given that “an interlocutory appeal . . . is not available in attorney-client privilege cases” (In re Kellogg Brown & Root, 756 F. 3d 754, 761 (D.C. Cir. 2014)), maybe this issue will be revisited on appeal if Holmes is convicted at trial. See C. E. Stewart, The D. C. Circuit: Wrong and Wronger, NY Business Law Journal (Winter 2015).

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