Brian Grossman — Direct/Cross
2,196 linesDIRECT EXAMINATION BY MR. LEACH:
MR. LEACH: MR. GROSSMAN, I UNDERSTAND YOU'RE FULLY VACCINATED AND ARE COMFORTABLE TESTIFYING WITHOUT A MASK.
BRIAN GROSSMAN: YES, I AM.
MR. LEACH: OKAY. WHERE DO YOU WORK, SIR?
BRIAN GROSSMAN: I WORK AT A FIRM CALLED PFM HEALTH SCIENCES.
MR. LEACH: WHAT IS PFM HEALTH SCIENCES?
BRIAN GROSSMAN: WE ARE AN S.E.C. REGISTERED INVESTMENT ADVISOR. WE HAVE TWO PRINCIPAL STRATEGIES. WE HAVE A HEDGE FUND STRATEGY AND A GROWTH EQUITY STRATEGY THAT WE MANAGE.
MR. LEACH: WHEN YOU SAY AN S.E.C. REGISTERED INVESTMENT ADVISOR, WHAT DO YOU MEAN?
BRIAN GROSSMAN: WE ARE AN INVESTMENT FIRM THAT REGISTERS WITH THE S.E.C., FILES REGULATORY UPDATES, HOLDINGS. WE'RE A REGULATED ENTITY.
MR. LEACH: IF YOU'RE COMFORTABLE AND WOULD LIKE SOME WATER, LET ME GIVE YOU THE OPPORTUNITY TO POUR THAT. ARE YOU COMFORTABLE NOW?
BRIAN GROSSMAN: YES.
MR. LEACH: AND WHAT DO YOU DO FOR PFM?
BRIAN GROSSMAN: I AM THE MANAGING PARTNER FOR THE FIRM. I AM THE PORTFOLIO MANAGER FOR BOTH STRATEGIES AND THE CHIEF INVESTMENT OFFICER.
MR. LEACH: WHEN YOU SAY THE CHIEF INVESTMENT OFFICER, WHAT ARE SOME OF YOUR RESPONSIBILITIES?
BRIAN GROSSMAN: PORTFOLIO MANAGEMENT, RISK MANAGEMENT ARE THE TWO MAIN ONES.
MR. LEACH: OKAY. IN OR ABOUT FEBRUARY OF 2014, DID PFM INVEST IN A COMPANY CALLED THERANOS?
BRIAN GROSSMAN: WE DID.
MR. LEACH: AND WERE YOU INVOLVED IN MAKING THAT INVESTMENT DECISION?
BRIAN GROSSMAN: I WAS.
MR. LEACH: WE'LL COME BACK TO THAT. BUT FOR NOW COULD YOU BRIEFLY DESCRIBE YOUR EDUCATIONAL BACKGROUND?
BRIAN GROSSMAN: YES. I GRADUATED FROM THE UNIVERSITY OF PENNSYLVANIA IN 1996. I JOINED JP MORGAN ASSET MANAGEMENT IN SUMMER OF 1996 AND WORKED THERE FOR FIVE YEARS. THE FIRST TWO I WAS A -- I WORKED IN THE EQUITY PORTFOLIO MANAGEMENT GROUP, AND THE LAST THREE I WAS PROMOTED TO BE A RESEARCH ANALYST COVERING THE HEALTH CARE SECTOR. IN THE MIDDLE OF 2001 I LEFT JP MORGAN TO JOIN A FIRM CALLED PEQUOT CAPITAL, THEY WERE A HEDGE FUND BASED IN CONNECTICUT, NEW YORK, AND MY ROLE AT THAT POINT WAS TO COVER THE BIOTECHNOLOGY SECTOR. I DID THAT AT PEQUOT FOR A FEW MONTHS. PEQUOT THEN SPLIT INTO TWO FIRMS. THE FIRM THAT LEFT AND SPLIT OUT AND SPUN OUT OF PEQUOT WAS A FIRM CALLED ANDOR CAPITAL. I JOINED -- I WAS PART OF THE GROUP THAT LEFT PEQUOT AND JOINED ANDOR. THAT WAS IN 2001. FROM NOVEMBER OF 2001 UNTIL THE MIDDLE OF 2004 I WAS THE BIOTECH ANALYST AT ANDOR CAPITAL MANAGEMENT. AND THEN ANDOR HAD A SIMILAR SPLIT IN THE MIDDLE OF 2004, AND AT THAT POINT MYSELF AND A FEW OF THE OTHER -- MY COLLEAGUES STARTED OUR CURRENT FIRM, PFM.
MR. LEACH: SO YOU'VE HAD OVER 20 YEARS EXPERIENCE COVERING THE BIOTECH SECTOR EITHER AS ANALYST OR AN INVESTOR?
BRIAN GROSSMAN: THAT IS CORRECT.
MR. LEACH: OKAY. AND PFM IS AN INVESTMENT PARTNERSHIP?
BRIAN GROSSMAN: WE ARE -- YES, WE ARE A, WE ARE A PARTNERSHIP. WE ARE NOT A C CORP, AND SO WE HAVE, WE HAVE PARTNERS AND THEN WE HAVE NON-PARTNERED EMPLOYEES.
MR. LEACH: OKAY. DO YOU INVEST JUST FOR YOURSELF OR DO YOU INVEST FOR CLIENTS? WHAT DO YOU DO?
BRIAN GROSSMAN: THE PRINCIPAL CAPITAL BASE, THE VAST MAJORITY OF THAT IS NON-EMPLOYEE CAPITAL.
MR. LEACH: SO INDIVIDUALS WHO INVEST IN YOUR FUND?
BRIAN GROSSMAN: THAT'S CORRECT.
MR. LEACH: OKAY. DO YOU ALSO MAKE INVESTMENTS ON BEHALF OF PENSION FUNDS?
BRIAN GROSSMAN: YES, WE DO. WE HAVE A BROAD RANGE OF DIFFERENT INVESTORS IN OUR FUNDS.
MR. LEACH: AND ARE THOSE PENSION FUNDS PRIVATE COMPANIES? PUBLIC COMPANIES? STATES? WHAT ARE THEY?
BRIAN GROSSMAN: THEY REPRESENT BOTH.
MR. LEACH: I'D LIKE TO DRAW YOUR ATTENTION, PLEASE, TO THE TIME PERIOD DECEMBER OF 2013. IN OR AROUND THAT TIME, DID YOU MEET WITH INDIVIDUALS FROM THERANOS ABOUT A POSSIBLE INVESTMENT IN THE COMPANY?
BRIAN GROSSMAN: YES.
MR. LEACH: OKAY. WHO DID YOU MEET WITH?
BRIAN GROSSMAN: WE MET WITH MS. HOLMES AND MR. BALWANI.
MR. LEACH: AND WAS IT JUST YOU ON BEHALF OF PFM OR WAS THERE SOMEBODY ELSE?
BRIAN GROSSMAN: IN THAT FIRST MEETING IT WAS MYSELF AND MY PARTNER, CHRIS JAMES.
MR. LEACH: WHERE DID YOU MEET WITH MS. HOLMES AND MR. BALWANI?
BRIAN GROSSMAN: WE MET AT THEIR OFFICES ON CALIFORNIA AVENUE IN PALO ALTO.
MR. LEACH: APPROXIMATELY HOW LONG DID YOU MEET WITH THEM FOR?
BRIAN GROSSMAN: I BELIEVE IT WAS ROUGHLY AN HOUR MEETING.
MR. LEACH: OKAY. WERE YOU SHOWN ANY DOCUMENTS IN THIS HOUR LONG MEETING?
BRIAN GROSSMAN: I BELIEVE THERE WAS A LAPTOP WITH A PRESENTATION IN THAT MEETING.
MR. LEACH: OKAY. DESCRIBE FOR US WHAT HAPPENED, YOUR EXPERIENCE IN GOING TO THERANOS AND RECEIVING INFORMATION FROM MS. HOLMES AND MR. BALWANI.
BRIAN GROSSMAN: WELL, WE SCHEDULED THE MEETING FOR MID-DECEMBER. I REMEMBER DRIVING DOWN FROM SAN FRANCISCO WHERE OUR OFFICES ARE WITH MY PARTNER. I REMEMBER ARRIVING AT THE COMPANY'S HEADQUARTERS AND GOING THROUGH THE LOBBY WHERE THEY HAD SECURITY, AND WE HAD TO SIGN SOME DOCUMENTS THAT I WAS A LITTLE SURPRISED THAT WE HAD TO SIGN DOCUMENTS TO GET INTO THE BUILDING. THEN WE WERE USHERED THROUGH AN AREA THAT WAS A LOBBY AREA WITH SOME EQUIPMENT, KIND OF A DEMONSTRATION AREA, BACK THROUGH A KITCHEN, PASSED A WHOLE BUNCH OF PEOPLE WORKING, AND INTO A CONFERENCE ROOM IN THE BACK OF THE BUILDING, AND THAT'S WHERE WE MET WITH MS. HOLMES AND MR. BALWANI.
MR. LEACH: YOU MENTIONED THE LEVEL OF SECURITY GETTING IN THERANOS. WAS IT UNUSUALLY HIGH IN YOUR EXPERIENCE?
BRIAN GROSSMAN: IT WAS A LITTLE UNUSUAL. WE HAD -- I DON'T REMEMBER -- I DON'T RECALL THAT FOR EITHER A PUBLIC OR PRIVATE COMPANY, BUT -- SO I DO REMEMBER THAT ASPECT OF IT.
MR. LEACH: OKAY. AND YOU MET WITH MS. HOLMES AND MR. BALWANI IN THIS DECEMBER 2013 MEETING?
BRIAN GROSSMAN: YES.
MR. LEACH: OKAY. TAKE A MOMENT AND DESCRIBE FOR US THE SUBSTANCE OF WHAT WAS SAID.
BRIAN GROSSMAN: OKAY. WELL, THE MEETING STARTED OUT, AND THE FIRST THING WE TALKED ABOUT WAS THE TECHNOLOGY. WE KNEW WHAT WAS PUBLICLY AVAILABLE, WHAT HAD BEEN PUBLICLY DISCLOSED ABOUT THE COMPANY AT THAT POINT. WE KNEW THAT THEY HAD A PARTNERSHIP WITH WALGREENS THAT HAD BEEN ANNOUNCED I THINK IN SEPTEMBER OF 2013. BUT BEYOND THAT WE REALLY KNEW NOTHING ABOUT THERANOS. SO THIS WAS OUR FIRST OPPORTUNITY TO REALLY HEAR THEIR STORY AND UNDERSTAND WHAT THEIR, WHAT THEIR BUSINESS, THEIR BUSINESS WAS. THE FIRST THING WE TALKED ABOUT WAS THE TECHNOLOGY, AND THEY TOLD US THAT THEY COULD DO ALL -- OVER A THOUSAND CPT CODES WITH THEIR TECHNOLOGY. THAT WAS A PRETTY PROFOUND STATEMENT. SO THEY THEN EXPLAINED HOW IT HAD TAKEN THEM TEN YEARS TO GET TO THAT POINT, AND OVER THAT TEN YEAR PERIOD OF TIME THEY DESCRIBED HOW THEY HAD WORKED WITH BOTH THE MILITARY, THE DEPARTMENT OF DEFENSE, AND PHARMACEUTICAL COMPANIES DOING CLINICAL TRIAL RESEARCH.
ON THE DEPARTMENT OF DEFENSE, THEY TOLD US THAT THE TECHNOLOGY HAD BEEN USED IN THE BATTLEFIELD ON MEDEVACS, FOR EXAMPLE, AND THAT GETTING DIAGNOSTIC INFORMATION TO MEDICAL PERSONNEL IN THE -- IN THAT SETTING WAS A MATTER OF LIFE AND DEATH. AND THEY EMPHASIZED HOW THEIR TECHNOLOGY HAD BEEN ABLE TO DO THAT IN THOSE DIFFICULT CONDITIONS. ON THE PHARMACEUTICAL SIDE, THEY TALKED ABOUT THE PARTNERSHIPS THAT THEY HAD WITH A VARIETY OF DIFFERENT PHARMACEUTICAL COMPANIES, AND THEY SAID OVER THE YEARS THEY HAD BEEN ASKED TO DO A VARIETY OF DIFFERENT TESTS. THE IDEA WAS THAT YOU COULD GIVE SOMEONE A REAL -- A TEST IN THEIR HOUSE WITHIN 20, 30 MINUTES FOR AN EXPERIMENTAL DRUG, AND IT WAS THE -- IT WAS THOSE RELATIONSHIPS WHICH OPENED THEIR EYES TO THE FACT THAT THERE WERE REALLY WERE NO LIMITATIONS TO THE TECHNOLOGY. SO THAT'S WHAT KIND OF STARTED THEIR THINKING ABOUT A RETAIL-LIKE STRATEGY WITH SOMEONE LIKE WALGREENS.
THEY THEN DESCRIBED HOW THE TECHNOLOGY WAS ACTUALLY BETTER THAN CONVENTIONAL LABORATORY EQUIPMENT, WHICH SUFFERED FROM A HUGE AMOUNT OF VARIABILITY. AND VARIABILITY WAS DUE TO HUMANS, INTERACTING WITH BIG VENOUS DRAWS, SAMPLES THAT WERE TAKEN CONVENTIONALLY, AND THEN MANIPULATING THOSE SAMPLES IN A LABORATORY ENVIRONMENT. IT CREATED -- IT INTRODUCED A SIGNIFICANT AMOUNT OF VARIABILITY. AND THEY EXPLAINED THAT THEIR TECHNOLOGY ELIMINATED THE HUMAN ASPECT OF THAT, AND AS A RESULT IT HAD DRAMATICALLY LESS VARIABILITY FROM TEST TO TEST, FROM MACHINE TO MACHINE. I THINK IN THAT MEETING THEY TALKED ABOUT A NUMBER THAT WAS LESS THAN 5 PERCENT, AND THEY COMPARED THAT TO SOMETHING LIKE HIGH DENSITY -- HDL, WHICH IS THE GOOD CHOLESTEROL, SO HIGH DENSITY LIPID PROTEIN, AND THEY EXPLAINED THAT THAT TEST, WHICH IS PROBABLY A TEST THAT EVERYONE IN THIS COURTROOM HAS HAD, YOU CAN SEE VARIABILITY OF UPWARDS OF 30 PERCENT OR MORE FROM THE SAME MACHINE IN THE SAME LAB.
SO THEY REALLY EMPHASIZED HOW NOT ONLY WAS THIS A MORE CONVENIENT TECHNOLOGY, BUT, YOU KNOW, IT HAD VERY, VERY SIGNIFICANT ADVANTAGES IN TERMS OF THE RELIABILITY AND REPRODUCIBILITY. WE CIRCLED BACK TO THE TECHNOLOGY AT THAT POINT AND SAID THAT WE WANTED TO COME BACK TO UNDERSTAND AND -- COME BACK TO THE OPENING STATEMENTS IN THAT MEETING AND UNDERSTAND IF THERE WERE ANY LIMITATIONS. AND, AGAIN, THEY WERE VERY CLEAR. MS. HOLMES WAS ACTUALLY VERY CLEAR THAT THEY COULD MATCH EVERY TEST ON THE LABCORP AND QUEST MENU OF TESTS. THOSE WERE THE TWO LABORATORIES THAT ARE PROBABLY MOST WELL-KNOWN IN THE CLINICAL DIAGNOSTIC SPACE AS BEING INDEPENDENT, WHAT WE REFER TO AS REFERENCE LABORATORIES. BUT SHE DID HIGHLIGHT THAT THERE WAS ONE LIMITATION THAT THEY HAD WITH THE TECHNOLOGY AT FIRST, WHICH WAS AROUND CULTURES, AND CULTURES, BY THAT SHE WAS REFERRING TO THE IDEA OF HOW YOU GROW A LITTLE MICROORGANISMS AND IDENTIFY THOSE, AND IT'S SOMETHING THAT HAPPENS ALL THE TIME IN HOSPITALS. SHE DESCRIBED A TECHNOLOGY THAT THEY HAD DEVELOPED INTERNALLY TO DO THAT TYPE OF TESTING ON THEIR PROPRIETARY EQUIPMENT. IT INVOLVED A DIFFERENT TYPE OF NUCLEIC ACID AMPLIFICATION THAT WAS MUCH FASTER, MEANINGFULLY FASTER THAN ANYTHING THAT WAS AVAILABLE AT THAT POINT IN TIME. SO WE TALKED ABOUT THIS NUCLEIC ACID AMPLIFICATION TECHNOLOGY. FROM THERE --
MR. LEACH: MR. GROSSMAN, LET ME PAUSE YOU BRIEFLY BECAUSE --
BRIAN GROSSMAN: YEAH.
MR. LEACH: -- BECAUSE I WANT TO BREAK DOWN SOME OF THE ELEMENTS OF YOUR ANSWER AND I DON'T MEAN TO INTERRUPT YOU. YOU STARTED WITH THE REFERENCE TO THE NUMBER OF CPT CODES THAT THERANOS COULD PERFORM. DO YOU RECALL THAT?
BRIAN GROSSMAN: YES.
MR. LEACH: AND WHAT WAS THE NUMBER THAT YOU RECALL MS. HOLMES AND MR. BALWANI PROVIDING YOU?
BRIAN GROSSMAN: IT WAS OVER A THOUSAND.
MR. LEACH: OKAY. AND WAS THAT IMPRESSIVE TO YOU?
BRIAN GROSSMAN: VERY.
MR. LEACH: OKAY. WHY WAS THAT IMPRESSIVE TO YOU?
BRIAN GROSSMAN: WELL, THIS WAS A COMPANY THAT WE REALLY HAD NEVER HEARD OF, AND TO BE ABLE TO MATCH THE ENTIRE MENU OF TESTS, A THOUSAND CPT CODES, WAS A REALLY BIG STATEMENT ABOUT HOW MUCH THEY HAD ACCOMPLISHED, WHERE THE TECHNOLOGY WAS AT THAT POINT IN TIME. AND THEN IT WAS KIND OF ALSO SUPPORTED BY HOW IT HAD BEEN USED IN BOTH THE MILITARY AND IN THE PHARMACEUTICAL CLINICAL TRIAL SETTING.
MR. LEACH: OKAY. YOU TALKED A LITTLE BIT ABOUT THE MILITARY APPLICATIONS THAT WERE DESCRIBED TO YOU IN THIS MEETING, AND I THINK I HEARD YOU SAY YOU WERE TOLD IT WAS BEING USED IN THE BATTLEFIELD.
BRIAN GROSSMAN: CORRECT.
MR. LEACH: AND IT WAS BEING USED ON MEDEVAC HELICOPTERS?
BRIAN GROSSMAN: CORRECT.
MR. LEACH: AND WAS THAT IMPRESSIVE TO YOU?
BRIAN GROSSMAN: I MEAN, WHAT, WHAT -- YES. WHAT BETTER APPLICATION FOR A TECHNOLOGY LIKE THIS THAN IN A MILITARY SETTING UNDER HARSH CONDITIONS LIKE ONE WOULD EXPECT IN A PLACE LIKE AFGHANISTAN OR IRAQ.
MR. LEACH: YOU ALSO DESCRIBED WORK THAT THE COMPANY HAD BEEN DOING WITH PHARMACEUTICAL COMPANIES. DO YOU RECALL THAT?
BRIAN GROSSMAN: I DO, YES.
MR. LEACH: AND DID MS. HOLMES OR MR. BALWANI GIVE YOU A SENSE OF HOW LARGE AND ROBUST THAT BUSINESS WAS?
BRIAN GROSSMAN: I DON'T RECALL SPECIFICALLY, ONLY THAT THAT HAD BEEN A BIG PART OF WHAT HAD SUSTAINED, ALONG WITH THE MILITARY, THE COMPANY OVER THE TEN YEARS THAT THEY WERE, THEY WERE IN STEALTH MODE.
MR. LEACH: DID EITHER OF THEM MAKE REFERENCE TO HISTORICAL REVENUE NUMBERS ABOUT THE WORK WITH PHARMA AND THE MILITARY?
BRIAN GROSSMAN: TOWARDS THE END OF THE MEETING THEY TALKED ABOUT HOW THEY HAD -- I WANT TO SAY SOMETHING, A LITTLE OVER 200 MILLION OF REVENUES FROM THE DEPARTMENT OF DEFENSE, MOSTLY FROM THE DEPARTMENT OF DEFENSE, THAT HAD SUSTAINED THE COMPANY THROUGH THIS PERIOD, THIS PERIOD THAT THEY WERE BUILDING THEIR MENU OF TESTS FOR THE RETAIL SETTING.
MR. LEACH: AND WAS THAT IMPRESSIVE TO YOU?
BRIAN GROSSMAN: YEAH, IT WAS VERY IMPRESSIVE, YES.
MR. LEACH: I THINK I ALSO HEARD YOU SAY THAT THEY TALKED ABOUT THE LACK OF VARIABILITY FROM MACHINE TO MACHINE AND HOW THAT ELIMINATED ERROR IN TRADITIONAL LABS.
BRIAN GROSSMAN: CORRECT.
MR. LEACH: AND WAS THAT IMPRESSIVE TO YOU?
BRIAN GROSSMAN: VERY.
MR. LEACH: AND WHY WAS THAT?
BRIAN GROSSMAN: WELL, WE KNEW THAT IN THE CONVENTIONAL LABORATORY ENVIRONMENT THERE WERE MANY DIFFERENT TYPES OF EQUIPMENT, AND HUMANS HAD -- HUMAN LAB TECHNICIANS HAD A BIG ROLE AND OFTEN ONLY HAD A NARROW JOB WITHIN THE LABORATORY TO WORK ONE PIECE OF EQUIPMENT. AND SO, YOU KNOW, THAT IS THE WAY THAT THE INDUSTRY HAD BEEN FOR THE LAST 30, 40 YEARS. SO THE IDEA THAT YOU COULD ELIMINATE THE HUMAN PART OF THE LABORATORY INDUSTRY HAD PROFOUND IMPLICATIONS FOR THE ECONOMICS OF THAT INDUSTRY, THE PROFITABILITY, THE COSTS. SO THAT WAS, THAT WAS A VERY KIND OF IMPORTANT PART OF THAT MEETING.
MR. LEACH: WHO DID MOST OF THE TALKING IN THIS DECEMBER 2013 MEETING?
BRIAN GROSSMAN: MS. HOLMES.
MR. LEACH: AT ANY POINT DID MS. HOLMES OR MR. BALWANI DISAGREE WITH EACH OTHER ABOUT INFORMATION THAT WAS BEING PROVIDED TO YOU?
MR. LEACH: WAS THERE ANY DISCUSSION OF THE WALGREENS RELATIONSHIP IN THIS DECEMBER 2013 MEETING?
BRIAN GROSSMAN: YES, THERE WAS. WE -- THEY TALKED -- THEY TOLD US THAT WALGREENS HAD 8100 STORES. THEY WOULD BE COMMERCIALLY ROLLING THIS TECHNOLOGY OUT IN ALL OF THE WALGREENS STORES, AND THAT AT THAT POINT IN TIME THEY WERE ACTUALLY USING THE PROPRIETARY TECHNOLOGY, TESTING HUMAN SAMPLES, AND BILLING FOR THOSE TESTS, BEING REIMBURSED, TO USE A TERM WE USE A LOT, AN INVESTMENT TERM THAT WE USE. SO THAT WAS -- THEY WERE USING THE TECHNOLOGY ON ACTUAL HUMANS AT THAT POINT IN TIME, OR NOT HUMANS, BUT HUMAN SAMPLES.
MR. LEACH: AND WAS THAT IMPRESSIVE TO YOU?
BRIAN GROSSMAN: VERY.
MR. LEACH: AT THE CONCLUSION OF THIS DECEMBER 2013 MEETING WITH MS. HOLMES AND MR. BALWANI, WERE YOU INTERESTED IN PURSUING A POSSIBLE INVESTMENT IN THERANOS?
BRIAN GROSSMAN: WE WERE INTERESTED IN LEARNING MORE ABOUT THE COMPANY, YES.
MR. LEACH: OKAY. MAY I APPROACH THE WITNESS, YOUR HONOR?
JUDGE DAVILA: YES.
BY MR. LEACH:
MR. LEACH: (HANDING.) MR. GROSSMAN, I'VE PLACED BEFORE YOU A BINDER OF DOCUMENTS AND I'D LIKE TO DRAW YOUR ATTENTION TO WHAT HAS BEEN MARKED AS TRIAL EXHIBIT 1404.
JUDGE DAVILA: DOES THE DEFENSE HAVE A COPY OF YOUR BINDER?
MR. LEACH: YOUR HONOR, I BELIEVE THE DEFENSE DOES, BUT I NEGLECTED TO TENDER THE BINDER TO THE COURT.
JUDGE DAVILA: THANK YOU.
MR. LEACH: (HANDING.) THANK YOU, YOUR HONOR.
MR. LEACH: DO YOU HAVE 1404 IN FRONT OF YOU, SIR?
BRIAN GROSSMAN: I DO.
MR. LEACH: IS THIS A TRUE AND CORRECT COPY OF AN EMAIL EXCHANGE AMONG YOU, SUNNY BALWANI, CHRIS JAMES, AND ELIZABETH HOLMES?
BRIAN GROSSMAN: IF I COULD JUST TAKE A MINUTE TO REVIEW IT?
MR. LEACH: PLEASE.
BRIAN GROSSMAN: THANK YOU.
(PAUSE IN PROCEEDINGS.)
BRIAN GROSSMAN: OKAY.
BY MR. LEACH:
MR. LEACH: IS THIS A TRUE AND CORRECT COPY OF AN EMAIL INVOLVING YOU, MR. BALWANI, CHRIS JAMES, AND ELIZABETH HOLMES IN OR ABOUT JANUARY 7TH, 2014?
BRIAN GROSSMAN: YES.
MR. LEACH: AND DO YOU SEE THE SUBJECT LINE "DUE DILIGENCE QUESTIONS"?
BRIAN GROSSMAN: YES.
MR. LEACH: OKAY. AND IS THIS EMAIL -- DOES THIS EMAIL EXCHANGE INCLUDE DUE DILIGENCE QUESTIONS THAT YOU SENT TO MS. HOLMES AND MR. BALWANI TO BETTER UNDERSTAND THE THERANOS OPPORTUNITY?
BRIAN GROSSMAN: YES.
MR. LEACH: YOUR HONOR, I OFFER EXHIBIT 1404 INTO EVIDENCE.
JUDGE DAVILA: IT'S ADMITTED. IT MAY BE PUBLISHED.
(GOVERNMENT'S EXHIBIT 1404 WAS RECEIVED IN EVIDENCE.)
BY MR. LEACH:
MR. LEACH: MR. GROSSMAN, I'D LIKE TO DRAW YOUR ATTENTION TO THE BOTTOM EMAIL ON PAGE 1. DO YOU SEE YOUR NAME ON THE FROM LINE?
BRIAN GROSSMAN: YES.
MR. LEACH: AND YOU MENTIONED CHRIS JAMES. HE WAS YOUR PARTNER AT THE TIME?
BRIAN GROSSMAN: YES.
MR. LEACH: AND THE SUBJECT OF THIS IS DUE DILIGENCE QUESTIONS. DO YOU SEE THAT?
BRIAN GROSSMAN: YES.
MR. LEACH: AND IN THE PARAGRAPH YOU WROTE, "ELIZABETH AND SUNNY. "I HOPE YOU BOTH HAD AN ENJOYABLE FINISH TO WHAT WAS OBVIOUSLY A TREMENDOUSLY SUCCESSFUL YEAR FOR THE COMPANY." FURTHER ON YOU SAY, "BELOW IS OUR LIST OF DUE DILIGENCE QUESTIONS. WE WERE HOPING TO START THE PROCESS AS SOON AS POSSIBLE." WHY WERE YOU SENDING THESE QUESTIONS TO MS. HOLMES AND MR. BALWANI?
BRIAN GROSSMAN: WELL, AFTER OUR FIRST MEETING, WE DIGESTED THAT THE -- THE MATERIAL THAT THE, THE INFORMATION THE COMPANY PROVIDED US, AND WE AS A GROUP CAME UP WITH QUESTIONS THAT WE WANTED TO UNDERSTAND, OR WE WANTED ANSWERS TO THAT WE WANTED TO BETTER UNDERSTAND THE BUSINESS. SO THIS IS -- THIS IS THE RESULT OF THAT EFFORT TO PUT TOGETHER A MORE COMPREHENSIVE LIST OF QUESTIONS SO THAT THE NEXT TIME WE MET WITH THEM IT WOULD BE A PRODUCTIVE MEETING AND THEY WOULD KNOW WHAT ISSUES WE WANTED TO ADDRESS BEFORE WE GOT TO THE -- BEFORE THE MEETING STARTED.
MR. LEACH: OKAY. LET ME DRAW YOUR ATTENTION TO PAGE 2. AND UP AT THE TOP -- IF YOU CAN ZOOM IN ON THE TOP HALF, MS. HOLLIMAN? YOU WROTE, "DEAL TEAM, BRIAN GROSSMAN, PORTFOLIO MANAGER/HEAD OF HEALTH CARE TEAM." DO YOU SEE THAT?
BRIAN GROSSMAN: YES.
MR. LEACH: AND THERE ARE SOME OTHERS LISTED BELOW YOU?
BRIAN GROSSMAN: YES.
MR. LEACH: AND CAN YOU EXPLAIN WHO THESE OTHER FOLKS ARE?
BRIAN GROSSMAN: ALEX RABODZEY WAS ONE OF OUR BIOTECH ANALYSTS AT THAT POINT AND HE HAD DONE SOME WORK FOR US IN THE DIAGNOSTIC SPACE AND SO HE WAS GOING TO, HE WAS GOING TO BE PART OF THE ANALYSIS, PART OF THE DUE DILIGENCE TEAM. VIVEK KHANNA WAS OUR HEALTH CARE SERVICES. HEALTH CARE IS A BROAD TERM THAT REFERS TO BUSINESSES THAT ARE INVOLVED IN THE DELIVERY OF HEALTH CARE, SO HOSPITALS, INSURANCE COMPANIES, LABORATORIES, DIALYSIS COMPANIES. SO THERE'S QUITE AN ECLECTIC GROUP OF BUSINESSES THAT FALL UNDER THAT HEADING. BUT HE'S BEEN COVERING THE HEALTH CARE SPACE, INCLUDING THE REFERENCE LABORATORIES, FOR AT THAT POINT I THINK MORE THAN 25 YEARS. AND THEN SRI BALASURYAN WAS OUR JUNIOR ANALYST WHO WORKED WITH VIVEK. HIS JOB WAS MORE ANALYTIC SUPPORT. HE DID A LOT OF THE MODELING AND WAS AVAILABLE TO HELP VIVEK, AND ACTUALLY HE WORKED WITH ANOTHER ANALYST AS WELL. SO THOSE WERE THE INDIVIDUALS LISTED THERE AT THE TOP OF THIS EMAIL.
MR. LEACH: OKAY. YOU MENTIONED MODELING. WHAT DID YOU MEAN BY THAT?
BRIAN GROSSMAN: WHEN WE INVEST IN COMPANIES, WE LIKE TO UNDERSTAND QUALITATIVELY WHAT THEY DO, WHAT IS INTERESTING ABOUT THE BUSINESS. BUT WE ALWAYS MAKE AN EFFORT TO TRANSLATE THAT INTO AN ACTUAL FORECAST FOR THE BUSINESS. WE DO THAT FOR EVERYTHING -- EVERY INVESTMENT THAT WE MAKE. SO AS ANALYST AT OUR FIRM, THERE'S A LOT OF ANALYTIC LABOR THAT GOES INTO BUILDING THOSE MODELS, SO FOR OUR SENIOR PEOPLE OVER THE YEARS WE'VE USED -- WE'VE HIRED JUNIOR ANALYSTS TO HELP WITH THE MODEL BUILDING AND UPDATING MODELS EVERY TIME WE REPORT. SO IT'S SOMETHING NOW THAT WE'VE BEEN DOING FOR OVER A DECADE.
MR. LEACH: BENEATH THE DEAL TEAM THAT YOU'VE LISTED HERE, THERE'S AN OUTLINE: TECHNOLOGY, INTELLECTUAL PROPERTY AND BARRIERS TO ENTRY, WALGREENS'S PARTNERSHIP AND COMMERCIAL STRATEGY, AND SO ON. DO YOU SEE THAT?
BRIAN GROSSMAN: YES.
MR. LEACH: AND IS THIS AN OUTLINE OF THE QUESTIONS THAT YOU WERE PROPOSING TO MS. HOLMES AND MR. BALWANI TO BETTER UNDERSTAND THE THERANOS OPPORTUNITY?
BRIAN GROSSMAN: YES.
MR. LEACH: I'D LIKE TO BETTER LOOK AT SOME OF YOUR QUESTIONS THAT YOU PUT TO MS. HOLMES AND MR. BALWANI. LET'S START WITH NUMBER 1, TECHNOLOGY. DO YOU SEE THAT ON THE SCREEN?
BRIAN GROSSMAN: YES.
MR. LEACH: AND THE VERY FIRST QUESTION, "HOW DOES YOUR ACCURACY AND SPEED STACK UP AGAINST TRADITIONAL TESTS." DO YOU SEE THAT?
BRIAN GROSSMAN: YES.
MR. LEACH: AND WHY WERE YOU ASKING THAT?
BRIAN GROSSMAN: WELL, IT WAS, IT WAS A FUNDAMENTAL PART OF UNDERSTANDING WHAT THEIR TECHNOLOGY WAS CAPABLE OF DOING, AND WHAT THEIR COMPETITIVE ADVANTAGE -- WHAT COMPETITIVE ADVANTAGE THAT THEY HAD AGAINST THE CONVENTIONAL LABORATORY EQUIPMENT.
MR. LEACH: AND OVER THE COURSE OF YOUR DECISION MAKING PROCESS, DID MS. HOLMES AND MR. BALWANI MAKE STATEMENTS TO YOU RESPONSIVE TO THIS QUESTION?
BRIAN GROSSMAN: YES.
MR. LEACH: AND WHAT DID THEY TELL YOU?
BRIAN GROSSMAN: THEY TOLD US MULTIPLE TIMES OVER --
JUDGE DAVILA: COMPOUND QUESTION? DO YOU WANT TO BREAK IT --
JUDGE DAVILA: OKAY. SURE.
BY MR. LEACH:
MR. LEACH: SITTING HERE TODAY, MR. GROSSMAN, HOW MANY MEETINGS DID YOU HAVE WITH MS. HOLMES?
BRIAN GROSSMAN: I BELIEVE WE HAD TWO MEETINGS WITH MS. HOLMES.
MR. LEACH: SO THE FIRST ONE IN DECEMBER OF 2013?
BRIAN GROSSMAN: YES.
MR. LEACH: AND A SECOND ONE AT SOME POINT SUBSEQUENT TO PROPOSING THESE QUESTIONS?
BRIAN GROSSMAN: YES.
MR. LEACH: AND DID YOU ALSO HAVE ADDITIONAL -- AND WAS MR. BALWANI THERE FOR THE SECOND MEETING?
BRIAN GROSSMAN: YES.
MR. LEACH: WITH MS. HOLMES?
BRIAN GROSSMAN: YES.
MR. LEACH: AND DID YOU ALSO HAVE FOLLOW-UP CONVERSATIONS WITH MR. BALWANI?
BRIAN GROSSMAN: YES.
MR. LEACH: OKAY. SITING HERE TODAY, ARE YOU ABLE TO DISSECT EVERY SINGLE CONVERSATION AS TO WHO SAID WHAT IN EACH ONE?
MR. LEACH: DO YOU RECALL -- WHAT DO YOU RECALL MS. HOLMES TELLING YOU ABOUT "HOW DOES YOUR ACCURACY AND SPEED STACK UP AGAINST TRADITIONAL TESTS"?
BRIAN GROSSMAN: I RECALL FROM OUR FIRST MEETING THAT THEY TOLD US FROM AN ACCURACY STANDPOINT THEIR MACHINES WERE MORE ACCURATE, HAD LESS VARIABILITY THAN CONVENTIONAL LAB EQUIPMENT BOTH INSIDE OF A LAB, TWO DIFFERENT MACHINES SIDE BY SIDE, DIFFERENT RESULTS, AND THEN INTRA LAB VARIABILITY, OR THE RESULTS BETWEEN DIFFERENT LABS USING THE SAME TYPE OF EQUIPMENT. AND AGAIN, THAT GOES BACK TO THE FACT THAT THEY DIDN'T HAVE THE HUMAN INTERACTION AND EVERYTHING WAS MINIATURIZED INSIDE OF THE SAMPLE PROCESSING UNIT. IN TERMS OF SPEED, THEY TOLD US THAT THEY COULD HAVE RESULTS FOR THE RETAIL SETTING WITHIN FOUR HOURS. THEY COULD GUARANTEE TEST RESULTS WITHIN FOUR HOURS. THAT HAD IMPORTANT IMPLICATIONS FOR HOW PHYSICIANS INTERACT -- AND THEY EXPLAINED HOW THAT HAD IMPORTANT IMPLICATIONS FOR HOW PHYSICIANS INTERACT WITH THEIR PATIENTS. YOU COULD ACTUALLY HAVE YOUR LAB WORK DONE THE SAME DAY YOU VISIT YOUR PHYSICIAN, WHICH WAS A PARADIGM SHIFT IN TERMS OF PRODUCTIVITY FOR PHYSICIAN PRACTICES. AND SO -- AND THEN WHEN THE TECHNOLOGY WAS USING THE NUCLEIC ACID AMPLIFICATION TECHNOLOGY ON THEIR PROPRIETARY SYSTEMS IN A HOSPITAL SETTING, THEY COULD IDENTIFY A VIRAL OR A BACTERIAL PATHOGEN IN I BELIEVE IT WAS LESS THAN AN HOUR, AND THAT COMPARED TO A DAY OR TWO USING CONVENTIONAL CULTURED TECHNOLOGIES THAT WERE PROCESSES. SO, SO, YOU KNOW, THOSE WERE STATEMENTS THAT I RECALL FROM BOTH OF THOSE FIRST TWO MEETINGS.
MR. LEACH: THANK YOU. THE NEXT BULLET IS, "WHAT ARE THE KEY TESTS FROM A COMMERCIAL STANDPOINT AND HOW DOES ACCURACY AND SPEED COMPARE SPECIFICALLY ON THOSE." DO YOU SEE THAT QUESTION?
BRIAN GROSSMAN: YES.
MR. LEACH: AND WHY WERE YOU ASKING ABOUT THAT?
BRIAN GROSSMAN: WELL, WE, WE WERE VERY FOCUSSED ON UNDERSTANDING HOW THIS TECHNOLOGY WAS, WAS BEING USED IN THE COMMERCIAL SETTING, IN THE RETAIL COMMERCIAL SETTING, AND SO WE WANTED TO BE VERY CLEAR, WE WANTED TO BE CRYSTAL CLEAR ABOUT WHAT THE TECHNOLOGY CAPABILITIES WERE AT THAT POINT IN TIME IN A REAL WORLD RETAIL SETTING.
MR. LEACH: AND WHY WAS IT IMPORTANT FOR YOU TO KNOW AT THE TIME IN THE REAL WORLD RETAIL SETTING? WHY WAS THAT IMPORTANT TO YOU?
BRIAN GROSSMAN: BECAUSE OUR INVESTMENT WAS BASED ON -- I MEAN, I THINK AT A -- SO, NUMBER ONE, WE, WE -- THAT WAS A CRITICAL PART OF OUR INVESTMENT, UNDERSTANDING HOW THIS TECHNOLOGY WAS ACTUALLY BEING USED AT THAT POINT IN TIME IN A RETAIL ENVIRONMENT AND WHAT, IF ANY, LIMITATIONS THERE WERE. BUT FROM A BIGGER PICTURE PERSPECTIVE, WE WANTED TO UNDERSTAND WHETHER THERE WAS DEVELOPMENT, TECHNOLOGICAL RISKS OR WHETHER WE WERE INVESTING IN A COMPANY THAT ALREADY PASSED THAT REALLY PROOF OF IMPORTANT CONCEPTS, AND THE RISKS WERE REALLY COMMERCIAL ROLLOUT AND BUSINESS STRATEGY.
MR. LEACH: AND LET ME DRAW YOUR ATTENTION TO THE FOURTH BULLET. DO YOU SEE WHERE IT SAYS, "WHAT ARE THE LIMITATIONS TO THE TECHNOLOGY? WHAT TESTS ARE NOT FEASIBLE? ARE THERE TRADITIONAL ANALYTIC APPROACHES THAT ARE NOT WELL SUITED TO THERANOS'S PLATFORM?" WHY WERE YOU ASKING ABOUT THAT?
BRIAN GROSSMAN: WE JUST WANTED TO ASK THE SAME QUESTIONS AS MANY WAYS AS WE COULD SO THERE WAS NO AMBIGUITY, THERE WAS ABSOLUTELY NO, THERE WAS NO CONFUSION ABOUT WHAT THE TECHNOLOGY WAS CAPABLE OF DOING. AND SO THIS IS ANOTHER WAY OF ASKING THE SAME QUESTION AGAIN. THE ANSWER WAS THAT THERE WERE NO LIMITATIONS. THERE WAS NO METHODOLOGY THAT EXISTED IN THE ANALYTIC, THERE WAS NO ANALYTIC TECHNIQUE THAT WAS USED IN A REFERENCE LAB THAT THEY COULD NOT AND WERE NOT DOING ON THEIR PROPRIETARY TECHNOLOGY. AND AGAIN, THE COMMENTS, THE CONVERSATION AROUND NUCLEIC ACID AMPLIFICATION ALSO KIND OF CAME UP AGAIN.
MR. LEACH: AND THAT'S SOMETHING THAT MS. HOLMES TOLD YOU?
BRIAN GROSSMAN: YES.
MR. LEACH: LET ME LOOK FURTHER DOWN, IF WE COULD, MS. HOLMES -- OR MS. HOLLIMAN, DOWN TO NUMBER 3, WALGREENS'S RELATIONSHIP AND COMMERCIAL STRATEGY. DO YOU SEE THAT HEADING?
BRIAN GROSSMAN: YES.
MR. LEACH: AND YOUR FIRST QUESTION, "IS THE WALGREENS'S RELATIONSHIP EXCLUSIVE? CAN YOU SELL ANALYZERS TO PHYSICIANS? DOES IT MAKE ECONOMIC SENSE TO DO THIS IN THE LONG RUN?" WHAT DID YOU MEAN BY "ANALYZERS"?
BRIAN GROSSMAN: WHAT I MEANT WAS THE MINILAB, THE SAMPLE PROCESSING UNIT.
MR. LEACH: AND AT ANY POINT DID YOU SEE A MINILAB OR A SAMPLE PROCESSING UNIT?
BRIAN GROSSMAN: YES.
MR. LEACH: DESCRIBE IT FOR US.
BRIAN GROSSMAN: I SAW A FEW DIFFERENT, I SAW A FEW DIFFERENT VERSIONS. THE VERSION THAT WAS BEING MANUFACTURED FOR THE RETAIL SETTING WAS THE SIZE OF A PC, LIKE, FIVE YEARS AGO, A BIG PC. THEY'RE OBVIOUSLY -- THEY KEEP GETTING SMALLER, BUT, YOU KNOW, MAYBE, MAYBE 2 FEET TALL BY 10 INCHES WIDE, KIND OF LIKE THAT DIMENSION. WE SAW THEM MAKING THOSE MACHINES AT THEIR MANUFACTURING FACILITY IN NEWARK. WE ALSO SAW THOSE MACHINES IN THEIR CLIA LABORATORY IN PALO ALTO. WE ALSO SAW A DIFFERENT VERSION OF THE MINILAB IN THE LOBBY OF THEIR CALIFORNIA AVENUE OFFICES THAT THEY TOLD US WERE USED IN THE CLINICAL SETTING. THEY WERE SMALLER, AND I THINK THE POINT OF BEING SMALLER WAS TO MAKE THEM EASIER TO PUT IN SOMEONE'S HOME. SO WE SAW A DIFFERENT DEVICE THAT THEY TOLD US AT THE TIME WAS WHAT THEY USED IN THE CLINICAL TRIAL BUSINESS.
MR. LEACH: AND DID MS. HOLMES HOLD OUT THIS MINILAB DEVICE THAT YOU WERE SHOWN ON A NUMBER OF OCCASIONS AS THE DEVICE BEING USED TO TEST PATIENT SAMPLES?
BRIAN GROSSMAN: YES.
MR. LEACH: AND WAS IT RELEVANT TO YOU THAT IT WAS A SMALL DEVICE THAT THERANOS WAS MANUFACTURING?
BRIAN GROSSMAN: YES.
MR. LEACH: WHY?
BRIAN GROSSMAN: IT HAD A FUNDAMENTAL, PROFOUND IMPACT ON THE ECONOMICS OF THE LABORATORY INDUSTRY. THIS ISSUE CAME UP IN OUR SECOND MEETING WITH THE COMPANY. WHEN THEY WERE DESCRIBING THE SAMPLE PROCESSING UNIT, THEY WERE EMPHATIC WITH US THAT THIS WAS NOT ANOTHER POINT OF CARE TESTING TECHNOLOGY. THIS WAS THE ENTIRE LABORATORY SHRUNK DOWN INTO A BOX. THE IMPLICATION OF THAT IS A RADICAL CHANGE IN THE COST AND THE REAL ESTATE YOU NEED TO SUPPORT A LAB OPERATION IN A, IN ANY GIVEN AREA. AND THE EXAMPLE THEY USED WAS THE PHOENIX MARKET. THEY SAID, WE CAN -- WITH OUR MINILABS, WE CAN SUPPORT THE ENTIRE COMMERCIAL ROLLOUT OF THE PHOENIX MARKET IN 200 SQUARE FEET, 20 FEET BY 10, BECAUSE OUR SYSTEMS ARE SO MUCH SMALLER. AND THAT HAS PROFOUND IMPLICATIONS FOR THE COST STRUCTURE OF THIS BUSINESS. AND YOU THINK ABOUT WHAT THAT MEANS ON A GLOBAL BASIS AS YOU TAKE A TECHNOLOGY LIKE THIS AND YOU APPLY IT NOT JUST TO THE U.S., BUT TO OTHER MARKETS. YOU COMPARE THAT TO A CONVENTIONAL REFERENCE LABORATORY -- AND I'VE TOURED CONVENTIONAL REFERENCE LABORATORIES. QUEST HAS A BIG FACILITY IN NEW JERSEY JUST ACROSS FROM THE GEORGE WASHINGTON BRIDGE. IT'S HUNDREDS OF THOUSANDS OF SQUARE FEET. SO THAT'S BIGGER THAN MOST REFERENCE LABORATORIES, BUT YOU NEED DRAMATICALLY MORE SPACE BECAUSE EACH TESTING METHODOLOGY HAS BIG PIECES OF EQUIPMENT THAT NEED LAB TECHNICIANS TO RUN THOSE, YOU NEED CHEMICALS, REAGENTS TO RUN THOSE EXPERIMENTS. SO IT WAS A -- IT HAD IMPORTANT, PROFOUND IMPLICATIONS FOR THE ECONOMICS OF THE TESTING BUSINESS AND REPRESENTED TO US A TREMENDOUS DISRUPTION TO AN INDUSTRY THAT HADN'T CHANGED IN 30, 40 YEARS. SO, YES.
MR. LEACH: THANK YOU. LET ME DRAW YOUR ATTENTION TO PAGE 3 OF YOUR DUE DILIGENCE QUESTIONS. AND THESE ARE UNDER THE HEADING "WALGREENS RELATIONSHIP AND CUSTOMER STRATEGY." DO YOU SEE THE QUESTIONS UP AT THE TOP, "WHAT DOES THE WALGREENS SYSTEM COST TO PRODUCE, HOW WILL THAT CHANGE OVER TIME, AND WHAT IS THE TRANSFER PRICING YOU HAVE AGREED TO? "DO ANALYZERS NEED TO BE VALIDATED IN THE FIELD. WHAT IS THE ROLLOUT SCHEDULE FOR WALGREENS. "WHAT IS THE CAP X FROM THE WALGREENS ROLLOUT." WHY WERE YOU ASKING THESE TYPES OF QUESTIONS, MR. GROSSMAN?
BRIAN GROSSMAN: WELL, IT WAS NOT JUST TO BETTER UNDERSTAND HOW THEY WERE GOING TO WORK WITH WALGREENS, BUT THE STRATEGY. YOU KNOW, DID THEY WANT TO BE A MEDICAL DEVICE COMPANY? DID THEY WANT TO SELL THESE DEVICES? THAT'S TYPICALLY WHAT COMPANIES WE SEE IN THIS SECTOR DO. OR DID THEY WANT TO BE A VERTICALLY INTEGRATED SERVICE PROVIDER? DID THEY WANT TO USE THEIR OWN EQUIPMENT JUST FOR THEMSELVES AND THEIR OWN, AND IN THEIR OWN LABORATORY. SO WE WERE REALLY TRYING TO UNDERSTAND THE BUSINESS STRATEGY HERE AND HOW THEY THOUGHT ABOUT THE LONG-TERM OPPORTUNITY WITH THIS DISRUPTIVE TECHNOLOGY.
MR. LEACH: LET ME NEXT DRAW YOUR ATTENTION TO PAGE 4. AND AT PARAGRAPH 7, ARE THERE A NUMBER OF QUESTIONS RELATED TO FINANCIAL MODEL/PROJECTIONS?
BRIAN GROSSMAN: YES.
MR. LEACH: ROUGHLY SIX BULLETS DOWN YOU WROTE, "WHAT ARE GM ON THE ANALYZERS, THE TESTS?" DO YOU SEE THAT?
BRIAN GROSSMAN: YES.
MR. LEACH: AND WHAT DOES GM STAND FOR?
BRIAN GROSSMAN: THAT'S A SHORTHAND FOR GROSS MARGIN. THAT'S JUST THE SELLING PRICE OF THE DEVICE, AND THEN YOU SUBTRACT THE COST OF MANUFACTURING THE DEVICE, AND THAT'S YOUR GROSS PROFIT. THAT DOESN'T INCLUDE SALES, MARKETING, ADMINISTRATIVE, OTHER EXPENSES.
MR. LEACH: WHY DID YOU WANT TO UNDERSTAND WHAT THE COST OF MANUFACTURING THE DEVICE WAS?
BRIAN GROSSMAN: WELL, WE WANTED TO UNDERSTAND WHETHER THIS WAS A SCALEABLE, VIABLE BUSINESS. AND THE POINT THERE IS THAT THE TECHNOLOGY COULD BE INCREDIBLE, BUT IF YOU CAN'T MANUFACTURE IT AT A COST THAT IS AFFORDABLE, THAT IS SIMILAR TO OTHER EQUIPMENT, THEN THEY WERE GOING TO NEED DRAMATICALLY MORE CAPITAL TO COMMERCIALIZE THE TECHNOLOGY OR THEY MAY NEVER BE PROFITABLE, IN WHICH CASE THIS WOULDN'T HAVE BEEN A VERY -- THAT WOULD HAVE HAD AN IMPACT ON -- THAT WOULD HAVE IMPACTED OUR INVESTMENT DECISION. SO, YOU KNOW, IN THIS CASE THEY WERE -- THE GOOD NEWS WAS THAT CONVENTIONAL EQUIPMENT FROM COMPANIES LIKE CEPHEID WAS ALREADY KIND OF -- THEY REPRESENTED TO US THAT THE COST OF MAKING THE MINILAB WAS ALREADY ABOUT 20 PERCENT BELOW WHAT EQUIVALENT EQUIPMENT COSTS, AND THAT THEY HAD A PLAN TO, OVER TIME, AS THEY MADE MORE OF THE MINILABS, THEY THOUGHT THEY COULD GET THAT COST DOWN TO 20 PERCENT. SO AN 80 PERCENT DECLINE VERSUS WHAT EXISTING EQUIPMENT MOLECULAR DIAGNOSTIC EQUIPMENT COSTS. IN ADDITION TO THAT, WE WANTED TO MAKE SURE THAT THE CAPITAL THAT THEY RAISED WOULD -- THEY WOULD HAVE ENOUGH CASH TO BUILD AND MANUFACTURE THESE DEVICES. AND SO, YOU KNOW, UNDERSTANDING WHAT THEY COST WAS FUNDAMENTAL TO UNDERSTANDING WHETHER THE SALES PROJECTIONS FOR 2014 AND '15 WERE REALISTIC BASED ON THEIR ABILITY TO MANUFACTURE MINILABS.
MR. LEACH: AND IN YOUR MEETING WITH MS. HOLMES IN DECEMBER OF 2013 AND THE MEETING WITH MS. HOLMES THAT YOU LATER HAD WITH HER AFTER SENDING THESE QUESTIONS, DID YOU HAVE DISCUSSIONS WITH HER AROUND THE COSTS OF THE ANALYZER?
BRIAN GROSSMAN: WE, WE -- THESE QUESTIONS WERE ADDRESSED OVER THE COURSE OF OUR DUE DILIGENCE MEETINGS, YES.
MR. LEACH: OKAY. DID MS. HOLMES OR MR. BALWANI EVER TELL YOU THAT THE THERANOS ANALYZER WAS CURRENTLY BEING USED FOR ONLY A HANDFUL OF TESTS IN THE CLIA LAB?
JUDGE DAVILA: CAN YOU JUST PARSE THAT OUT AS TO WHICH INDIVIDUAL?
MR. LEACH: YES.
MR. LEACH: DID MS. HOLMES EVER TELL YOU THAT THE THERANOS ANALYZER WAS CURRENTLY BEING USED FOR ONLY A HANDFUL OF TESTS IN THE CLIA LAB?
MR. LEACH: DID MR. BALWANI EVER TELL YOU THAT?
MR. LEACH: DID MS. HOLMES EVER TELL YOU THAT THERANOS WAS USING MODIFIED COMMERCIALLY AVAILABLE MACHINES TO PERFORM SOME OF ITS TESTING IN THE CLIA LAB?
MR. LEACH: DID MR. BALWANI EVER TELL THAT TO YOU?
MR. LEACH: DID THEY EVER -- IN THE DISCUSSIONS THAT YOU HAD WITH MS. HOLMES, DID SHE EVER DESCRIBE FOR YOU THE COSTS OF ACQUIRING SIEMENS MACHINES TO DO TESTING?
BRIAN GROSSMAN: ABSOLUTELY NOT.
MR. LEACH: WOULD THAT HAVE BEEN RESPONSIVE TO QUESTIONS THAT YOU PUT TO MS. HOLMES?
BRIAN GROSSMAN: YES.
MR. LEACH: AND WOULD THAT HAVE BEEN RELEVANT TO YOU?
BRIAN GROSSMAN: YES.
MR. LEACH: OKAY. DID MR. BALWANI EVER TALK TO YOU ABOUT THE COST OF ACQUIRING SIEMENS MACHINES AND HOW THAT MIGHT AFFECT GROSS MARGIN?
MR. LEACH: AND WOULD THAT HAVE BEEN RELEVANT AS YOU'RE ASSESSING THE POTENTIAL COSTS AND PROFITABILITY OF THIS OPERATION?
BRIAN GROSSMAN: YES.
MR. LEACH: DID MS. HOLMES EVER TELL YOU THAT THE GM ON ANALYZERS INCLUDED THE COST OF THIRD PARTY MACHINES?
MR. LEACH: WOULD THAT HAVE BEEN RELEVANT TO YOU?
BRIAN GROSSMAN: YES.
MR. LEACH: AND DID MR. BALWANI EVER TELL YOU THAT THE GROSS MARGINS ON ANALYZERS INCLUDED THE COSTS OF THIRD PARTY MACHINES?
BRIAN GROSSMAN: DID HE EVER TELL ME THAT?
MR. LEACH: YES.
BRIAN GROSSMAN: I'M SORRY. COULD YOU REPEAT THE QUESTION?
MR. LEACH: DID MR. BALWANI EVER TELL YOU THAT THE GROSS MARGIN ON THE ANALYZERS INCLUDED COSTS OF THIRD PARTY MACHINES?
MR. LEACH: LET'S GO BACK TO PAGE 1 OF EXHIBIT 1404. AND IF WE CAN ZOOM IN ON THE TOP, MS. HOLLIMAN. IN THE TOP EMAIL MR. BALWANI IS WRITING TO YOU, MR. GROSSMAN, "WE ARE CONFIRMED FOR FRIDAY AT 9:00 A.M. SEE YOU THEN." DO YOU SEE THAT LANGUAGE?
BRIAN GROSSMAN: YES.
MR. LEACH: AND DO YOU BELIEVE THAT TO BE A REFERENCE TO A MEETING THAT YOU HAD WITH MS. HOLMES AND MR. BALWANI LATER THAT WEEK IN JANUARY OF 2014?
BRIAN GROSSMAN: YES.
MR. LEACH: WHERE WAS THAT MEETING HELD?
BRIAN GROSSMAN: THAT MEETING WAS ALSO HELD AT THEIR CORPORATE HEADQUARTERS ON CALIFORNIA AVENUE IN PALO ALTO.
MR. LEACH: AND DID YOU GO THROUGH THE SAME LEVEL OF SECURITY FOR THAT MEETING?
BRIAN GROSSMAN: YES, WE HAD, WE HAD -- WE BROUGHT OUR FULL INVESTMENT TEAM WITH US, AND SO THE NEW MEMBERS WHO HAD NOT BEEN AT THE FIRST MEETING WERE REQUIRED TO SIGN SIMILAR DOCUMENTATION BEFORE WE WERE ADMITTED TO THE LOBBY OF THE BUILDING.
MR. LEACH: OKAY. WHO WAS THERE FROM THE THERANOS SIDE?
BRIAN GROSSMAN: IT WAS -- FROM THE THERANOS SIDE IT WAS MS. HOLMES AND MR. BALWANI.
MR. LEACH: AND WHO WAS THERE FROM THE PFM SIDE?
BRIAN GROSSMAN: THE PFM SIDE HAD MYSELF, BRIAN GROSSMAN; VIVEK KHANNA; ALEX RABODZEY; SRI BALASURYAN; AND I BELIEVE MY PARTNER, CHRIS JAMES.
MR. LEACH: AND WERE YOU SHOWN ANY DOCUMENTS IN THIS MEETING?
BRIAN GROSSMAN: YES.
MR. LEACH: WHAT WERE YOU SHOWN?
BRIAN GROSSMAN: THE COMPANY HAD A PRESENTATION ON A LAPTOP. THEY ALSO HAD A FINANCIAL MODEL WHICH WAS ALSO ON A LAPTOP.
MR. LEACH: WAS MS. HOLMES THERE FOR THE ENTIRETY OF THE MEETING?
BRIAN GROSSMAN: I DO NOT -- I DON'T BELIEVE SHE WAS.
MR. LEACH: OKAY. TELL US WHAT HAPPENED.
BRIAN GROSSMAN: THE MEETING -- COULD YOU BE A LITTLE MORE SPECIFIC?
MR. LEACH: WHY DO YOU SAY SHE WASN'T THERE FOR THE WHOLE MEETING?
BRIAN GROSSMAN: I REMEMBER AT SOME POINT IN THE MEETING SHE STEPPED OUT OF THAT, OF THAT MEETING.
MR. LEACH: OKAY. AND SITTING HERE TODAY, ARE YOU ABLE TO TELL US WHICH PARTS SHE WAS THERE FOR OR NOT THERE FOR?
BRIAN GROSSMAN: I BELIEVE IT WAS ROUGHLY HALFWAY THROUGH.
MR. LEACH: OKAY. DESCRIBE -- DID MS. HOLMES TALK TO YOU IN THIS MEETING ABOUT THE IDEA OF MINIATURIZING THE LAB?
BRIAN GROSSMAN: YES.
MR. LEACH: AND WHAT DID SHE SAY ON THAT POINT?
BRIAN GROSSMAN: THAT, THAT THIS WAS -- WE DISCUSSED THE DIFFERENCE BETWEEN A POINT OF CARE TESTING TECHNOLOGY, LIKE A HOME PREGNANCY TEST OR A HOME COVID TEST, AND THE MINIATURIZATION OF THE ENTIRE REFERENCE LAB INTO ONE SMALL DEVICE, AND THEY WERE VERY CLEAR THAT THIS TECHNOLOGY WAS NOT A POINT OF CARE TEST, WAS NOT A POINT OF CARE TESTING PLATFORM. IT WAS A MINIATURIZED LAB. AGAIN, THAT LED TO THE IMPLICATION ON THE COST OF PROVIDING LABORATORY SERVICES IN A RETAIL OR IN A HOSPITAL SETTING.
MR. LEACH: DID MS. HOLMES TALK TO YOU ABOUT WHY THEY WERE LAUNCHING NOW AS OPPOSED TO EARLIER?
BRIAN GROSSMAN: YES.
MR. LEACH: WHAT DID SHE SAY?
BRIAN GROSSMAN: THAT WAS AT THE BEGINNING OF THIS MEETING, AND THEY TOLD US THAT THE REASON THAT THEY HAD WAITED THIS LONG TO LAUNCH A RETAIL PRODUCT WAS THAT THEY WANTED TO MAKE SURE THAT THEY HAD COMPLETE COVERAGE, 100 PERCENT COVERAGE OF WHAT QUEST AND LABCORP COULD OFFER.
MR. LEACH: AND DID SHE SAY THAT THEY HAD ACCOMPLISHED THAT AT THIS POINT?
BRIAN GROSSMAN: YES.
MR. LEACH: AND DID MS. HOLMES TALK ABOUT THE VARIANCE BETWEEN TRADITIONAL ANALYZERS?
BRIAN GROSSMAN: IN THIS MEETING WE ALSO DISCUSSED, AS WE DID IN THE FIRST MEETING, THE ADVANTAGES OF THE MINILAB AND THEIR PROPRIETARY TECHNOLOGY, THE FACT THAT BY ELIMINATING HUMAN ELEMENTS OF A REFERENCE LABORATORY OPERATING ENVIRONMENT YOU COULD DRAMATICALLY REDUCE THE VARIABILITY SYSTEM TO SYSTEM. SO, YES, WE HIGHLIGHTED THAT AND WE DISCUSSED SOME OF THE TESTS THAT WERE KNOWN TO BE PROBLEMATIC IN THE REFERENCE LABORATORY ENVIRONMENT, AND I BELIEVE THAT THEY, THEY -- WE DISCUSSED HOW THEIR PROPRIETARY TECHNOLOGY HAD A VARIANCE OF LESS THAN 3 PERCENT.
MR. LEACH: DID MS. HOLMES MAKE STATEMENTS ABOUT THE COST OF THE DEVICE?
BRIAN GROSSMAN: I BELIEVE IN THIS MEETING WE ALSO DISCUSSED THE COST OF THE DEVICE SAMPLE PROCESSING UNIT BEING ALREADY LESS THAN WHAT A SYSTEM FROM CEPHEID OR ILLUMINA, WHICH WERE TWO OTHER COMPANIES THAT MAKE DIAGNOSTIC EQUIPMENT, WHAT THOSE SYSTEMS COST, AND I BELIEVE THEY SAID THEY ALREADY WERE 15 OR 20 PERCENT LESS THAN -- THE COST WAS ALREADY 15 OR 20 PERCENT LESS THAN WHAT THOSE SYSTEMS WERE SELLING FOR.
JUDGE DAVILA: OVERRULED. THE ANSWER CAN REMAIN.
BY MR. LEACH:
MR. LEACH: DID MS. HOLMES ALSO MAKE STATEMENTS ABOUT THE SPEED WITH WHICH THERANOS COULD TEST BLOOD?
BRIAN GROSSMAN: YES. THAT THIS IS -- THEY DESCRIBED HOW IN THE RETAIL SETTING THEY COULD GUARANTEE A TEST RESULT WITHIN FOUR HOURS, AND IN THE HOSPITAL SETTING HOW THEY COULD GET AN ANSWER IN LESS THAN AN HOUR.
MR. LEACH: YOUR HONOR, I'M ABOUT TO MOVE INTO ANOTHER DOCUMENT. I'M NOT SURE WHAT TIME WE HAD PLANNED ON OUR BREAK, BUT WE'RE GETTING CLOSE TO 11:00.
JUDGE DAVILA: WE WERE PLANNING ON 11:00 O'CLOCK. SHOULD WE DO THAT NOW? LET'S TAKE OUR MORNING BREAK. 30 MINUTES, LADIES AND GENTLEMEN. THIRTY MINUTES, SIR, AND THEN YOU'LL RETURN TO THE STAND.
BRIAN GROSSMAN: OKAY.
JUDGE DAVILA: AND WE'LL HAVE OUR BREAK.
MR. LEACH: THANK YOU.
(JURY OUT AT 10:59 A.M.)
(RECESS FROM 10:59 A.M. UNTIL 11:35 A.M.)
JUDGE DAVILA: PLEASE BE SEATED. WE'RE BACK ON THE RECORD. ALL PARTIES PREVIOUSLY PRESENT ARE PRESENT ONCE AGAIN. MR. LEACH, DO YOU WANT TO CONTINUE WITH YOUR EXAMINATION?
MR. LEACH: YES, YOUR HONOR. THANK YOU.
MR. LEACH: MR. GROSSMAN, WHEN WE BROKE WE WERE TALKING ABOUT A MEETING THAT YOU HAD WITH MS. HOLMES AND MR. BALWANI IN EARLY JANUARY 2014. DO YOU RECALL THAT TOPIC?
BRIAN GROSSMAN: YES.
MR. LEACH: IN YOUR MEETING WITH MS. HOLMES AND MR. BALWANI, DID MS. HOLMES MAKE STATEMENTS TO YOU ABOUT THE SIZE OF THE THERANOS EQUIPMENT COMPARED TO OTHER LABORATORIES?
BRIAN GROSSMAN: YES.
MR. LEACH: WHAT DID SHE TELL YOU?
BRIAN GROSSMAN: I'M SORRY, CAN YOU RESTATE THE QUESTION AGAIN.
MR. LEACH: DID MS. HOLMES MAKE STATEMENTS TO YOU ABOUT THE COMPARATIVE SIZE OF THE THERANOS LAB OR ANALYZER COMPARED TO TRADITIONAL LABORATORY EQUIPMENT?
BRIAN GROSSMAN: YES.
MR. LEACH: WHAT DID SHE SAY TO YOU ABOUT THAT?
BRIAN GROSSMAN: THEY WERE -- THEIR PROPRIETARY EQUIPMENT WAS MUCH SMALLER THAN CONVENTIONAL LABORATORY ANALYTIC INSTRUMENTS.
MR. LEACH: AND WAS THAT ATTRACTIVE TO YOU?
BRIAN GROSSMAN: YES.
MR. LEACH: HOW SO?
BRIAN GROSSMAN: IT, ON ONE LEVEL, SPOKE TO THE TECHNOLOGICAL ACCOMPLISHMENTS THE COMPANY HAD ACHIEVED AT THAT POINT. BUT FROM A BUSINESS PERSPECTIVE, IT HAD PROFOUND IMPLICATIONS FOR THE COSTS, THE PRODUCTIVITY, THE ECONOMICS OF PROVIDING LABORATORY SERVICES, WHETHER IT WAS A RETAIL LAB SETTING OR A HOSPITAL LABORATORY SETTING.
MR. LEACH: LET ME MOVE FORWARD IN TIME, PLEASE, AND DRAW YOUR ATTENTION TO WHAT HAS BEEN MARKED AS TRIAL EXHIBIT 4077. IT SHOULD BE IN YOUR BINDER. LET ME DRAW YOUR ATTENTION TO THE FIRST TWO PAGES OF EXHIBIT 4077. DO YOU RECOGNIZE THIS?
BRIAN GROSSMAN: I'M JUST REVIEWING THIS.
(PAUSE IN PROCEEDINGS.)
BRIAN GROSSMAN: YEAH. YES.
BY MR. LEACH:
MR. LEACH: IS THIS AN EMAIL EXCHANGE BETWEEN YOU AND SUNNY BALWANI FOLLOWING THE EARLY JANUARY 2014 MEETING WITH MS. HOLMES AND MR. BALWANI AT THERANOS?
BRIAN GROSSMAN: I BELIEVE IT IS.
MR. LEACH: OKAY.
BRIAN GROSSMAN: YES.
MR. LEACH: AND THERE'S ATTACHMENTS TO THIS EMAIL. ARE YOU FAMILIAR WITH THE -- AND IT'S QUITE LENGTHY, BUT IF YOU COULD JUST PERUSE IT AND LET ME KNOW IF YOU'RE GENERALLY FAMILIAR WITH IT.
BRIAN GROSSMAN: YES.
MR. LEACH: WHAT IS THE ATTACHMENT?
BRIAN GROSSMAN: THIS WAS THE PRESENTATION, CORPORATE PRESENTATION THAT THEY SENT US. IT ALSO INCLUDED ANALYTIC MEASUREMENT, DATA TABLES FROM DIFFERENT TESTS THAT WE HAD ASKED THEM FOR ON THEIR PROPRIETARY TECHNOLOGY.
MR. LEACH: AND IS THIS POWERPOINT CONSISTENT WITH SLIDES THAT YOU SAW AT THERANOS IN DECEMBER AND JANUARY?
BRIAN GROSSMAN: I BELIEVE IT IS, YES.
MR. LEACH: OKAY. AND IS THIS PART OF THE INFORMATION THAT YOU RELIED ON IN DECIDING WHETHER OR NOT TO INVEST IN THERANOS?
BRIAN GROSSMAN: YES.
MR. LEACH: YOUR HONOR, I OFFER EXHIBIT 4077 INTO EVIDENCE.
JUDGE DAVILA: IT'S ADMITTED. IT MAY BE PUBLISHED.
(GOVERNMENT'S EXHIBIT 4077 WAS RECEIVED IN EVIDENCE.)
MR. LEACH: LET ME START WITH PAGE 2, IF WE COULD, MS. HOLLIMAN.
MR. LEACH: AND I'LL DRAW YOUR ATTENTION TO THE BOTTOM HALF, MR. GROSSMAN. DO YOU SEE THE DATE OF JANUARY 10TH, 2014?
BRIAN GROSSMAN: YES.
MR. LEACH: AND THIS IS AN EMAIL FROM YOU TO SUNNY BALWANI?
BRIAN GROSSMAN: YES.
MR. LEACH: YOU WROTE, "THANKS AGAIN FOR THE TIME YOU SPENT WITH OUR TEAM WALKING US THROUGH THE THERANOS STORY." IS THAT A REFERENCE TO YOUR SECOND MEETING AT THERANOS WITH MEMBERS OF YOUR TEAM?
BRIAN GROSSMAN: YES.
MR. LEACH: OKAY. YOU SAID, "WE WILL LIKELY NEED A FEW DAYS TO PROCESS EVERYTHING WE LEARNED TODAY. ONE THING THAT WOULD BE ESPECIALLY HELPFUL TO OUR DUE DILIGENCE PROCESS IS HAVING ACCESS TO THE FINANCIAL MODEL WE VIEWED WITH YOU TODAY." DO YOU SEE THAT LANGUAGE?
BRIAN GROSSMAN: YES.
MR. LEACH: AND WHAT WERE YOU REFERRING TO?
BRIAN GROSSMAN: IN OUR MEETING THEY SHARED A FINANCIAL FORECAST, A FINANCIAL MODEL WITH US, A DETAILED FINANCIAL MODEL WITH US, AND I'M ASKING FOR AN ELECTRONIC COPY OF THE MODEL THAT THEY REVIEWED AT THAT MEETING ON JANUARY 10TH.
MR. LEACH: OKAY. AT SOME POINT DID YOU GET A COPY OF THAT FINANCIAL MODEL?
BRIAN GROSSMAN: YES.
MR. LEACH: AND DID YOU USE THAT AS PART OF THE BASIS TO PREPARE YOUR OWN FINANCIAL MODEL WITH PROJECTIONS ABOUT WHAT THERANOS WOULD ACHIEVE IN THE YEARS TO COME?
BRIAN GROSSMAN: YES.
MR. LEACH: WAS THAT AN IMPORTANT BUILDING BLOCK FOR YOUR MODEL?
BRIAN GROSSMAN: YES.
MR. LEACH: OKAY. LET'S GO TO PAGE 1, PLEASE. AND I DRAW YOUR ATTENTION TO THE TOP PORTION OF THE EMAIL ALL OF THE WAY DOWN TO P.S. DO YOU SEE MR. BALWANI'S NAME AT THE TOP, MR. GROSSMAN, IN THE FROM LINE?
BRIAN GROSSMAN: YES.
MR. LEACH: AND DO YOU SEE WHERE HE WROTE, "BRIAN. "ATTACHED PLEASE FIND A PDF WHICH IS A VERY CONFIDENTIAL SLIDE DECK OF DISCUSSIONS WE HAD. IT ALSO INCLUDES A VERY DETAILED SECTION ON DATA WHICH ALEX HAD REQUESTED, INCLUDING THE NUCLEIC ACID APPLICATION ASSAYS. THIS SLIDE DECK DOES NOT INCLUDE ANY REFERENCE TO SAFEWAY." DO YOU SEE THAT?
BRIAN GROSSMAN: YES.
MR. LEACH: AND ALEX, HE WAS A MEMBER OF YOUR TEAM?
BRIAN GROSSMAN: YES. THAT'S ALEX RABODZEY.
MR. LEACH: OKAY. AND HAD YOU REQUESTED THAT MR. BALWANI PROVIDE IN WRITTEN FORMAT SOME OF THE INFORMATION THAT YOU HAD GONE OVER WITH HE AND MS. HOLMES IN THE PRIOR MEETINGS?
BRIAN GROSSMAN: YES.
MR. LEACH: LET'S LOOK AT THE SLIDE DECK, PLEASE. JUST TO ORIENT US, PLEASE GO TO PAGE 3, PLEASE, MS. HOLLIMAN. IS THIS THE COVER PAGE OF THE SLIDE DECK THAT YOU RECEIVED, MR. GROSSMAN?
BRIAN GROSSMAN: YES.
MR. LEACH: LET'S NOW GO TO PAGE 67 IF WE COULD. DO YOU SEE THE SLIDE ENTITLED "OVERVIEW: THERANOS SYSTEMS," MR. GROSSMAN?
BRIAN GROSSMAN: YES.
MR. LEACH: AND IS THIS A FAIR DEPICTION OF WHAT YOU UNDERSTOOD THE THERANOS SYSTEMS TO BE?
BRIAN GROSSMAN: YES.
MR. LEACH: TO THE LEFT SIDE OF THE SCREEN THERE'S THE WORDS "THERANOS ANALYZERS," AND THERE ARE IMAGES OF TWO DEVICES. DO YOU SEE THOSE?
BRIAN GROSSMAN: YES.
MR. LEACH: HOW DO THOSE COMPARE TO THE DEVICES YOU SAW IN YOUR TRIPS TO THERANOS?
BRIAN GROSSMAN: THEY LOOK -- THOSE DEVICES LOOK VERY SIMILAR TO THE DEVICES WE SAW WHEN WE VISITED THEIR CORPORATE HEADQUARTERS.
MR. LEACH: OKAY. AT ANY POINT IN TIME DID MS. HOLMES TELL YOU THAT THEY WERE USING THIRD PARTY MACHINES TO DO ITS TESTING?
MR. LEACH: DID THEY EVER SHOW YOU AN IMAGE OF A SIEMENS DEVICE?
MR. LEACH: TO THE RIGHT THERE'S THE WORDS "CARTRIDGES." WHAT DID YOU UNDERSTAND CARTRIDGES TO BE?
BRIAN GROSSMAN: CARTRIDGES WERE THE CONSUMABLE, WERE THE ACTUAL TESTS. THEY COULD PUT, I BELIEVE, UP TO 70 TESTS ON ONE CARTRIDGE, AND THOSE CARTRIDGES WERE THEN LOADED INTO THE ANALYZER, THE SAMPLE PROCESSING UNIT, AND THE SAMPLE PROCESSING UNIT WOULD THEN RUN THE EXPERIMENTS ON THOSE SAMPLES.
MR. LEACH: WHERE DID YOU GET THE INFORMATION THAT THERANOS COULD PUT 70 TESTS ON A CARTRIDGE?
BRIAN GROSSMAN: THAT WAS PART OF OUR DUE DILIGENCE PROCESS. I BELIEVE THE SECOND MEETING WITH THE COMPANY, WE DISCUSSED THAT TOWARDS THE BEGINNING OF THE MEETING. AND THEN THAT ISSUE OF WHAT WE REFER TO AS MULTIPLEXING, THE ABILITY TO TEST FOR MULTIPLE THINGS AT THE SAME TIME CAME UP OVER THE COURSE OF OUR DUE DILIGENCE AS IT WAS A DRAMATIC IMPROVEMENT ON WHAT COMPANIES THAT WERE OFFERING EQUIPMENT IN THIS SPACE WERE CAPABLE OF DOING.
MR. LEACH: AND THE 70 TESTS ON ONE CARTRIDGE, YOU BELIEVED THAT WAS SOMETHING THAT THERANOS WAS CURRENTLY DOING?
BRIAN GROSSMAN: YES.
MR. LEACH: WITH ITS SAMPLE PROCESSING UNIT?
BRIAN GROSSMAN: YES.
MR. LEACH: LET'S LOOK AT PAGE 66. DO YOU SEE THE HEADING "PRODUCTS," MR. GROSSMAN?
BRIAN GROSSMAN: YES.
MR. LEACH: AND DOES THIS SUMMARIZE WHAT YOU UNDERSTOOD THERANOS'S PRODUCTS TO BE?
BRIAN GROSSMAN: YES.
MR. LEACH: THE FIRST LINE SAYS, "DEVICE. MINILAB AND 4S FOR AUTOMATED PROCESSING." DO YOU SEE THAT?
BRIAN GROSSMAN: YES.
MR. LEACH: AND WHAT DID YOU UNDERSTAND THE 4S TO BE?
BRIAN GROSSMAN: I DON'T REMEMBER.
MR. LEACH: AND WHAT DID YOU UNDERSTAND MINILAB TO BE?
BRIAN GROSSMAN: MINILAB REFERRED TO THE SAMPLE PROCESSING UNIT, THE LABORATORY DOWN INTO A SINGLE DEVICE.
MR. LEACH: IN ANY OF THE WRITTEN MATERIALS THAT YOU'VE REVIEWED, DID YOU SEE ANYTHING SUGGESTING THE DEVICE INCLUDED THIRD PARTY MACHINES FROM SIEMENS OR SOME OTHER MANUFACTURER?
MR. LEACH: WOULD THAT HAVE BEEN A RED FLAG FOR YOU?
BRIAN GROSSMAN: YES.
MR. LEACH: WHY IS THAT?
BRIAN GROSSMAN: IT WOULD HAVE RAISED A WHOLE SERIES OF QUESTIONS ABOUT WHAT THE TECHNOLOGY WAS CAPABLE OF DOING. IT WOULD HAVE LED TO A SERIES OF QUESTIONS ON THE BUSINESS, HOW -- WHAT MACHINES ARE YOU USING, WHAT SETTINGS, WHAT TYPES OF ANALYTIC EXPERIMENTS DO YOU NEED THIRD PARTY MACHINES TO PERFORM AND WHY? THAT WOULD HAVE LED TO A WHOLE SERIES OF QUESTIONS AROUND THE TECHNICAL LIMITATIONS AROUND THE PLATFORM. IT ALSO WOULD HAVE HAD IMPLICATIONS FOR THE COST STRUCTURE OF THE BUSINESS, THE SIZE OF THE LABORATORIES THAT THEY WOULD NEED AS THEY ROLLED THIS OUT GEOGRAPHICALLY TO DIFFERENT URBAN AREAS. IT WOULD HAVE IMPACTED THEIR ABILITY TO REPLACE HOSPITALS, THE LABORATORIES WITHIN HOSPITALS, AND IT WOULD HAVE -- IT WOULD HAVE OBVIOUSLY HAD AN IMPACT ON THE CASH BURN OF THE BUSINESS, WHERE CASH FLOW, THE CASH THAT WAS SITTING ON THE BALANCE SHEET WOULD GO, WHERE IT WOULD BE SPENT. OUR, OUR UNDERSTANDING FROM THE FINANCIAL MODEL THEY SENT US, ALL OF THE CAPITAL SPENDING WAS FOCUSSED ON MANUFACTURING MINILABS AND MAKING ADDITIONAL INVESTMENTS IN PRODUCTION LINES FOR EXPANDED MINILAB PRODUCTION.
MR. LEACH: BENEATH THAT FIRST LINE DEVICE IT SAYS, "CARTRIDGE. "AUTOMATED CONSUMABLES FOR 75 PLUS ASSAYS SIMULTANEOUSLY ACROSS ALL SAMPLE TYPES (BLOOD, URINE, TISSUE, ET CETERA)." DO YOU SEE THAT?
BRIAN GROSSMAN: YES.
MR. LEACH: IS THAT CONSISTENT WITH STATEMENTS MS. HOLMES MADE TO YOU IN YOUR MEETINGS WITH HER IN DECEMBER OR JANUARY?
BRIAN GROSSMAN: YES.
MR. LEACH: AND BENEATH THAT IT SAYS, "BLOOD COLLECTION DEVICES. "AUTOMATED SAMPLE COLLECTION FOR MICRO-SAMPLE VOLUMES CUSTOMIZED FOR PEDIATRICS, PHLEBOTOMY, AND FULL RANGE OF COLLECTION PROCEDURES." DO YOU SEE THAT?
BRIAN GROSSMAN: YES.
MR. LEACH: AND ARE YOU FAMILIAR WITH THE TERM "NANOTAINER"?
BRIAN GROSSMAN: YES.
MR. LEACH: AND WHAT IS THE NANOTAINER?
BRIAN GROSSMAN: THE NANOTAINER WAS THE COLLECTION DEVICE THEY USED TO CAPTURE DROPLETS OF BLOOD AFTER YOUR FINGER HAD BEEN PRICKED, AND THEN THOSE NANOTAINERS COULD THEN TRANSPORT THE SAMPLE TO A LOCATION WHERE IT COULD BE ANALYZED.
MR. LEACH: BENEATH THAT IT SAYS, "ASSAYS. "CHEMISTRIES, 800 PLUS TEST MENU AND TPS LIBRARY." DO YOU SEE THAT LANGUAGE?
BRIAN GROSSMAN: YES.
MR. LEACH: AND IS THAT CONSISTENT WITH THE STATEMENTS THAT MS. HOLMES MADE TO YOU IN YOUR DECEMBER AND JANUARY MEETINGS?
BRIAN GROSSMAN: YES.
MR. LEACH: LET'S GO BACK IN THIS DOCUMENT TO PAGE 8. IF WE CAN ZOOM IN ON THE SUBSTANCE, MS. HOLLIMAN. MR. GROSSMAN, DO YOU SEE THE HEADING "PRESS" ON THIS?
BRIAN GROSSMAN: YES.
MR. LEACH: AND DO YOU SEE A REFERENCE IN "THE WALL STREET JOURNAL," "ELIZABETH HOLMES: THE BREAKTHROUGH OF INSTANT DIAGNOSIS"?
BRIAN GROSSMAN: YES.
MR. LEACH: IS THIS MATERIAL THAT YOU REVIEWED PRIOR TO PFM'S INVESTMENT?
BRIAN GROSSMAN: YES.
MR. LEACH: AND WAS THIS RELEVANT INFORMATION TO YOUR INVESTMENT DECISION?
BRIAN GROSSMAN: YES.
MR. LEACH: OKAY. LET'S, PLEASE, LOOK AT PAGE 9, MS. HOLLIMAN. DO YOU SEE WHAT APPEARS TO BE A PRESS RELEASE TITLED "THERANOS SELECTS WALGREENS AS A LONG-TERM PARTNER THROUGH WHICH TO OFFER ITS NEW CLINICAL LABORATORY SERVICE. "WITH FIRST LOCATION LAUNCHING THIS MONTH IN SILICON VALLEY, CONSUMERS CAN NOW COMPLETE ANY CLINICIAN-DIRECTED LAB TEST WITH AS LITTLE AS A FEW DROPS OF BLOOD AND RESULTS AVAILABLE IN A MATTER OF HOURS." WITH YOU FAMILIAR WITH THIS LANGUAGE?
BRIAN GROSSMAN: YES.
MR. LEACH: AND WERE YOU FAMILIAR WITH THIS AT THE TIME OF PFM'S INVESTMENT?
BRIAN GROSSMAN: YES.
MR. LEACH: AND WAS THIS IMPORTANT INFORMATION TO YOU?
BRIAN GROSSMAN: YES.
MR. LEACH: AND WHY WAS THAT?
BRIAN GROSSMAN: THIS WAS CRITICAL. IT REPRESENTED A TRANSITION FOR THIS BUSINESS FROM BEING A RISKY EARLY STAGE COMPANY TO BEING A COMMERCIAL BUSINESS, AND IT CHANGED THE NATURE OF THE INVESTMENT AND THE RISKS OF THE INVESTMENT. IT ALSO REPRESENTED A POWERFUL EXTERNAL VALIDATION TO THE TECHNOLOGY, A COMPANY LIKE WALGREENS, ONE OF THE LARGEST NATIONAL PHARMACY CHAINS, PARTNERING WITH THEM. IT ALSO HIGHLIGHTED THAT THIS TECHNOLOGY WAS, WAS AVAILABLE OR SOON TO BE AVAILABLE. I DIDN'T READ THE WHOLE ARTICLE, BUT, YOU KNOW, IT REPRESENTED, YOU KNOW, THE BEGINNING OF THE COMMERCIAL ERA FOR THIS COMPANY.
MR. LEACH: OKAY. YOU SAY YOU DIDN'T REVIEW THE WHOLE ARTICLE, AND I SAW YOU LOOKING AT THE SCREEN, AND I UNDERSTAND YOU TO BE SAYING THAT YOU DIDN'T READ THE WHOLE THING RIGHT NOW.
BRIAN GROSSMAN: THAT'S RIGHT.
MR. LEACH: BUT BACK AT THE TIME, YOU'RE CONFIDENT THAT YOU REVIEWED IT IN FULL?
BRIAN GROSSMAN: YES.
MR. LEACH: OKAY. LET'S GO TO PAGE 17, PLEASE. DO YOU SEE A SLIDE TITLED, "SAME TESTS, A WHOLE NEW APPROACH"?
BRIAN GROSSMAN: YES.
MR. LEACH: AND DO YOU SEE AN IMAGE OF THE NANOTAINER ON KIND OF THE RIGHT SIDE IN THE MIDDLE THERE?
BRIAN GROSSMAN: YES, I DO.
MR. LEACH: OKAY. AND THIS READS, "THERANOS RUNS ANY TEST AVAILABLE IN CENTRAL LABORATORIES, AND PROCESSES ALL SAMPLE TYPES." IS THAT CONSISTENT WITH INFORMATION THAT MS. HOLMES PROVIDED YOU IN YOUR JANUARY AND DECEMBER MEETINGS?
BRIAN GROSSMAN: YES.
MR. LEACH: AND WAS THAT IMPORTANT TO YOU?
BRIAN GROSSMAN: YES.
MR. LEACH: IN THE THIRD LINE IT SAYS, "THERANOS PROVIDES THE HIGHEST LEVEL OF OVERSIGHT, AUTOMATION, AND STANDARDIZATION IN OUR PRE- AND POST-ANALYTIC PROCESSES, ENSURING THE HIGHEST LEVELS OF ACCURACY AND PRECISION." WAS THAT RELEVANT INFORMATION TO YOU?
BRIAN GROSSMAN: YES, IT WAS.
MR. LEACH: AND WAS IT CONSISTENT WITH ORAL STATEMENTS THAT MS. HOLMES MADE TO YOU?
BRIAN GROSSMAN: YES, IT WAS.
MR. LEACH: LET ME DRAW YOUR ATTENTION TO PAGE 19. DO YOU SEE THE HEADING, "FASTER RESULTS. FASTER ANSWERS"?
BRIAN GROSSMAN: YES.
MR. LEACH: AND WAS THE SPEED WITH WHICH THERANOS COULD PRODUCE RESULTS IMPORTANT TO YOU?
BRIAN GROSSMAN: YES.
MR. LEACH: AND WHY WAS THAT?
BRIAN GROSSMAN: IT WAS PART OF WHY THIS COMPANY WAS CAPABLE OF SIGNIFICANTLY IMPACTING THE LABORATORY RETAIL INDUSTRY. THE ABILITY TO GET YOUR TEST BACK THAT QUICKLY ON THE SAME DAY WAS A SIGNIFICANT IMPROVEMENT FOR THE TYPICAL CONSUMER. IT ALSO HAD IMPLICATIONS FOR HOW PHYSICIAN OFFICES WERE ORIENTED. THE ABILITY TO SEE THE PATIENT AND HAVE THE LAB WORK DONE IN THE SAME DAY AVOIDED A SECOND OFFICE VISIT. SO FOR ALL OF THOSE REASONS THIS WAS, YOU KNOW, THIS WAS AN IMPORTANT ASPECT OF THE COMMERCIAL OFFERING.
MR. LEACH: LET'S GO FORWARD TO PAGE 21, PLEASE. DO YOU SEE THE HEADING "A NEW STANDARD IN QUALITY. "THE HIGHEST LEVELS OF ACCURACY"?
BRIAN GROSSMAN: YES.
MR. LEACH: AND DO YOU SEE IN THE MIDDLE THERE'S A LESS THAN 10 PERCENT COEFFICIENT OF VARIATION FOR VITAMIN D?
BRIAN GROSSMAN: YES.
MR. LEACH: AND DID YOU ASK QUESTIONS OF MS. HOLMES ABOUT THE ACCURACY OF THERANOS'S TESTS?
BRIAN GROSSMAN: YES.
MR. LEACH: AND WHAT WAS THE SUBSTANCE OF WHAT SHE SAID TO YOU?
BRIAN GROSSMAN: IN THE FIRST MEETING WE HAD WITH THE COMPANY, THEY DESCRIBED THAT THEIR TECHNOLOGY, BECAUSE IT DID NOT HAVE THE HUMAN ELEMENTS, THE POTENTIAL FOR HUMANS TO INTRODUCE VARIABILITY IN ERRORS INTO THE ANALYTIC PROCESSES IN LABORATORIES, BY LIMITING IT, IT HAD DRAMATICALLY LESS VARIABILITY. WE TALKED ABOUT SOME OF THE TYPICAL TESTS THAT ARE DIFFICULT FOR TRADITIONAL LABORATORIES TO RUN. ONE OF THEM WAS VITAMIN D. ANOTHER ONE WE DISCUSSED WAS HDL. AND IN BOTH CASES I THINK WE, WE -- IN BOTH CASES THE PERCENTAGE OF THE COEFFICIENT OF VARIATION WAS SIGNIFICANTLY HIGHER. I WANT TO -- I BELIEVE SOMETHING ON THE ORDER OF 25 TO 30 PERCENT, OR HIGHER, FOR THOSE TESTS USING CONVENTIONAL EQUIPMENT.
MR. LEACH: LET'S PLEASE NOW LOOK AT PAGE 33. DO YOU SEE THE HEADING "COMMERCIAL"?
BRIAN GROSSMAN: YES.
MR. LEACH: AND THERE'S A NUMBER OF KEY DEPLOYMENTS LISTED HERE. DO YOU SEE THAT?
BRIAN GROSSMAN: YES.
MR. LEACH: AND THERE'S REFERENCES DOWN AT THE BOTTOM TO DOD AND PHARMA?
BRIAN GROSSMAN: YES.
MR. LEACH: AND I THINK YOU TESTIFIED EARLIER MS. HOLMES MADE REPRESENTATIONS TO YOU ABOUT THE DOD RELATIONSHIP IN THAT FIRST MEETING IN DECEMBER OF 2013.
BRIAN GROSSMAN: YES.
MR. LEACH: AND SHE ALSO MADE REPRESENTATIONS TO YOU ABOUT THE DOLLAR AMOUNT OF THE PHARMA BUSINESS?
BRIAN GROSSMAN: YES.
MR. LEACH: OKAY. LET ME NEXT DRAW YOUR ATTENTION TO PAGE 51. DO YOU SEE THE HEADING, "NEW POSSIBILITY IS IN LAB"?
BRIAN GROSSMAN: YES.
MR. LEACH: AND TO THE LEFT THERE'S A BOX WITH THE TITLE, "ROUTINE, SPECIALTY, AND ESOTERIC TESTING." DO YOU SEE THAT?
BRIAN GROSSMAN: YES.
MR. LEACH: AND DO YOU SEE THE REFERENCE, "ALL 1,000 PLUS CURRENTLY RUN TESTS/CPT CODES ARE AVAILABLE THROUGH THERANOS." DO YOU SEE THAT?
BRIAN GROSSMAN: YES, I DO.
MR. LEACH: AND IS THAT CONSISTENT WITH INFORMATION THAT YOU RECEIVED FROM MS. HOLMES IN THE MEETING IN DECEMBER OF 2013?
BRIAN GROSSMAN: YES.
MR. LEACH: DOWN AT THE BOTTOM IT SAYS, "WITH CLIA CERTIFICATION, THERANOS IS A NATIONALLY ACCREDITED PROVIDER." DO YOU SEE THAT LANGUAGE?
BRIAN GROSSMAN: I DO.
MR. LEACH: OKAY. IF YOU COULD NOW TURN TO PAGE 62 AND 63. MAYBE WE CAN SPLIT THE SCREEN, MS. HOLLIMAN. MR. GROSSMAN, ON THE -- ON PAGE 62, WHICH IS DISPLAYED ON THE LEFT SIDE OF THE SCREEN, IT SAYS, "THERANOS'S CLIA QUALITY STANDARDS." DO YOU SEE THAT?
BRIAN GROSSMAN: I DO.
MR. LEACH: AND THERE'S A LIST OF PERSONNEL QUALIFICATIONS AND RESPONSIBILITIES, QUALITY CONTROL, SPECIMEN INTEGRITY AND RECORDKEEPING, PROFICIENCY TESTING, QUALITY ASSESSMENT. DO YOU SEE THAT LANGUAGE?
BRIAN GROSSMAN: I DO.
MR. LEACH: AND WHAT DID MS. HOLMES TELL YOU ABOUT THERANOS'S PROFICIENCY TESTING?
BRIAN GROSSMAN: THEY TOLD US THAT, THEY TOLD US THAT THEIR, THEIR -- THE REGULATORY AUTHORITY, OR THE REGULATORY RULES FOR THEIR LABORATORY FELL UNDER THE CLIA LAWS, AND UNDER CLIA THEY HAD A PROCESS THEY HAD TO, THEY HAD TO RUN IN ORDER FOR THEIR PROPRIETARY TECHNOLOGY TO BE COMMERCIALLY AVAILABLE. THEY WERE SENT SAMPLES THAT THEY HAD TO MEASURE, AND THEY HAD TO REPORT THOSE MEASUREMENTS BACK TO AN INDEPENDENT ORGANIZATION. AND THEY TOLD US THAT THEY HAD BEEN -- THEY TOLD US THAT THEY COULD REPEATEDLY AND RELIABLY MEET THOSE STANDARDS FOR ALL OF THEIR COMMERCIALLY AVAILABLE TESTS ON THEIR PROPRIETARY TECHNOLOGY.
MR. LEACH: DID MS. HOLMES TELL YOU ANYTHING ABOUT SOMETHING CALLED ALTERNATIVE ASSESSMENT OF PROFICIENCY?
BRIAN GROSSMAN: WE DID, I BELIEVE, DISCUSS ALTERNATIVE -- CAN YOU PLEASE RESTATE THE QUESTION?
MR. LEACH: ALTERNATIVE ASSESSMENT OF PROFICIENCY, OR AAP?
BRIAN GROSSMAN: YES, I BELIEVE WE DID DISCUSS AAP AND HOW THAT APPLIED TO PROFICIENCY TESTING.
MR. LEACH: AND WHAT DID MS. HOLMES TELL YOU ABOUT THAT?
BRIAN GROSSMAN: I DON'T HAVE -- I BELIEVE THEY, I BELIEVE THEY -- I BELIEVE WE DISCUSSED HOW THAT WAS APPLIED AS THEY DEVELOPED NEW ASSAYS FOR THEIR PLATFORM. FOR EXAMPLE, A NEW FLU TEST IF THERE WAS A FLU STRAIN THAT WAS CIRCULATING THAT WAS NEW TO THE WORLD, THEY WOULD DEVELOP THE TEST, VALIDATE THE TEST, AND THEN BRING IT UP IN THE CLIA LAB. AND AS PART OF THAT DISCUSSION, I BELIEVE WE TALKED ABOUT THOSE ALTERNATIVE PROTOCOLS.
MR. LEACH: THE DISCUSSION YOU HAD ABOUT BLINDED SAMPLES AND THERANOS GOING THROUGH TRADITIONAL PROFICIENCY TESTING, DID YOU BELIEVE THAT APPLIED TO THERANOS'S MINILAB?
BRIAN GROSSMAN: YES.
MR. LEACH: LET ME DRAW YOUR ATTENTION TO PAGE 64. FORGIVE ME, MR. GROSSMAN. BEFORE WE GO TO 64, I HAVE ONE MORE QUESTION ON 63. THERE'S A STATEMENT IN 63 THAT SAYS, "THERANOS MAINTAINS CLIA ACCREDITATION AS A HIGH COMPLEXITY LAB AND HAS PASSED ALL AUDITS WITHOUT A SINGLE DEFICIENCY TO MAINTAIN THIS STATUS." DO YOU SEE THAT LANGUAGE?
BRIAN GROSSMAN: YES.
MR. LEACH: AND WAS THAT IMPORTANT TO YOU?
BRIAN GROSSMAN: YES, VERY IMPORTANT.
MR. LEACH: AND WHY WAS THAT?
BRIAN GROSSMAN: IT JUST SPOKE TO THE FACT THAT THEY WERE ABLE TO MEET THIS STANDARD OF ACCREDITATION UNDER THE CLIA LAWS FOR ALL OF THEIR TESTS, AND IT ALSO MEANT THAT THEY WERE ABLE TO BILL MEDICARE AND MEDICAID FOR LAB SERVICES FOR SAMPLES THAT THEY WERE PROCESSING.
MR. LEACH: AND DID YOU BELIEVE THIS ACCREDITATION TO SPEAK TO USE OF THE MINILAB IN THE CLIA LAB?
BRIAN GROSSMAN: YES.
MR. LEACH: NOW LET'S PLEASE GO TO PAGE 64. DO YOU SEE THE HEADING "VALIDATION OF THERANOS"?
BRIAN GROSSMAN: YES.
MR. LEACH: AND DO YOU SEE THE FIRST LINE, "THERANOS HAS BEEN COMPREHENSIVELY VALIDATED OVER THE COURSE OF THE LAST SEVEN YEARS BY TEN OF THE FIFTEEN LARGEST PHARMACEUTICAL COMPANIES, WITH HUNDREDS OF THOUSANDS OF ASSAYS PROCESSED." WAS THAT RELEVANT TO YOU?
BRIAN GROSSMAN: YES, IT WAS.
MR. LEACH: HOW SO?
BRIAN GROSSMAN: IT WAS A VALIDATION OF THE TECHNOLOGY. THOSE ORGANIZATIONS, MANY OF WHOM WE KNEW WELL AS INVESTORS IN THIS SPACE, ARE HIGHLY DEMANDING ORGANIZATIONS AND USING A TECHNOLOGY LIKE THIS ON SOMETHING AS IMPORTANT AS A CLINICAL TRIAL PROGRAM WOULD ONLY -- YOU COULD ONLY DO THAT IF YOU HAD ENORMOUS CONFIDENCE IN THE ANALYTIC ACCURACY OF THE TECHNOLOGY THAT WAS BEING USED. FOR THOSE COMPANIES, CLINICAL TRIALS ON NEW EXPERIMENTAL MEDICINES ARE THE LIFEBLOOD OF THOSE BUSINESSES. WITHOUT APPROVAL, WITHOUT SUCCESSFUL CLINICAL RESULTS, PHASE THREE TRIAL RESULTS, THOSE ORGANIZATIONS CAN'T GROW. SO THIS IS THE MOST IMPORTANT PART OF THEIR BUSINESS. SO USING A TECHNOLOGY LIKE THIS IN THEIR SETTING IS A HUGE VALIDATION ON THE CAPABILITIES AND ANALYTIC ACCURACY OF THIS TECHNOLOGY.
MR. LEACH: DID MS. HOLMES EVER TELL YOU THAT THERANOS HAD ZERO REVENUE FROM PHARMACEUTICAL COMPANIES IN 2013?
MR. LEACH: WOULD THAT HAVE BEEN RELEVANT TO YOU?
BRIAN GROSSMAN: YES.
MR. LEACH: WHY?
BRIAN GROSSMAN: IT WOULD HAVE LED TO A SERIES OF QUESTIONS AROUND WHY THERE WAS NO REVENUE. SO, YES, IT WOULD HAVE BEEN, IT WOULD HAVE BEEN RELEVANT TO US.
MR. LEACH: OKAY. LET ME NEXT DRAW YOUR ATTENTION TO PAGE 69. DO YOU SEE THE HEADING "EXCERPTS FROM THERANOS'S TEST MENU"?
BRIAN GROSSMAN: YES.
MR. LEACH: AND THERE'S AN ASTERISK, "105 TESTS SHOWN, ANOTHER 20 PLUS PAGES SHOW ALL AVAILABLE TESTS WITH THERANOS." DO YOU SEE THAT LANGUAGE?
BRIAN GROSSMAN: YES.
MR. LEACH: AND DID YOU BELIEVE THIS TO BE A LISTING OF THE TESTS THAT THERANOS WAS CURRENTLY ABLE TO PERFORM WITH ITS MINILAB?
BRIAN GROSSMAN: YES.
MR. LEACH: AND WAS THAT SIGNIFICANT TO YOU?
BRIAN GROSSMAN: YES, IT WAS.
MR. LEACH: LAST, LET ME DRAW YOUR ATTENTION TO PAGE 95. DO YOU SEE THE HEADING "THERANOS: COST SAVINGS"?
BRIAN GROSSMAN: YES.
MR. LEACH: AND DO YOU SEE THE FIRST BULLET, "THERANOS'S INITIAL PRICE POINTS ARE 50 PERCENT BELOW MEDICARE REIMBURSEMENT AMOUNTS FOR ALL CURRENTLY RUN TESTS/CPT CODES." WAS THAT RELEVANT INFORMATION TO YOU?
BRIAN GROSSMAN: YES.
MR. LEACH: EXPLAIN WHY, PLEASE.
BRIAN GROSSMAN: IT SPOKE TO THE UNIT ECONOMICS, THE COST ADVANTAGE THAT THEY HAD AGAINST TRADITIONAL LABORATORY EQUIPMENT AND TRADITIONAL LABORATORY OPERATIONS, THE FACT THAT THEY COULD, THEY COULD BILL AT 50 PERCENT OF THE MEDICARE REIMBURSEMENT AND THEY WERE PROFITABLE DOING THAT WAS AN IMPORTANT PART, NOT THE ONLY, BUT AN IMPORTANT PART OF THE COMPETITIVE ADVANTAGE THAT THIS COMPANY HAD AS A RESULT OF THEIR PROPRIETARY TECHNOLOGY.
MR. LEACH: AND IS THIS BULLET HERE CONSISTENT WITH STATEMENTS MS. HOLMES MADE TO YOU IN THE DECEMBER 2013 AND JANUARY 2014 MEETING?
BRIAN GROSSMAN: YES.
MR. LEACH: OKAY. AND AT ANY POINT IN TIME DID YOU THINK THERANOS WAS USING LOW COST TESTS AS SOME FORM OF LOSS LEADER?
BRIAN GROSSMAN: I DON'T RECALL IF THEY WERE USING THIS AS A LOSS LEADER.
MR. LEACH: FURTHER DOWN THERE'S A BULLET, "THE UNPRECEDENTED LACK OF VARIATION FROM SYSTEM TO SYSTEM YIELDS HIGHER INTEGRITY DATA." DO YOU SEE THAT LANGUAGE?
BRIAN GROSSMAN: YES.
MR. LEACH: AND WHAT DID YOU UNDERSTAND THAT TO MEAN?
BRIAN GROSSMAN: THIS WAS CONSISTENT WITH THE COMMENTS THAT THEY MADE, THAT MS. HOLMES MADE TO US IN THE FIRST MEETING ABOUT THE LACK OF HUMAN INVOLVEMENT IN THE ANALYTIC OPERATIONS OF THE LABORATORY. ELIMINATING THAT REDUCED MANY OF THE ERRORS THAT HAPPENED IN TRADITIONAL LABORATORIES, AND STANDARDIZING -- AND ALLOWED YOU TO STANDARDIZE THE ANALYTIC PROCESSES WITHIN THE MINILAB SO THAT MUCH OF THE VARIATION THAT EXISTED IN THE TRADITIONAL LABORATORY ENVIRONMENT WAS ELIMINATED, AND THAT'S WHY THEIR TECHNOLOGY HAD SUCH LOW LEVELS OF VARIABILITY COMPARED TO CONVENTIONAL EQUIPMENT.
MR. LEACH: IS THAT LACK OF VARIABILITY LOST SOMEHOW IF YOU'RE USING CONVENTIONAL EQUIPMENT?
BRIAN GROSSMAN: IF YOU USED CONVENTIONAL EQUIPMENT, YOU WOULD HAVE ALL OF THE SAME ISSUES THAT TRADITIONAL THIRD PARTY REFERENCE LABS HAVE, BIG MACHINES, LAB TECHS FOR EACH MACHINE, AND THROUGHOUT THAT PROCESS MISTAKES AND VARIATION CAN BE CREATED AT MULTIPLE POINTS IN TIME.
MR. LEACH: AFTER RECEIVING THIS POWERPOINT FROM MR. BALWANI AROUND JANUARY 17TH, DID YOU CONTINUE TO HAVE EMAIL AND PHONE CONVERSATIONS WITH MR. BALWANI ABOUT A POTENTIAL INVESTMENT?
BRIAN GROSSMAN: YES.
MR. LEACH: OKAY. LET ME DRAW YOUR ATTENTION TO WHAT HAS BEEN MARKED AS EXHIBIT 1443. DO YOU RECOGNIZE THIS DOCUMENT?
BRIAN GROSSMAN: I DON'T HAVE A DOCUMENT ON MY SCREEN.
MR. LEACH: LET'S USE THE BINDER.
BRIAN GROSSMAN: OKAY.
MR. LEACH: WE CAN'T DISPLAY IT UNTIL IT'S IN EVIDENCE.
BRIAN GROSSMAN: OH, SORRY.
MR. LEACH: SO IF WE CAN LOOK AT THE HARD COPY AT 1443.
BRIAN GROSSMAN: CAN YOU JUST GIVE ME A MOMENT TO REVIEW THIS?
MR. LEACH: PLEASE, TAKE YOUR TIME.
(PAUSE IN PROCEEDINGS.)
BRIAN GROSSMAN: YES, I AM FAMILIAR WITH THIS.
BY MR. LEACH:
MR. LEACH: OKAY. AND IS THIS AN EMAIL WITH ADDITIONAL QUESTIONS AND REQUESTS FOR INFORMATION THAT YOU SENT TO MR. BALWANI IN OR AROUND THE JANUARY 20TH, 2014 TIME PERIOD?
BRIAN GROSSMAN: YES.
MR. LEACH: YOUR HONOR, I OFFER EXHIBIT 1443 INTO EVIDENCE.
JUDGE DAVILA: IT'S ADMITTED. IT MAY BE PUBLISHED.
(GOVERNMENT'S EXHIBIT 1443 WAS RECEIVED IN EVIDENCE.)
BY MR. LEACH:
MR. LEACH: LET ME DRAW YOUR ATTENTION, MR. GROSSMAN, TO THE EMAIL ON THE BOTTOM PART OF PAGE 1. DO YOU SEE WHERE YOU WROTE, "HERE ARE A FEW OF THE TOPICS FOR TOMORROW"?
BRIAN GROSSMAN: YES.
MR. LEACH: AND IS THAT A REFERENCE TO A PHONE CONVERSATION THAT YOU WERE SCHEDULED TO HAVE WITH MR. BALWANI?
BRIAN GROSSMAN: YES, I BELIEVE IT WAS.
MR. LEACH: OKAY. THE FIRST PARAGRAPH RELATES TO COMPETITION. I WANT TO FOCUS ON THE SECOND PARAGRAPH WHERE YOU WROTE, "WE WANT TO REVISIT THE FDA APPROVAL PROCESS FOR ASSAYS AND ANALYZER." WHAT DID YOU MEAN BY "ANALYZER"?
BRIAN GROSSMAN: ANALYZER WAS REFERRING TO THE MINILAB, THE SAMPLE PROCESSING UNIT.
MR. LEACH: "MORE DETAIL ON HOW YOU INTEND TO PROCEED. WHAT THE FDA HAS SAID. THE NATURE OF THE FDA COMMUNICATIONS. WILL THE ANALYZER BE AN FDA APPROVED DEVICE?" WHY WERE YOU ASKING THAT?
BRIAN GROSSMAN: WE WANTED TO UNDERSTAND THEIR BUSINESS STRATEGY, WHETHER THEY INTEND TO -- WHETHER THEY INTENDED TO SELL ANALYZERS TO THIRD PARTIES OR WHETHER THEY WERE GOING TO USE ANALYZERS IN A CLIA ENVIRONMENT AND OPERATE AS A LAB AND A MEDICAL DEVICE COMPANY, SO WE REALLY WANTED TO UNDERSTAND THE BUSINESS STRATEGY. BUT BEYOND THAT, THEY HAD TOLD US THAT AN IMPORTANT PART OF THEIR EXTERNAL VALIDATION WAS SEEKING FDA APPROVAL FOR ALL OF THEIR TESTS, THE MINILAB AND THE NANOTAINERS, AND THAT WOULD BE THE ULTIMATE PROOF TO THE MARKET, CONSUMERS, EXPERTS IN THE LAB INDUSTRY, OTHER HEALTH CARE WORKERS THAT THIS TECHNOLOGY WAS AS GOOD -- ACTUALLY BETTER THAN WHAT TRADITIONAL LABORATORIES USE. THE REASON IT WAS BETTER IS THAT TRADITIONAL LABORATORIES DON'T OFTEN RECEIVE FDA APPROVAL FOR TESTS THAT THEY RUN. THEY OPERATE IN A BIT OF A GREY AREA, AND A REGULATORY GREY AREA. BUT IN A CLIA ENVIRONMENT THEY'RE ALLOWED TO DO THAT. SO THIS WAS -- THE COMPANY HAD EXPLAINED TO US THAT IN ADDITION TO HAVING A HIGH PERFORMANCE, HIGHLY PERFORMING CLIA LAB ENVIRONMENT WHERE THEY WERE RUNNING THEIR OWN PROPRIETARY TECHNOLOGY, THEY, IN ADDITION TO THAT, WERE GOING TO SEEK FDA APPROVAL FOR ALL OF THEIR TESTS. SO WE WANTED TO UNDERSTAND WHERE THAT PROCESS WAS BECAUSE AS AN INVESTOR, FDA APPROVAL WOULD BE A REALLY SIGNIFICANT VALUE DRIVER FOR THE INVESTMENT OVER TIME.
MR. LEACH: FURTHER DOWN IN THIS EMAIL YOU WROTE TO MR. BALWANI, "WE WANT TO BETTER UNDERSTAND THE MANUFACTURING RAMP OF ANALYZERS. CAN THEY MAKE THEM AT HIGHER VOLUME WITHOUT SACRIFICING PRODUCT QUALITY? WHERE DO THEY MAKE THEM? WE'D LIKE TO SEE THAT PART OF THE OPERATION IF POSSIBLE. WHY DID THEY DECIDE TO MAKE THE ANALYZERS VERSUS OUTSOURCE THEM?" WHAT WERE YOU GETTING AT THERE?
BRIAN GROSSMAN: THERE WERE A FEW DIFFERENT THINGS THAT WE WERE FOCUSSED ON HERE. FIRST OF ALL, MOST PEOPLE IN THE MEDICAL DEVICE INDUSTRY, CLINICAL DIAGNOSTICS INDUSTRY, THEY OUTSOURCE MANUFACTURING. THEY'RE JUST LIKE YOUR IPHONE. IF YOU HAVE AN APPLE IPHONE, IT'S NOT MADE BY APPLE, IT'S MADE BY THIRD PARTIES. THE SAME IS TRUE IN THE MEDICAL DEVICE INDUSTRY. SO OUR FIRST MEETING WITH THE COMPANY, ELIZABETH TOLD US THAT THEY WERE VERTICALLY INTEGRATING FROM A MANUFACTURER STANDPOINT, MEANING THAT THEY MADE THEIR OWN ANALYZERS AS OPPOSED TO USING THIRD PARTIES. SO WE WANTED TO UNDERSTAND WHY THEY WERE DOING THAT AND MAKE SURE THAT THEY WEREN'T, AS A RESULT OF NOT USING THIRD PARTIES, THEY WOULD BE UNABLE TO MEET DEMAND FOR THEIR SERVICE IN THE MARKETPLACE, AND NOT HAVE ENOUGH MINILABS TO PROCESS THE TESTS.
SO WE WANTED TO MAKE SURE THAT, NUMBER ONE, THEY HAD THEIR ARMS AROUND THE MANUFACTURING OF THESE DEVICES SINCE THEY WERE DOING IT THEMSELVES, WHICH WAS UNUSUAL FOR COMPANIES IN THE DIAGNOSTIC SPACE. NUMBER TWO, AS PART OF OUR DUE DILIGENCE PROCESS, WE WANTED TO SEE THE FACILITY. WE, WE, WE -- THAT IS -- IT WAS AN IMPORTANT -- MEETING THE DEMAND ON THE HOSPITAL SIDE, ON THE RETAIL SIDE, WE HAD TO FEEL COMFORTABLE THAT THEY HAD THE ABILITY TO ACTUALLY MAKE THESE DEVICES. AND THEN OBVIOUSLY YOU CAN'T, IN THE PROCESS OF SCALING THE MANUFACTURING PROCESS, YOU CAN'T COMPROMISE QUALITY. SO THE DEVICE -- THEY, THEY -- IT'S ONE THING TO MAKE A DEVICE, YOU KNOW, 10 DEVICES, BUT CAN YOU MAKE 200 DEVICES? AND ARE THOSE 200 DEVICES GOING TO WORK THE WAY THAT 1 OR 2 DEVICE PROTOTYPE WOULD HAVE PERFORMED? SO WE REALLY WANTED TO MAKE SURE THAT THIS COMPANY COULD ACTUALLY MAKE THESE THINGS, THESE MINILABS. AND IT WAS ALSO PART OF THE FINANCIAL FORECAST IN THE FINANCIAL MODEL, THE CASH THAT WAS GOING TOWARDS PRODUCING MINILABS. WE WANTED TO MAKE SURE THAT THEY REALLY COULD MAKE THE REQUIRED NUMBER OF MINILABS THAT WAS IN THE FORECAST. SO FOR ALL OF THOSE REASONS WE WANTED TO, WE REALLY WANTED TO, WE WANTED TO CIRCLE BACK TO THIS ISSUE, AND WE DIDN'T WANT ANY MISUNDERSTANDING OR AMBIGUITY AROUND THEIR ABILITY TO PRODUCE THEIR OWN SAMPLE PROCESSING UNITS.
MR. LEACH: SO IN YOUR INITIAL MEETING IN DECEMBER, MS. HOLMES TOLD YOU THEY WERE VERTICALLY INTEGRATED?
BRIAN GROSSMAN: YES.
MR. LEACH: MEANING WE MAKE ALL OF OUR DEVICES?
BRIAN GROSSMAN: YES.
MR. LEACH: AND THIS IS YOU FOLLOWING UP ON STATEMENTS LIKE THAT AND OTHER STATEMENTS THAT YOU HAD RECEIVED?
BRIAN GROSSMAN: YES.
MR. LEACH: OKAY. AFTER THIS EMAIL TO MR. BALWANI, DID HE DESCRIBE FOR YOU ANYTHING ABOUT THE MANUFACTURING RAMP UP OR ANALYZERS VERSUS OUTSOURCING THEM? DID HE RESPOND TO THESE QUESTIONS HERE?
BRIAN GROSSMAN: YES, HE DID.
MR. LEACH: WHAT DID HE TELL YOU?
BRIAN GROSSMAN: HE WAS, HE WAS VERY CONFIDENT THAT THEY WOULD HAVE NO ISSUES MANUFACTURING MINILABS TO MEET THE SALES FORECAST FOR BOTH 2014 AND 2015. IN FACT, HE SAID THAT THEY WOULDN'T EVEN NEED TO REACH PEAK CAPACITY, PRODUCTION CAPACITY TO MEET THEIR FORECAST. SO THEY HAD SLACK. THEY HAD EXCESS CAPACITY IN THEIR MANUFACTURING PROCESS IN ORDER TO DELIVER ON THE FINANCIAL FORECAST THAT THEY SENT US. AND IT WASN'T JUST THE RETAIL SETTING. THEY ALSO HAD TO MAKE THESE DEVICES FOR THE HOSPITAL VISITS. SO IT WAS BOTH OF THOSE BUSINESSES AND UNDERSTANDING THE PRODUCTIVITY AND THROUGHPUT OF THE SYSTEMS WAS PARTS OF THAT ANALYSIS.
MR. LEACH: DID HE SAY ANYTHING TO THE EFFECT OF, WE'RE USING MACHINES MANUFACTURED BY OTHERS TO DO MOST OF THE TESTING IN OUR LAB?
BRIAN GROSSMAN: NO, NO, HE DID NOT.
MR. LEACH: DID MR. BALWANI MAKE STATEMENTS TO YOU ABOUT THERANOS'S -- WHAT IT TOOK TO MAINTAIN A PARTICULAR MINILAB?
BRIAN GROSSMAN: YES, HE DID.
MR. LEACH: WHAT DID HE TELL YOU?
BRIAN GROSSMAN: WE TALKED ABOUT HOW THEY HAD ENGINEERED THESE DEVICES SO THAT THEY HAD INTELLIGENCE EXISTING CONVENTIONAL ANALYTICS INSTRUMENTS THINGS DON'T HAVE, THINGS LIKE WIRELESS SENSORS THAT WOULD PROVIDE REALTIME FEEDBACK TO THERANOS IF A MACHINE WAS NOT PROPERLY CALIBRATED, IF IT WAS PERFORMING POORLY, IF IT WAS CLOGGED, AND THOSE -- AND SO THAT CAPABILITY WOULD ENABLE THEM TO SERVICE THESE MACHINES FOR EFFICIENTLY AT LOWER COST THAN EXISTING LAB INFRASTRUCTURE, AGAIN, SPEAKING TO THE COMPETITIVE ADVANTAGE THIS COMPANY HAD AS RESULT OF THEIR CORE TECHNOLOGY. HE ALSO EXPLAINED THAT BASED ON USING THESE DEVICES IN AFGHANISTAN, THEY KNEW THAT THE SYSTEM DIDN'T FUNCTION AT TEMPERATURES OVER 120 DEGREES FAHRENHEIT, AND THAT WAS AN EXAMPLE OF HOW, IF A SYSTEM IS EXPOSED TO AN EXTREME TEMPERATURE LIKE THAT, THEY WOULD HAVE -- THEY WOULD BE ALERTED TO THAT EXPOSURE AND THEY WOULD BE ABLE TO TAKE THAT MACHINE OFFLINE OR PUT IT IN A DIFFERENT ENVIRONMENT.
MR. LEACH: AT SOME POINT DURING YOUR ANALYSIS OF THE THERANOS INVESTMENT, DID YOU ASK MR. BALWANI IF YOU COULD SPEAK TO REPRESENTATIVES OF WALGREENS?
BRIAN GROSSMAN: YES.
MR. LEACH: WHAT DID HE TELL YOU?
BRIAN GROSSMAN: HE SAID HE WAS VERY UNCOMFORTABLE WITH THAT AND HE SAID THEY WEREN'T WILLING TO DO THAT. HE, HE, HE REFERENCED SOMETHING TO THE EFFECT THAT IT WOULD BE A STRANGE CONVERSATION. THEY HAVE A GREAT RELATIONSHIP. THEY DIDN'T -- THAT COULD SEEM -- IT WOULDN'T LOOK GOOD. HE HAD A SERIES OF RESPONSES ALONG THOSE LINES.
MR. LEACH: DID YOU ALSO ASK MR. BALWANI IF YOU COULD SPEAK WITH UNITED HEALTH CARE?
BRIAN GROSSMAN: YES, WE DID.
MR. LEACH: AND WHY WERE YOU INTERESTED IN SPEAKING WITH UNITED HEALTH CARE?
BRIAN GROSSMAN: SO IN -- TOWARDS THE BEGINNING OF OUR SECOND MEETING WITH THE COMPANY, THEY DETAILED THE COMMERCIAL CONTRACTS THEY HAD WITH IMPORTANT INSURANCE COMPANIES. THE FIRST WAS THE BLUE CROSS AND BLUE SHIELD ORGANIZATION, WHICH EVERY STATE HAS A NOT FOR PROFIT HEALTH INSURANCE COMPANY, AND IN CALIFORNIA WE HAVE TWO, BUT THAT'S THE ONLY STATE THAT HAS TWO. THEY'RE TYPICALLY THE LARGEST INSURER IN EACH STATE. THEY ARE THE LARGEST INSURER IN EACH STATE, AND THEY HAVE A NATIONAL ORGANIZATION THAT CAN EVALUATE TECHNOLOGY. SO THEY TOLD US THEY HAD A CONTRACT WITH THE PARENT BLUE CROSS AND BLUE CROSS -- I'M SORRY. AND THEY HAD ACCESS TO THE MEMBER STATE BLUE'S PLANS. THEY ALSO TOLD US IN THAT MEETING THAT THEY HAD A NATIONAL CONTRACT WITH UNITED HEALTH CARE. THAT WAS VERY SIGNIFICANT TO US BECAUSE UNITED HEALTH CARE IS, IN OUR VIEW, THE SMARTEST, MOST SOPHISTICATED NATIONAL HEALTH INSURANCE COMPANY. UNLIKE THE BLUES PLANS, THEY'RE A FOR PROFIT HEALTH COMPANY.
SO WE KNOW THESE COMPANIES VERY WELL IN THE HEALTH CARE SPACE AND WE HIGHLY VALUE THEIR ABILITY TO VET TECHNOLOGY AND NEW COMPANIES. THE FACT THAT -- SO IN THAT MEETING THE COMPANY TOLD US THAT THEY HAD A CONTRACT WITH UNITED HEALTH CARE. THAT WAS SIGNIFICANT NOT JUST BECAUSE UNITED WAS A VERY SMART, WELL RESPECTED ORGANIZATION, UNITED HAD A CONTRACT WITH I BELIEVE LABCORP AT THE TIME. SO THEY EXPLAINED THAT -- SO IT WAS VERY UNUSUAL THAT THEY HAD A CONTRACT IF THEY ALREADY HAD ANOTHER CONTRACT WITH ANOTHER THIRD PARTY. THEY EXPLAINED TO US, BECAUSE THE TECHNOLOGY WAS SO DIFFERENT AND SO TRANSFORMATIVE AND SUCH A HUGE ADVANCEMENT FOR PATIENTS, THAT THEY WERE ABLE TO CONTRACT DIRECTLY WITH UNITED HEALTH CARE AND THEY HAD ACCESS TO UNITED'S, I THINK AT THE TIME THEY HAD ROUGHLY 30 MILLION COVERED LIVES. SO AS A RESULT OF THAT, WE WANTED TO SPEAK TO SOMEONE AT UNITED THAT DID THE TECHNICAL DUE DILIGENCE. WE WANTED TO UNDERSTAND THEIR VIEW OF THE COMPANY AND THE TECHNOLOGY AND, JUST AS IMPORTANT, HOW THEY SAW THIS, THIS TESTING METHODOLOGY BEING USED BY THEIR BENEFICIARIES IN THE DIFFERENT MARKETS THAT THEY OPERATED.
MR. LEACH: OKAY. AND WHEN YOU MADE THIS REQUEST OF MR. BALWANI, WHAT DID HE TELL YOU?
BRIAN GROSSMAN: HE SAID -- SIMILAR TO WALGREENS. HE SAID NO, WE WILL NOT ALLOW YOU TO SPEAK TO UNITED HEALTH CARE. WE'RE UNCOMFORTABLE WITH THAT. IT WOULD, AGAIN, LOOK BADLY ON US, THERANOS, IF INVESTORS ARE ASKING TO SPEAK TO SOMEONE AT THE COMPANY. SO SIMILAR, A VERY SIMILAR ANSWER TO WHAT -- HOW HE RESPONDED TO THE WALGREENS, THE WALGREENS REQUEST.
MR. LEACH: AT SOME POINT IN JANUARY OF 2014 DID YOU SPEAK WITH SOMEBODY NAMED CHANNING ROBERTSON?
BRIAN GROSSMAN: YES.
MR. LEACH: WHO IS CHANNING ROBERTSON?
BRIAN GROSSMAN: HE'S A STANFORD PROFESSOR WHO, WHO HELPED MS. HOLMES START THE COMPANY TEN YEARS BEFORE OUR DUE DILIGENCE PROCESS.
MR. LEACH: WHY DID YOU WANT TO SPEAK WITH MR. ROBERTSON?
BRIAN GROSSMAN: HE WAS AN IMPORTANT FOUNDING MEMBER OF THE COMPANY. HE WAS ON THE BOARD, THE ORIGINAL BOARD. I BELIEVE HE WAS ON THE ORIGINAL BOARD WITH MS. HOLMES, AND HE WAS A WELL RESPECTED SCIENTIST IN THE LOCAL COMMUNITY THAT HAD BEEN INVOLVED WITH OTHER SUCCESSFUL HEALTH CARE STARTUPS THAT, AS INVESTORS IN THE HEALTH CARE INDUSTRY, WE KNEW. WE KNEW THOSE STARTUPS. SO WE -- HE WAS SOMEONE THAT WE WANTED TO SPEAK TO.
MR. LEACH: AND DID YOU RELY IN PART ON THE INFORMATION THAT MR. ROBERTSON PROVIDED YOU?
BRIAN GROSSMAN: YES.
MR. LEACH: OKAY. DID MR. ROBERTSON MAKE STATEMENTS TO YOU ABOUT THE RISKS THAT HE SAW RELATING TO THERANOS?
BRIAN GROSSMAN: YES.
MR. LEACH: AND WHAT DID HE TELL YOU?
BRIAN GROSSMAN: HE TOLD ME THAT THE RISK THAT -- THE TWO PRINCIPAL RISKS THAT HE SAW FOR THE BUSINESS, OR THE PRINCIPAL RISK HE SAW FOR THE BUSINESS WAS THE CONSUMER EXPERIENCE, AND THAT THIS COMPANY, THIS TECHNOLOGY HAD LONG PASSED THE POINT OF TECHNICAL RISK OR REGULATORY RISK. HE DID NOT SEE ANY TECHNICAL RISK AT ALL IN, IN THEIR CORE TECHNOLOGY AND WHAT THEY COULD DO USING THEIR PROPRIETARY FINGERSTICK TECHNOLOGY AND THEIR SAMPLE PROCESSING UNITS. THAT WAS HIS PERSPECTIVE ON THE RISKS OF THE BUSINESS.
MR. LEACH: AND DID HE MAKE STATEMENTS TO YOU ABOUT THERANOS'S USE OF ITS DEVICE COMPARED TO OTHER COMPANIES OR OTHER COMPETITORS?
BRIAN GROSSMAN: HE DID. WE HAD, I BELIEVE, TWO CONVERSATIONS. IN THE FIRST CONVERSATION HE DESCRIBED THE PHILOSOPHICAL DIFFERENCE THAT THERANOS HAD ABOUT TESTING COMPARED TO THE CONVENTIONAL LABORATORY INDUSTRY. THE CONVENTIONAL LAB INDUSTRY HAD A DECENTRALIZED NETWORK OF SUPPLIERS. THEY BOUGHT THIRD PARTY EQUIPMENT, THEY HAD TO HIRE TECHNICIANS TO RUN THAT EQUIPMENT, THEY WERE INEFFICIENT, THEY REALLY DIDN'T FOCUS ON THE PATIENT, THEY DIDN'T KEEP TRACK OF THEIR DATA. IT WAS AN OUTDATED, INEFFICIENT, ANTIQUATED BUSINESS MODEL. HE COMPARED THAT TO THERANOS WHERE EVERYTHING WAS CENTRALIZED, AND IT WAS A PATIENT SPECIFIC, PATIENT FOCUSSED BUSINESS WHERE YOU AS A CONSUMER NOT ONLY HAD A RADICALLY DIFFERENT EXPERIENCE, IT WAS CHEAPER, EASY TO ACCESS, OPEN UP TESTING TO POPULATIONS THAT STRUGGLED WITH FEAR OF NEEDLES, VENOUS ACCESS, A WHOLE SERIES OF ISSUES. BUT IT ALSO ENABLED THE CONSUMER TO KEEP THEIR DATA OVER TIME, AND SO HE WAS -- AND THEN BEYOND THAT, HE JUST TALKED ABOUT THE TECHNICAL CAPABILITIES, THE TECHNOLOGY WITHIN THE MINILAB. HE DESCRIBED THE PROCESS OF LOOKING IT OVER AND THE TECHNOLOGY THAT WAS IN IT, THE OPTICS, THE CHEMISTRIES, THE TINY PLASTIC CHANNELS WHERE FLUIDS ARE EXCHANGED, WHICH IS CALLED MICROFLUIDICS. HIS VIEW WAS THAT EVEN IF A COMPETITOR OPENED THE BOX, IT WOULD TAKE THEM YEARS, IF THEY COULD AT ALL, TO CREATE A SIMILAR TYPE OF TECHNOLOGY, REINFORCING THE COMPETITIVE ADVANTAGE THAT THE COMPANY HAD DESCRIBED TO US OVER THE COURSE OF OUR DUE DILIGENCE.
MR. LEACH: AND DID THE NUMBER OF ASSAYS OR PARTICULAR ASSAYS COME UP IN YOUR CONVERSATIONS WITH MR. ROBERTSON?
BRIAN GROSSMAN: YEAH. WE TALKED ABOUT THE UNDERLYING TECHNOLOGY, AND HE DESCRIBED HOW THERE WERE ROUGHLY 300 DIFFERENT TYPES OF THINGS THAT ONE HAD TO MEASURE IN ORDER TO MATCH THE FULL MENU THAT A REFERENCE LABORATORY LIKE A QUEST OR A LABCORP, WHAT THEY OFFER. AND HE DESCRIBED THE PROCESS OVER THE PRECEDING TEN YEARS OF GOING TEST BY TEST AND TRYING TO FIGURE OUT HOW TO MEASURE THAT THING AT DRAMATICALLY LESS VOLUMES, MICROLITERS AS OPPOSED TO MILLILITERS, AND THERE WAS NOTHING THAT THEY COULDN'T DO. THERE WAS NOTHING THE TECHNOLOGY COULDN'T DO. THERE WERE THINGS THAT WERE EASIER, BUT THEY HADN'T FOUND A SINGLE ANALYTIC TECHNIQUE THAT THEY WERE NOT ABLE TO MEASURE.
MR. LEACH: CURRENTLY MEASURE?
BRIAN GROSSMAN: CURRENTLY MEASURE, CORRECT.
MR. LEACH: I THINK YOU TESTIFIED EARLIER THAT AT SOME POINT YOU VISITED THE THERANOS MANUFACTURING FACILITY.
BRIAN GROSSMAN: YES.
MR. LEACH: AND WHO WAS THERE FOR THAT?
BRIAN GROSSMAN: FROM THE PFM SIDE IT WAS MYSELF AND MR. KHANNA, I BELIEVE MR. KHANNA. FROM -- MR. KHANNA -- WE MAY HAVE HAD ONE OTHER PERSON FROM THE PFM SIDE. FROM THE THERANOS SIDE, MR. BALWANI MET US AT THE FACILITY, THE MANUFACTURING FACILITY IN NEWARK, CALIFORNIA, WHICH IS IN THE EAST BAY.
MR. LEACH: OKAY. AND WHAT DID YOU OBSERVE ON THIS TOUR OF THE MANUFACTURING FACILITY?
BRIAN GROSSMAN: WE SAW, WE SAW THEM MAKING MINILABS FROM THE MICRO MACHINING OF SPECIFIC PARTS, BOTH PLASTIC AND METAL, AND THEY DESCRIBED FOR US HOW THAT PROCESS WAS EVOLVING FROM THOUSANDS OF DIFFERENT LITTLE PARTS. AND THEN WITH THEIR PROPRIETARY MANUFACTURING TECHNIQUES THEY WERE SIMPLIFYING THE PROCESS. THEY WERE MAKING THEIR OWN PARTS SO THAT THEY COULD REDUCE THE NUMBER OF PIECES THAT GO INTO A MINILAB. WE -- SO WE SAW THOSE -- THE BIG EQUIPMENT THAT MACHINED THOSE PARTS. WE THEN TRANSFERRED -- WE THEN MOVED TO THE PART OF THE FACTORY FLOOR WHERE THEY WERE ASSEMBLING MINILABS, AND THEN WE FINISHED OUR TOUR IN THE DISTRIBUTION PART OF THE MANUFACTURING FACILITY WHERE THEY WERE PACKAGING AND SHIPPING MATERIALS.
MR. LEACH: AT ANY POINT DURING THIS TOUR OF THE MANUFACTURING FACILITY, DID YOU SEE ANY THIRD PARTY BLOOD TESTING MACHINES?
MR. LEACH: DID MR. BALWANI HIGHLIGHT ANY THIRD PARTY BLOOD TESTING MACHINES TO YOU?
MR. LEACH: DID YOU ALSO CONDUCT A TOUR OF THE THERANOS CALIFORNIA CLIA LAB?
BRIAN GROSSMAN: YES.
MR. LEACH: WHAT DID -- WHO WAS THERE FOR THAT?
BRIAN GROSSMAN: I BELIEVE IT WAS MR. BALWANI, ALTHOUGH I DON'T SPECIFICALLY REMEMBER. IT WAS MYSELF, AND I BELIEVE IT WAS MR. KHANNA, ALTHOUGH I'M NOT -- I DON'T, I DON'T -- I BELIEVE HE WAS WITH ME AS WELL.
MR. LEACH: WHAT DID YOU OBSERVE ON THIS TOUR OF THE THERANOS CLIA LAB?
BRIAN GROSSMAN: WE OBSERVED A LABORATORY SETTING WITH METAL RACKS THAT CONTAINED MINILABS THAT WERE ACTIVELY PROCESSING SAMPLES.
MR. LEACH: DID YOU SEE ANY SIEMENS MACHINES?
MR. LEACH: DID YOU SEE ANY OTHER THIRD PARTY BLOOD TESTING MACHINES?
MR. LEACH: LET ME PLEASE DRAW YOUR ATTENTION TO WHAT HAS BEEN MARKED AS EXHIBIT 5441. DO YOU HAVE THAT IN FRONT OF YOU, SIR?
BRIAN GROSSMAN: YES.
MR. LEACH: IS THE FIRST PAGE OF EXHIBIT 5441 AN EMAIL FROM YOU TO SOMEONE NAMED ADAM CLAMMER?
BRIAN GROSSMAN: YES.
MR. LEACH: AND WHO IS MR. CLAMMER?
BRIAN GROSSMAN: HE IS A PERSONAL FRIEND OF MY PARTNER AT THE TIME, CHRIS JAMES, AND HE'S ALSO AN INVESTOR. HE WAS AN INVESTOR BY PROFESSION IN THE PRIVATE EQUITY SPACE AND HAD INVESTED IN HEALTH CARE COMPANIES DURING HIS CAREER.
MR. LEACH: THERE IS AN ATTACHMENT TO THIS EMAIL ENTITLED THERANOS_V12.XLSX. DO YOU KNOW WHAT THE ATTACHMENT IS?
BRIAN GROSSMAN: YES.
MR. LEACH: AND WHAT IS IT?
BRIAN GROSSMAN: IT IS A FINANCIAL MODEL.
MR. LEACH: AND DID YOU -- DID PFM PREPARE THIS IN THE ORDINARY COURSE OF ITS BUSINESS?
BRIAN GROSSMAN: YES.
MR. LEACH: AND WAS THIS PART OF YOUR EFFORT TO UNDERSTAND SOME OF THE FINANCIAL METRICS AROUND A POSSIBLE INVESTMENT?
BRIAN GROSSMAN: YES.
MR. LEACH: YOUR HONOR, I OFFER EXHIBIT 5441. 5441.
JUDGE DAVILA: IT'S ADMITTED. IT MAY BE PUBLISHED.
(GOVERNMENT'S EXHIBIT 5441 WAS RECEIVED IN EVIDENCE.)
MR. LEACH: IF WE CAN ZOOM IN, MS. HOLLIMAN, ON THE TOP.
MR. LEACH: DO YOU SEE YOUR NAME IN THE FROM LINE, MR. GROSSMAN?
BRIAN GROSSMAN: YES.
MR. LEACH: AND DO YOU SEE IT SAYS, "CELL D113 ON PFM, REV MODEL IS SCENARIO. 1, 2, 3 FOR THE BEAR, BASE, BULL." WHAT DOES THAT MEAN?
BRIAN GROSSMAN: SO, FIRST OF ALL, THIS IS AN EXCEL MODEL AND IN EXCEL MODELS YOU CAN CREATE SCENARIOS WHERE, IF YOU JUST CHANGE ONE CELL, THERE ARE A WHOLE SERIES OF ASSUMPTIONS THAT WILL CHANGE. SO IT'S A GREAT WAY OF PRESENTING DIFFERENT IMAGES OF A BUSINESS. IN THIS CASE WE HAD BUILT THREE SCENARIOS TO CAPTURE WHAT WE THOUGHT THE FINANCIAL OUTLOOK FOR THERANOS WAS, BEAR BEING THE LOWEST, BASE BEING THE -- USING BEAR REFERS TO KIND OF BEAR MARKET OR A BAD OUTCOME; BASE BEING KIND OF OUR CENTRAL CASE, AND THEN BULL BEING THE UP SIDE, POSITIVE CASE, BULL STANDING FOR BULL MARKET.
MR. LEACH: AND THE MODEL THAT PFM PREPARED, WAS THAT BASED IN PART ON FINANCIAL INFORMATION THAT YOU RECEIVED FROM THERANOS?
BRIAN GROSSMAN: YES.
MR. LEACH: AND IS THAT INFORMATION INCLUDED ON SOME OF THE SLIDES OF THE EXCEL SPREADSHEET THAT IS ATTACHED TO THIS EXHIBIT?
BRIAN GROSSMAN: I'D HAVE TO REVIEW THE SPREADSHEET. I DON'T KNOW.
MR. LEACH: LET ME --
BRIAN GROSSMAN: THE MODEL HAD DIFFERENT TABS IN IT, SO I DON'T KNOW WHAT IS IN THIS BINDER.
MR. LEACH: WELL, LET ME DRAW YOUR ATTENTION, PLEASE, TO PAGE 44.
BRIAN GROSSMAN: I'VE GOT YOU.
MR. LEACH: DO YOU SEE THE LOGO FOR THERANOS IN THE TOP UPPER LEFT-HAND CORNER?
BRIAN GROSSMAN: YES.
MR. LEACH: AND DO YOU REMEMBER THIS TO BE A MODEL THAT YOU RECEIVED FROM THERANOS?
BRIAN GROSSMAN: YES.
MR. LEACH: AND IF YOU CONTINUE LOOKING IN THE HARD COPY TO PAGE 52, CAN YOU TELL US IF THESE ARE ALSO INPUTS IN DATA THAT YOU RECEIVED FROM THERANOS?
BRIAN GROSSMAN: IT'S KIND OF SMALL.
MR. LEACH: WE CAN DO IT ONE BY ONE THEN. I DON'T WANT TO TEST YOUR --
BRIAN GROSSMAN: I MEAN, MY EYESIGHT ISN'T WHAT IT USED TO BE.
(LAUGHTER.)
BRIAN GROSSMAN: BUT I BELIEVE THIS IS THE FINANCIAL MODEL THAT THE COMPANY PROVIDED US.
BY MR. LEACH:
MR. LEACH: WELL, THIS SHOULDN'T BE AN EYESIGHT TEST, AND WE CAN GO THROUGH THIS ONE BY ONE, MR. GROSSMAN. WE'RE ON PAGE 4, WHICH IS ON THE SCREEN.
BRIAN GROSSMAN: YEP.
MR. LEACH: ARE YOU SATISFIED THAT THIS IS INFORMATION FROM THERANOS?
BRIAN GROSSMAN: YES.
MR. LEACH: OKAY. THERE'S A ROW AT THE TOP, 2014 DEVICE COST PLUS INSTALLATION/CONFIG PLUS TRAINING. WHAT DID YOU UNDERSTAND THAT TO BE?
BRIAN GROSSMAN: THAT WAS THEIR COST OF PRODUCING MINILABS IN 2014.
MR. LEACH: AND THE COST THAT THEY WERE GIVING YOU WAS WHAT?
BRIAN GROSSMAN: $70,000.
MR. LEACH: AND THEN BENEATH THAT IT SAYS 2015 PLUS DEVICE COST, PLUS INSTALLATION/CONFIG. IS THAT A REFERENCE TO THE MINILAB DEVICE COST FOR 2015?
BRIAN GROSSMAN: YES.
MR. LEACH: AND WAS THIS THERANOS TELLING YOU THAT THE COST WAS GOING TO GO DOWN FROM $70,000 TO $50,000?
BRIAN GROSSMAN: YES.
MR. LEACH: BENEATH THAT THERE ARE SOME LINES FOR DEPRECIATIONS, PP&E, DEVICE INSTALLATIONS. WHAT DID YOU UNDERSTAND THOSE TO REFER TO?
BRIAN GROSSMAN: THIS WAS THE ASSUMPTION THE COMPANY WAS USING TO DEPRECIATE THEIR CAPITAL SPENDING. SO STANDARD ACCOUNTING PRACTICES FOR BUSINESSES LIKE THIS WHEN THEY PURCHASE CAPITAL EQUIPMENT, WHETHER IT'S -- OR MANUFACTURE CAPITAL EQUIPMENT, EITHER ONE, YOU WILL -- IT WILL GO AS AN ASSET ON THE BALANCE SHEET, AND THEN OVER TIME THE ACCOUNTING STANDARDS ALLOW YOU TO DEPRECIATE THAT ASSET UNDER DIFFERENT SCHEDULES. IN THIS CASE THEY -- THEY'RE USING WHAT IS REFERRED TO AS STRAIGHT LINE DEPRECIATION, THAT'S THE SL, AND THAT'S JUST A LINEAR DEPRECIATION. THERE ARE OTHER ACCELERATED DEPRECIATION SCHEDULES WHICH COMPANIES OFTEN USE, BUT IN THIS CASE THE ASSUMPTION WAS A STRAIGHT LINE DEPRECIATION.
MR. LEACH: AT ANY POINT IN TIME DID THERANOS PROVIDE YOU WITH DEVICE COSTS OR DEPRECIATION INFORMATION FOR THIRD PARTY MACHINES MADE BY OTHERS?
MR. LEACH: DID THEY, FOR EXAMPLE, SPELL OUT FOR YOU IN THEIR MODEL WHAT THE DEPRECIATION FOR A SIEMENS MACHINE WOULD BE?
MR. LEACH: WAS THAT INFORMATION THAT WOULD HAVE BEEN RELEVANT TO YOU IN ASSESSING THE ECONOMICS FOR THIS TRANSACTION?
BRIAN GROSSMAN: YES.
MR. LEACH: LET ME DRAW YOUR ATTENTION TO THE NEXT PAGE, PAGE 45. AND IF WE CAN ZOOM IN ON THE LEFT HALF OF THIS, MS. HOLLIMAN.
JUDGE DAVILA: BEFORE YOU ASK A QUESTION, LET'S LET OUR JURY STAND UP AND STRETCH FOR JUST A MOMENT.
MR. LEACH: THANK YOU, YOUR HONOR.
JUDGE DAVILA: THE NUMBERS LOOK INTIMIDATING HERE. SO PLEASE STAND UP AND STRETCH, FOLKS.
(STRETCHING.)
MR. LEACH: MAY I CONTINUE, YOUR HONOR?
JUDGE DAVILA: YES. THANK YOU VERY MUCH.
BY MR. LEACH:
MR. LEACH: MR. GROSSMAN, THE NUMBERS ON THIS PAGE ARE A LITTLE HARD TO SEE. MY ONLY QUESTION IS, IS THIS INFORMATION THAT YOU BELIEVE CAME FROM THERANOS?
BRIAN GROSSMAN: YES, I DO.
MR. LEACH: AND IF WE CAN NOW TURN TO PAGE 47, AND IF WE CAN ZOOM IN ON THE SUBSTANCE OF THE SLIDE, MS. HOLLIMAN. DO YOU SEE THE HEADING "THERANOS PROJECTED STATEMENT OF INCOME" IN THE TOP LEFT CORNER, MR. GROSSMAN?
BRIAN GROSSMAN: YES.
MR. LEACH: AND DO YOU BELIEVE THIS TO BE INFORMATION THAT THERANOS PROVIDED TO YOU IN CONNECTION WITH A POSSIBLE INVESTMENT?
BRIAN GROSSMAN: YES.
MR. LEACH: AND DID YOU USE THE INFORMATION ON THIS SLIDE AS A BASIS FOR HOW TO BUILD YOUR OWN REVENUE MODEL?
BRIAN GROSSMAN: YES.
MR. LEACH: IF WE CAN NOW GO TO PAGE 48, MS. HOLLIMAN. ZOOM IN ON THE SUBSTANCE. IS THIS A CONTINUATION OF THE PROJECTED STATEMENT OF INCOME THAT THERANOS PROVIDED TO YOU, MR. GROSSMAN?
BRIAN GROSSMAN: YES, IT IS.
MR. LEACH: OKAY. LET ME DRAW YOUR ATTENTION TO THE COLUMN TO THE FAR RIGHT FOR THE PERIOD ENDING 12/30/2014. DO YOU SEE THAT?
BRIAN GROSSMAN: YES.
MR. LEACH: AND WHAT WAS THE REVENUE THAT THERANOS WAS PROJECTING FROM LAB SERVICES FROM U.S. RETAIL PARTNERS?
BRIAN GROSSMAN: $109 MILLION.
MR. LEACH: AND WHAT WAS THE REVENUE THERANOS WAS PROJECTING TO YOU FOR LAB SERVICES REVENUE FROM PHYSICIAN OFFICES?
BRIAN GROSSMAN: $72 MILLION.
MR. LEACH: AND WHAT WAS THE REVENUE THAT WAS BEING PROJECTED FOR PHARMACEUTICAL SERVICES?
BRIAN GROSSMAN: $30 MILLION.
MR. LEACH: AND DO YOU SEE THE TOTAL OF 261 MILLION IN REVENUES BY THE END OF 2014?
BRIAN GROSSMAN: YES.
MR. LEACH: WAS THAT ATTRACTIVE TO YOU?
BRIAN GROSSMAN: YES.
MR. LEACH: HOW SO?
BRIAN GROSSMAN: IT WAS A, IT WAS A STRONG, IMPRESSIVE GROWTH IN REVENUES AS THE COMPANY COMMERCIALIZED THEIR TECHNOLOGY BOTH WITH WALGREENS BUT ALSO THE NON-WALGREENS PART OF THE BUSINESS AS WELL.
MR. LEACH: AND THEN TO THE RIGHT, ARE THERE PROJECTED REVENUE FOR THE PERIOD ENDING 12/30/2015?
BRIAN GROSSMAN: YES.
MR. LEACH: AND WAS THERANOS PROJECTING 750 MILLION IN LAB SERVICES FROM U.S. RETAIL PHARMACIES?
BRIAN GROSSMAN: YES.
MR. LEACH: AND WAS THERANOS TELLING YOU THAT IT EXPECTED 120 MILLION FROM PHARMACEUTICAL COMPANIES BY THE END OF 2015?
BRIAN GROSSMAN: YES.
MR. LEACH: AND WHAT WAS THE TOTAL REVENUE THAT THERANOS WAS TELLING YOU IT EXPECTED TO ACHIEVE BY THE END OF 2015?
BRIAN GROSSMAN: $1,608,000,000.
MR. LEACH: AND WAS THAT ATTRACTIVE TO YOU?
BRIAN GROSSMAN: YES.
MR. LEACH: AND IS IT FAIR, MR. GROSSMAN, THAT FOR PAGES WITH THE THERANOS LOGO, LIKE WE SEE IN THE TOP LEFT HAND OF THE SCREEN, THAT THAT IS INFORMATION COMING FROM THERANOS?
BRIAN GROSSMAN: YES.
MR. LEACH: AT SOME POINT IN TIME DID YOU GO TO A WALGREENS TO GET YOUR BLOOD TESTED?
BRIAN GROSSMAN: YES, I DID.
MR. LEACH: TELL US ABOUT THAT EXPERIENCE.
BRIAN GROSSMAN: I WENT TO THE PALO ALTO STORE THAT WAS OFFERING THERANOS SERVICES -- I DID NOT TELL THE COMPANY I WAS GOING -- AND I HAD MY BLOOD DRAWN WITH A VENOUS DRAW, NOT A FINGERSTICK, AND MY LAB RESULTS WERE, WERE -- AND I LEFT WITHIN A FEW MINUTES AND THAT WAS MY EXPERIENCE.
MR. LEACH: OKAY. AND DID YOU HAVE QUESTIONS FOR MR. BALWANI ABOUT YOUR EXPERIENCE?
BRIAN GROSSMAN: YES.
MR. LEACH: AND TELL US ABOUT THAT, PLEASE.
BRIAN GROSSMAN: WELL, I ASKED HIM WHY I DIDN'T RECEIVE A FINGERSTICK AND WHY IT WAS A VENOUS DRAW, AND I ALSO ASKED HIM WHY IT TOOK LONGER THAN FOUR HOURS TO GET MY TEST RESULTS BACK.
MR. LEACH: AND WHAT DID HE TELL YOU?
BRIAN GROSSMAN: HE TOLD ME THAT THE TEST -- ONE OF THE TESTS THAT MY PHYSICIAN HAD ORDERED WAS A HIGHLY UNUSUAL TEST, THAT THEY WERE NOT AT THAT POINT IN TIME OFFERING ON FINGERSTICK. BUT -- AND THEN IN ADDITION TO THAT, HE SAID THAT THERE WAS SOME TYPE OF LAB FAILURE THAT SHOULD HAVE BEEN RELEASED TO MY PHYSICIAN, THAT THEY INVESTIGATED. IN OTHER WORDS, THERE WAS ONE TEST THAT WAS -- THAT HELD THE PROCESS UP. THEY SHOULD HAVE REPORTED OUT THE RESULTS WITHIN FOUR HOURS. I BELIEVE HE THANKED ME FOR HIGHLIGHTING THIS PROCESS ISSUE, AND THEY HAVE ADDRESSED IT, AND FIXED IT GOING FORWARD. SOMETHING TO THAT EFFECT.
MR. LEACH: LET ME DRAW YOUR ATTENTION TO WHAT HAS BEEN MARKED AS EXHIBIT 1482.
BRIAN GROSSMAN: OKAY.
MR. LEACH: IS THIS AN EMAIL EXCHANGE BETWEEN YOU AND MR. BALWANI RELATING IN PART TO THE TESTS THAT YOU WERE ORDERING THROUGH WALGREENS?
BRIAN GROSSMAN: IF YOU COULD JUST GIVE ME A MINUTE TO REVIEW THIS?
MR. LEACH: PLEASE.
(PAUSE IN PROCEEDINGS.)
BRIAN GROSSMAN: YES, OKAY.
BY MR. LEACH:
MR. LEACH: YES, IT IS AN EXCHANGE BETWEEN YOU AND MR. BALWANI RELATING TO YOUR TESTS AT WALGREENS?
BRIAN GROSSMAN: YES.
MR. LEACH: YOUR HONOR, I OFFER EXHIBIT 1482.
JUDGE DAVILA: IT'S ADMITTED. IT MAY BE PUBLISHED.
(GOVERNMENT'S EXHIBIT 1482 WAS RECEIVED IN EVIDENCE.)
BY MR. LEACH:
MR. LEACH: LET ME DRAW YOUR ATTENTION, MR. GROSSMAN, TO PAGE 2. LET'S WORK OUR WAY UP FROM THE SECOND EMAIL FROM THE BOTTOM. DO YOU SEE WHERE YOU QUOTE, "SUNNY, JUST TO CONFIRM WE WOULD STILL LIKE TO SEE THE NEWARK AND THE THERANOS CLIA LAB." DO YOU SEE THAT?
BRIAN GROSSMAN: YES, I DO.
MR. LEACH: IS THAT A REFERENCE TO THE TOUR THAT YOU ENDED UP TAKING?
BRIAN GROSSMAN: YES.
MR. LEACH: MR. BALWANI RESPONDS IN THE NEXT EMAIL, "I AM WORKING ON BOTH. NEWARK HAS A LOT OF OPEN DEVICES AND EQUIPMENT SO WE ARE MOVING THEM ASIDE BUT WE CAN VISIT NEWARK FRIDAY MORNING." DO YOU SEE THAT LANGUAGE?
BRIAN GROSSMAN: YES.
MR. LEACH: AND WHAT DID YOU UNDERSTAND THAT TO MEAN?
BRIAN GROSSMAN: I DON'T, I DON'T KNOW WHAT -- I MEAN, I THINK WHAT I UNDERSTOOD IS THAT WE HAD AN APPOINTMENT FOR 11:00 O'CLOCK ON FRIDAY MORNING TO TOUR THE NEWARK LAB. I'M NOT SURE ABOUT THE BEGINNING OF THAT.
MR. LEACH: OKAY. YOU WROTE BACK IN THE NEXT EMAIL, "OK THANKS. IS THERE A WAY WE CAN SEE A PART OF THE LAB WITHOUT COMPROMISING THE PATENT PENDING OR UNFILLED PARTS OF IT? THIS IS MORE OF A PERFUNCTORY EXERCISE TO MAKE SURE THERE IS ACTUALLY A LAB THERE." WHAT WERE YOU GETTING AT THERE?
BRIAN GROSSMAN: WELL, HE WAS RESISTING OUR VISIT TO THE LAB ON THE GROUNDS THAT THEY HAD IMPORTANT UNPATENTED INFORMATION, ROBOTICS THAT THEY WERE USING, AND BY SHOWING US THE LAB, THEY WOULD COMPROMISE THEIR INTELLECTUAL PROPERTY, THEIR ABILITY TO GET PATENTS ISSUED ON THOSE, ON THOSE PROPRIETARY AUTOMATION TECHNIQUES USING THEIR OWN PROPRIETARY TECHNOLOGY. SO HE WAS RESISTING OUR LAB TOUR ON THOSE GROUNDS, OR HE WAS RESISTING OUR VIEW OF THE CLIA LAB ON THOSE GROUNDS, AND I BELIEVE HE WAS REFERRING SPECIFICALLY TO THE WHOLE BOTTOM FLOOR OF THEIR CORPORATE HEADQUARTERS WHERE THIS AUTOMATION WAS DEPLOYED, AND SO HE WAS NOT WILLING TO LET US SEE THAT PART OF THE CLIA LAB. SO THEN I'M ASKING, IS THERE A WAY THAT WE CAN SEE A PART OF THE LAB THAT DOESN'T HAVE THIS PROPRIETARY PATENT PENDING AUTOMATION SO THAT WE CAN MAKE SURE THAT YOU ACTUALLY ARE USING YOUR OWN PROPRIETARY TECHNOLOGY IN A CLIA LAB ENVIRONMENT?
MR. LEACH: AT THIS POINT IN TIME, HAD YOU SIGNED A CONFIDENTIALITY AGREEMENT?
BRIAN GROSSMAN: YES.
MR. LEACH: AND WERE YOU PREPARED TO GIVE THERANOS WHATEVER ASSURANCES OF CONFIDENTIALITY THEY NEEDED IN THE COURSE OF MAKING YOUR INVESTMENT DECISION?
BRIAN GROSSMAN: YES.
MR. LEACH: LET'S GO TO PAGE 1. IF I COULD DRAW YOUR ATTENTION TO THE BOTTOM PORTION. MR. BALWANI IS WRITING, "ON YOUR TESTS. THERE WAS A CONTROL THAT FAILED ON ONE OF THE ASSAYS AND THE LAB RERAN THE SAMPLE AND THEY WERE HOLDING BACK RESULTS FOR ALL OF THE OTHER TESTS UNTIL THE ENTIRE ORDER WAS COMPLETE." DO YOU SEE THAT LANGUAGE?
BRIAN GROSSMAN: YES, I DO.
MR. LEACH: AND DO YOU BELIEVE THIS TO BE A REFERENCE TO THE TESTS THAT YOU ORDERED THROUGH A WALGREENS?
BRIAN GROSSMAN: YES.
MR. LEACH: AT ANY POINT DID MR. BALWANI TELL YOU THAT SOME OF YOUR TESTS WERE RUN ON A THIRD PARTY MACHINE?
BRIAN GROSSMAN: NO, HE DID NOT.
MR. LEACH: WOULD THAT HAVE BEEN RELEVANT TO YOU?
BRIAN GROSSMAN: YES.
MR. LEACH: I'D LIKE TO SHOW YOU WHAT IS IN EVIDENCE AS EXHIBIT 1491. PERMISSION TO DISPLAY, YOUR HONOR?
JUDGE DAVILA: YES.
BY MR. LEACH:
MR. LEACH: LET ME DRAW YOUR ATTENTION TO -- DO YOU HAVE 1491 IN FRONT OF YOU, MR. GROSSMAN?
BRIAN GROSSMAN: I DO.
MR. LEACH: AND THIS IS AN EMAIL THAT YOU'RE NOT ON; IS THAT CORRECT?
BRIAN GROSSMAN: CAN YOU ASK THE QUESTION AGAIN?
MR. LEACH: THIS IS AN EMAIL THAT YOU WERE NOT ON A NOT A PARTY TO?
BRIAN GROSSMAN: YES, CORRECT.
MR. LEACH: OKAY. LET ME DRAW YOUR ATTENTION TO PAGE 2. DO YOU SEE AT THE BOTTOM WHERE SOMEONE NAMED MAX FOSQUE IS WRITING, "PLEASE FOLLOW UP ON WHY BRIAN GROSSMAN HAS NOT BEEN RELEASED YET, HE WAS PENDING AN LDAQ AS OF LAST NIGHT. THIS IS CRITICAL TO GET OUT ASAP." DO YOU SEE THAT LANGUAGE?
BRIAN GROSSMAN: YES.
MR. LEACH: OKAY. AND THEN IF WE LOOK -- AND THIS IS AROUND THE TIME WHERE YOU WERE CONSIDERING AN INVESTMENT IN THERANOS, JANUARY 28TH?
BRIAN GROSSMAN: YES.
MR. LEACH: OKAY. UP AT THE TOP, MR. FOSQUE WRITES AGAIN, "HI ADAM/MARK, THIS PATIENT (BRIAN GROSSMAN) IS A VIP, WOULD YOU MIND LOOKING INTO THE SLOW DOWN HERE?" DO YOU SEE THAT LANGUAGE?
BRIAN GROSSMAN: YES, I DO.
MR. LEACH: AND IF WE GO DOWN TO PAGE 1 UP AT THE TOP, THIS IS ON THE IMMULITE; CORRECT? DO YOU SEE WHERE MR. FOSQUE IS WRITING, "GREAT, THANKS FOR THE UPDATE. PLEASE LET US KNOW THE OUTCOME. "THIS IS ON THE IMMULITE; CORRECT?" DO YOU SEE THAT LANGUAGE?
BRIAN GROSSMAN: YES.
MR. LEACH: AND SOMEONE NAMED MARK PANDORI RESPONDS YES?
BRIAN GROSSMAN: YES.
MR. LEACH: AND DO YOU KNOW WHETHER THE IMMULITE IS A THIRD PARTY MACHINE MADE BY SOMEONE OTHER THAN THERANOS?
BRIAN GROSSMAN: I DON'T KNOW WHAT THAT'S REFERRING TO.
MR. LEACH: OKAY. BUT AT NO POINT DID MR. BALWANI TELL YOU THAT A PORTION OF YOUR TEST WAS RUN ON A THIRD PARTY MACHINE?
BRIAN GROSSMAN: NO, HE DID NOT.
MR. LEACH: WOULD THAT HAVE BEEN A RED FLAG TO YOU?
BRIAN GROSSMAN: YES.
MR. LEACH: LET ME DRAW YOUR ATTENTION TO EXHIBIT 1505. ARE YOU FAMILIAR WITH THIS DOCUMENT?
BRIAN GROSSMAN: YES.
MR. LEACH: WHAT IS IT?
BRIAN GROSSMAN: CAN I MAYBE JUST TAKE A MINUTE TO LOOK THROUGH IT?
MR. LEACH: SURE.
(PAUSE IN PROCEEDINGS.)
BRIAN GROSSMAN: OKAY. THIS IS -- UM, I AM FAMILIAR WITH THIS.
BY MR. LEACH:
MR. LEACH: OKAY. WHAT IS IT?
BRIAN GROSSMAN: THIS IS THE SERIES C-2 STOCK PURCHASE AGREEMENT.
MR. LEACH: AND IS THIS THE AGREEMENT BY WHICH PFM MADE AN INVESTMENT INTO THERANOS?
BRIAN GROSSMAN: YES.
MR. LEACH: YOUR HONOR, I OFFER EXHIBIT 1505.
JUDGE DAVILA: IT'S ADMITTED. IT MAY BE PUBLISHED.
(GOVERNMENT'S EXHIBIT 1505 WAS RECEIVED IN EVIDENCE.)
BY MR. LEACH:
MR. LEACH: MR. GROSSMAN, DO YOU SEE THE TITLE, THERANOS, INC. SERIES C-2 PREFERRED STOCK PURCHASE AGREEMENT AT THE TOP?
BRIAN GROSSMAN: YES.
MR. LEACH: AND IS THIS A DOCUMENT THAT YOU AND YOUR TEAM REVIEWED IN CONNECTION WITH THE THERANOS INVESTMENT?
BRIAN GROSSMAN: YES.
MR. LEACH: AND IF I COULD PLEASE DRAW YOUR ATTENTION TO PAGE 6. DO YOU SEE IN SECTION 4 THERE ARE A NUMBER OF REPRESENTATIONS AND WARRANTIES OF THE INVESTORS?
BRIAN GROSSMAN: YES.
MR. LEACH: AND THE INVESTORS IS A REFERENCE TO YOUR FUNDS?
BRIAN GROSSMAN: YES.
MR. LEACH: AND IS IF WE LOOK AT PAGE 7, THERE'S A NUMBER OF REPRESENTATIONS RELATING TO THE INVESTORS EXPERIENCE, THE NATURE OF THE INVESTMENT, ACCESS TO DATA, AND THE ACCREDITED NATURE OF THE INVESTOR. DO YOU SEE THOSE PARAGRAPHS?
BRIAN GROSSMAN: I'M NOT A LEGAL EXPERT BUT, YES, I DO SEE THOSE.
MR. LEACH: WELL, YOU ENDED UP SIGNING THE STOCK PURCHASE AGREEMENT; IS THAT FAIR?
BRIAN GROSSMAN: YES.
MR. LEACH: AND WERE YOU SATISFIED THAT THE REPRESENTATIONS MADE BY PFM AT THE TIME OF THE STOCK PURCHASE AGREEMENT WERE TRUE AND CORRECT?
BRIAN GROSSMAN: I MEAN, TO THE BEST OF MY MEMORY, YES.
MR. LEACH: OKAY. PLEASE LOOK AT EXHIBIT 1506. ARE YOU FAMILIAR WITH THIS DOCUMENT?
BRIAN GROSSMAN: YES.
MR. LEACH: WHAT IS THIS?
BRIAN GROSSMAN: THIS IS THE MASTER SIGNATURE PAGE.
MR. LEACH: OKAY. FOR THE INVESTMENT THAT YOU AND YOUR FUNDS ULTIMATELY MAKE?
BRIAN GROSSMAN: YES.
MR. LEACH: YOUR HONOR, I OFFER EXHIBIT 1506.
JUDGE DAVILA: IT'S ADMITTED. IT MAY BE PUBLISHED.
(GOVERNMENT'S EXHIBIT 1506 WAS RECEIVED IN EVIDENCE.)
MR. LEACH: IF WE CAN ZOOM IN, MS. HOLLIMAN, ON THE PORTION WHERE THERE IS FIRST SOME HANDWRITING, IT SAYS, "I ACKNOWLEDGE AND AGREE," AND ZOOM IN ON THE NEXT THREE -- THERE YOU GO.
MR. LEACH: MR. GROSSMAN, THERE ARE THREE DIFFERENT ENTITIES ON THIS, PARTNER INVESTMENT, LP; PFM HEALTHCARE MASTER FUND, LP; AND PFM HEALTHCARE PRINCIPALS FUND, LP. CAN YOU JUST EXPLAIN WHAT THOSE ARE?
BRIAN GROSSMAN: YES. I'M GOING TO START WITH PFM HEALTHCARE MASTER FUND LP. THAT IS THE ENTITY THAT REPRESENTS OUR HEDGE FUND THAT IS AVAILABLE TO INSTITUTIONAL CLIENTS, PENSION PLANS, FOUNDATIONS, ENDOWMENTS, HIGH NET WORTH INDIVIDUALS. PFM HEALTHCARE PRINCIPAL FUNDS IS WHAT WE CALLED OUR FRIENDS AND FAMILY FUND. IT'S A DIFFERENT LEGAL STRUCTURE, AND AS A RESULT PEOPLE, INDIVIDUALS WITH LOWER INCOME AND WEALTH LEVELS WERE ABLE TO INVEST IN THE PRINCIPALS FUND WHO WERE NOT -- WHO WOULDN'T BE ABLE TO INVEST IN OUR PFM HEALTHCARE MASTER FUND. SO THAT'S WHAT WE REFERRED TO AS OUR FRIENDS AND FAMILY FUND. PARTNER INVESTMENTS IS AN ENTITY THAT WE FORMED, THAT WE USED TO COINVEST IN DEALS, IN PRIVATE DEALS. AND WHAT I MEAN BY COINVEST IS WE AGGREGATE INVESTMENT INTEREST FROM OUR EXISTING INVESTORS AND POTENTIALLY NON -- OTHER INDIVIDUALS OR ENTITIES THAT AREN'T INVESTED WITH PFM, WE AGGREGATE THAT TO PARTNER INVESTMENTS AND WE MAKE ONE INVESTMENT INTO A COMPANY ALONGSIDE OUR HEDGE FUND, OUR TWO HEDGE FUNDS. SO IT IS AS OPPOSED TO HAVING 10 OR 15 INDIVIDUALS INVEST SEPARATELY.
MR. LEACH: AND SO DOES THIS REFLECT THAT PARTNER INVESTMENTS, LP, THE COINVESTMENT VEHICLE, INVESTED APPROXIMATELY $55.5 MILLION IN THERANOS?
BRIAN GROSSMAN: YES, IT DOES.
MR. LEACH: AND DOES THIS REFLECT THAT THE -- YOUR INVESTMENT FUND, THE HEDGE FUND, INVESTED APPROXIMATELY 38.3 MILLION IN THERANOS?
BRIAN GROSSMAN: OUR INSTITUTIONAL HEDGE FUND, YES.
MR. LEACH: AND DOES THIS REFLECT THAT THE FRIENDS AND FAMILY VEHICLE, PFM HEALTHCARE PRINCIPALS FUND, LP, INVESTED ABOUT $2.3 MILLION IN THERANOS?
BRIAN GROSSMAN: YES.
MR. LEACH: LET ME NEXT PLEASE DRAW YOUR ATTENTION TO WHAT IS IN EVIDENCE AS EXHIBIT 4345. PERMISSION TO DISPLAY, YOUR HONOR?
JUDGE DAVILA: YES.
MR. LEACH: GO TO PAGE 1. IT'S 4845. EXCUSE ME.
MR. LEACH: DOES THIS APPEAR TO BE A, A WIRE INFORMATION RELATING TO PFM, MR. GROSSMAN?
BRIAN GROSSMAN: YES.
MR. LEACH: AND UNDER BASIC INFORMATION, THERE'S AN AMOUNT $38,336,632, THAT'S THE INVESTMENT OF THE INSTITUTIONAL HEDGE FUND THAT YOU MANAGE?
BRIAN GROSSMAN: YES.
MR. LEACH: MAY I HAVE A MOMENT, YOUR HONOR?
JUDGE DAVILA: YES.
(DISCUSSION AMONGST GOVERNMENT COUNSEL OFF THE RECORD.)
MR. LEACH: I HAVE NO FURTHER QUESTIONS, YOUR HONOR. THANK YOU. THANK YOU, MR. GROSSMAN.
JUDGE DAVILA: CROSS-EXAMINATION?
JUDGE DAVILA: SURE. FOLKS, IF YOU FEEL LIKE STANDING AND STRETCHING, YOU CAN DO THAT DURING THIS EXCHANGE.
(STRETCHING.)
JUDGE DAVILA: MR. WADE.
CROSS-EXAMINATION BY MR. WADE:
BRIAN GROSSMAN: GOOD AFTERNOON.
MR. WADE: MY NAME IS LANCE WADE. I REPRESENT ELIZABETH HOLMES. I'M GOING TO ASK YOU A FEW QUESTIONS HERE THIS AFTERNOON.
BRIAN GROSSMAN: OKAY.
MR. WADE: OKAY. I'D LIKE TO START JUST BY PROVIDING A LITTLE FRAMEWORK DURING THE PERIOD IN WHICH PFM WAS CONSIDERING THE INVESTMENT IN THERANOS. ACTUALLY, YOUR HONOR, MAY I APPROACH?
JUDGE DAVILA: YES.
BY MR. WADE:
MR. WADE: (HANDING.) BUT BEFORE I DO THAT, I'M GOING TO HAND YOU A COUPLE OF BINDERS, AND THEY WILL HAVE NUMERICAL TABS. AS I CALL YOUR ATTENTION TO PARTICULAR DOCUMENTS, YOU CAN REFERENCE THEM IN THESE BINDERS. OKAY? NOW, SIR, DO YOU RECALL THAT YOU FIRST LEARNED ABOUT THERANOS AND THE FACT THAT IT MIGHT BE A POSSIBLE INVESTMENT ON NOVEMBER 1ST OF 2013?
BRIAN GROSSMAN: I DO.
MR. WADE: OKAY. AND I'M GOING TO PUT UP, WITH THE COURT'S PERMISSION, A CALENDAR DEMONSTRATIVE JUST SO THAT WE CAN MARK THESE DATES. OKAY? AND I BELIEVE YOU JUST TESTIFIED ON DIRECT TESTIMONY THAT THE INVESTMENT DECISION THAT YOU MADE WAS MADE IN, WAS IT FEBRUARY 5TH, 4TH OR 5TH OF 2014?
BRIAN GROSSMAN: I BELIEVE THAT'S RIGHT.
MR. WADE: OKAY. LET ME MARK THAT HERE ON THE DEMONSTRATIVE. AND ON DECEMBER 12TH OF 2013, YOU HAD YOUR INITIAL MEETING WITH MS. HOLMES AND MR. BALWANI; CORRECT?
BRIAN GROSSMAN: YES.
BRIAN GROSSMAN: I BELIEVE THAT'S RIGHT.
MR. WADE: OKAY. AND THEN I BELIEVE YOU TESTIFIED THAT THERE WAS A SECOND MEETING ON JANUARY 10TH OF 2013; CORRECT?
BRIAN GROSSMAN: I BELIEVE THAT'S RIGHT.
MR. WADE: AND I THINK YOU, YOU TESTIFIED MS. HOLMES WAS THERE FOR ABOUT HALF OF THE MEETING; IS THAT RIGHT?
BRIAN GROSSMAN: YES.
BRIAN GROSSMAN: I BELIEVE IT WAS LONGER THAN THAT.
BRIAN GROSSMAN: YES.
MR. WADE: OKAY. NOW, YOU ALSO TESTIFIED ABOUT A SLIDE DECK THAT THE COMPANY SENT YOU AT SOME POINT; RIGHT?
BRIAN GROSSMAN: YES.
BRIAN GROSSMAN: YES.
MR. WADE: THERE HAD BEEN SOME SLIDES THAT WERE SHOWN IN A MEETING AND YOU ASKED TO RECEIVE THOSE MATERIALS; CORRECT?
BRIAN GROSSMAN: YES.
MR. WADE: OKAY. AND IT WAS NOT JUST THE SLIDE -- AND THERE WERE SOME OTHER PHONE CALLS WITH MR. BALWANI; CORRECT?
BRIAN GROSSMAN: YES.
MR. WADE: OKAY. BUT YOU -- YOU AS AN INSTITUTION, PFM -- DID MORE THAN JUST HAVE THOSE MEETINGS AND LOOK AT THOSE MATERIALS; RIGHT?
BRIAN GROSSMAN: YES.
MR. WADE: YOU WENT THROUGH A PRETTY EXTENSIVE PROCESS BY WHICH YOU CONSIDERED THE INVESTMENT; CORRECT?
BRIAN GROSSMAN: YES.
BRIAN GROSSMAN: I DON'T KNOW.
BRIAN GROSSMAN: I DON'T.
MR. WADE: OKAY. BUT THERE WERE, THERE WERE FOUR MEMBERS OF THE TEAM, SOMETIMES FIVE WHO WERE INVOLVED IN THIS?
BRIAN GROSSMAN: YES.
BRIAN GROSSMAN: YES.
BRIAN GROSSMAN: YES.
MR. WADE: AND THEN IN ADDITION TO THAT, YOU ALSO CALLED IN, OR CALLED UPON A VARIETY OF OUTSIDE EXPERTS FOR THEIR VIEWS ON THE COMPANY; CORRECT?
BRIAN GROSSMAN: YES.
BRIAN GROSSMAN: I BELIEVE SO, YES.
BRIAN GROSSMAN: YES.
BRIAN GROSSMAN: I DON'T REMEMBER SPECIFICALLY.
BRIAN GROSSMAN: I DON'T -- I'M NOT SURE HOW TO ANSWER YOUR QUESTION. IF YOU'RE ASSUMING -- IF THE QUESTION IS, ARE WE AN ACCREDITED S.E.C. REGISTERED ADVISOR WITH INSTITUTIONAL FUNDS, YES, WE ARE.
MR. WADE: AND I DIDN'T MEAN FOR IT TO BE A TRICK QUESTION. YOU'VE MADE A LOT OF INVESTMENTS IN YOUR CAREER; CORRECT?
BRIAN GROSSMAN: YES.
MR. WADE: AND YOU GO THROUGH A PROCESS BY WHICH YOU CONSIDER WHETHER TO MAKE AN INVESTMENT OR WHETHER TO PASS ON IT; RIGHT?
BRIAN GROSSMAN: YES.
MR. WADE: AND THIS IS AN INVESTMENT THAT YOU CONSIDERED AND YOU EITHER COULD HAVE MOVED FORWARD OR YOU COULD HAVE PASSED AT ANY POINT; RIGHT?
BRIAN GROSSMAN: YES.
BRIAN GROSSMAN: YES, THAT'S CORRECT.
MR. WADE: OKAY. BUT AFTER THAT POINT, IT WAS MORE THAN A YEAR UNTIL YOU EVER SPOKE WITH MS. HOLMES AGAIN; CORRECT?
BRIAN GROSSMAN: I DON'T RECALL.
BRIAN GROSSMAN: I DON'T RECALL.
MR. WADE: OKAY. BUT AS YOU SIT HERE TODAY, YOU DON'T HAVE ANY INDICATIONS THAT THERE WERE ANY INTERACTIONS WITH MS. HOLMES AFTER YOU LEFT THAT MEETING ON JANUARY 10TH, 2014; CORRECT?
BRIAN GROSSMAN: IF THE QUESTION -- I'M -- I DON'T RECALL WHETHER I INTERACTED WITH HER AFTER THE JANUARY 10TH MEETING.
MR. WADE: OKAY. DO YOU RECALL PREVIOUSLY MAKING STATEMENTS THAT YOU DIDN'T INTERACT WITH HER AGAIN UNTIL LATE 2015?
BRIAN GROSSMAN: I DON'T.
MR. WADE: OKAY. AND AT THE TIME THAT YOU LEFT THAT MEETING IN JANUARY, THERE WAS A LOT OF WORK THAT YOU WANTED TO DO AS AN INSTITUTION BEFORE YOU WERE GOING TO MAKE AN INVESTMENT DECISION; IS THAT FAIR?
BRIAN GROSSMAN: THERE WAS WORK THAT WE NEEDED TO DO, YES.
MR. WADE: YOU WANTED TO DO ADDITIONAL RESEARCH AND DUE DILIGENCE SO THAT YOU COULD BE FULLY INFORMED BEFORE YOU COULD MAKE YOUR ASSESSMENT ON WHETHER TO INVEST IN THERANOS; RIGHT?
BRIAN GROSSMAN: YES.
BRIAN GROSSMAN: I DON'T QUITE UNDERSTAND THE QUESTION.
MR. WADE: WELL, YOUR INITIAL MEETINGS WITH THE BUSINESS IN WHICH YOU MIGHT INVEST ARE SORT OF THE BEGINNING OF THE PROCESS, AND THEN YOUR FUND GOES THROUGH ITS OWN SORT OF BOTTOM UP PROCESS BEFORE IT MAKES AN INVESTMENT DECISION; RIGHT?
BRIAN GROSSMAN: NOT ALWAYS.
MR. WADE: WELL, DO YOU RECALL TESTIFYING IN THIS CASE THAT THIS -- DO YOU RECALL TESTIFYING PREVIOUSLY WITH RESPECT TO THESE FACTS THAT THAT JANUARY 10TH MEETING WAS JUST REALLY THE START OF THE INVESTMENT ANALYSIS PROCESS FOR PFM?
BRIAN GROSSMAN: I DON'T RECALL SPECIFICALLY, BUT WE -- BUT IF THE QUESTION -- IF THE QUESTION IS, DID WE DO SUBSEQUENT ANALYSIS, THE ANSWER IS YES.
BRIAN GROSSMAN: ALL RIGHT.
MR. WADE: AND WE'LL GO INTO SOME DETAIL ON WHAT YOU CONSIDERED AS YOU WENT THROUGH THAT INVESTMENT DECISION. AT THE TIME THAT YOU FIRST LEARNED OF THERANOS IN NOVEMBER 1ST OF 2013, DO YOU RECALL HOW MANY WALGREENS LOCATIONS THERANOS WAS OPERATING OUT OF?
BRIAN GROSSMAN: I BELIEVE IT WAS AT THAT POINT ZERO.
MR. WADE: OKAY. AND, AND WITHIN ABOUT A WEEK OR SO, THEY HAD ACTUALLY OPENED UP TO ONE LOCATION IN PALO ALTO; CORRECT?
BRIAN GROSSMAN: I BELIEVE THAT'S RIGHT.
MR. WADE: OKAY. AND THEN BY THE TIME YOU COMPLETED YOUR INVESTMENT DECISION, DO YOU KNOW HOW MANY LOCATIONS THERANOS WAS OPERATING OUT OF?
BRIAN GROSSMAN: I DON'T REMEMBER SPECIFICALLY.
BRIAN GROSSMAN: I THINK IT WAS -- I DON'T, I DON'T REMEMBER.
BRIAN GROSSMAN: I -- AS OF FEBRUARY 5TH, WHAT WAS THE NUMBER?
BRIAN GROSSMAN: YEAH, I DON'T REMEMBER.
MR. WADE: OKAY. WE'LL SEE IF WE CAN REFRESH YOU AS WE GO THROUGH YOUR TESTIMONY TODAY. YOU RECALLED LEARNING DURING THE PROCESS THAT -- WELL, IN ANY EVENT, YOU RECALL IT WAS VERY EARLY IN THE ROLLOUT OF THE WALGREENS RELATIONSHIP; IS THAT FAIR?
BRIAN GROSSMAN: YES.
BRIAN GROSSMAN: I BELIEVE IT WAS 8100, BUT, YES.
BRIAN GROSSMAN: YES.
MR. WADE: BUT THEY WERE IN, A HANDFUL IN THE PERIOD THAT YOU WERE CONSIDERING THE INVESTMENT; CORRECT?
BRIAN GROSSMAN: YES.
MR. WADE: OKAY. AND YOU RECALL THAT LEARNING DURING THIS PROCESS THERE WAS A TWO PHASE ROLLOUT THAT WAS GOING TO HAPPEN AT THERANOS?
BRIAN GROSSMAN: YES.
MR. WADE: AND PHASE I WAS GOING TO BE THE PERIOD WHERE THEY WERE GOING TO OPERATE WITHIN A -- I THINK YOU REFERRED TO IT IN YOUR DOCUMENTS AS A HUB AND SPOKE MODEL; IS THAT RIGHT?
BRIAN GROSSMAN: YES.
BRIAN GROSSMAN: YES.
MR. WADE: AND PHASE II WAS GOING TO BE THE POINT WHERE THE DEVICES WERE DEPLOYED OUT INTO THE PHYSICAL LOCATIONS AT WALGREENS LOCATIONS; CORRECT?
BRIAN GROSSMAN: YES.
MR. WADE: AND AS YOU WERE LEARNING ABOUT THIS PROCESS FROM THE COMPANY, YOU DISCUSSED AT DIFFERENT TIMES PHASE I AND PHASE II OF THEIR BUSINESS PLAN; RIGHT?
BRIAN GROSSMAN: YES.
MR. WADE: NOW, I WANT TO -- YOU MENTIONED THAT YOU'RE AN S.E.C. REGISTERED INVESTMENT ADVISOR, AND I THINK YOU ALSO USED THE WORD HEDGE FUND. IS IT -- MR. LEACH SHOWED YOU THE THREE ENTITIES THAT INVESTED IN THERANOS. DO YOU RECALL THAT JUST A MINUTE AGO?
BRIAN GROSSMAN: YES, I DO.
MR. WADE: OKAY. WHY DON'T WE -- WITH THE COURT'S PERMISSION, I'LL PULL UP 1506, WHICH I THINK IS IN EVIDENCE.
JUDGE DAVILA: YES.
BY MR. WADE:
MR. WADE: AND JUST SO WE UNDERSTAND, WHICH ONE OF THESE, OR ARE MULTIPLE OF THESE ENTITIES CONSIDERED HEDGE FUNDS?
BRIAN GROSSMAN: THE MIDDLE ENTITY AND THE BOTTOM ENTITY ARE CONSIDERED HEDGE FUNDS.
MR. WADE: OKAY. AND WHY -- WHAT MAKES THEM A HEDGE FUND VERSUS THE -- BY COMPARISON TO THE TOP ENTITIES, FOR EXAMPLE?
BRIAN GROSSMAN: WHAT MAKES THEM A HEDGE FUND?
BRIAN GROSSMAN: THEY'RE GOVERNED BY DIFFERENT REGULATORY REGIMES. I'M NOT A HEDGE FUND LEGAL EXPERT, BUT AS A HEDGE FUND YOU ARE LIMITED IN WHAT YOU CAN SELL THE WAY YOU MARKET THE FUND, AND AS A RESULT YOU DON'T -- YOU'RE NOT ALLOWED TO MARKET THE, THE INVESTMENT PRODUCT TO THE GENERAL PUBLIC. THERE ARE OTHER DIFFERENCES BETWEEN MUTUAL FUNDS AND HEDGE FUNDS, ONE OBVIOUS ONE BEING IS THAT HEDGE FUNDS CAN HEDGE.
MR. WADE: OKAY. THE, THE -- AND THE -- IS IT FAIR TO SAY THE PRINCIPAL HEALTH CARE FUND WITHIN PFM IS SOMETHING THAT YOU WERE IN CHARGE OF DURING THIS PERIOD?
BRIAN GROSSMAN: CAN YOU BE A LITTLE MORE SPECIFIC WHAT YOU'RE REFERRING TO?
BRIAN GROSSMAN: THE LARGEST HEALTH CARE FUND WAS THE HEALTH CARE MASTER FUND.
BRIAN GROSSMAN: YES.
BRIAN GROSSMAN: YES.
MR. WADE: OKAY. AND THAT'S, THAT'S -- AND ARE YOU THE PERSON, THEREFORE, THAT HAS THE ULTIMATE AUTHORITY TO MAKE THE INVESTMENT DECISIONS WITH RESPECT TO THAT FUND?
BRIAN GROSSMAN: YES.
MR. WADE: OKAY. AND JUST SO WE ALL UNDERSTAND SORT OF HOW THIS WORKS, YOU MENTIONED THAT THERE WERE VARIOUS, I THINK YOU SAID, FAMILY OFFICES AND INSTITUTIONAL INVESTORS AND HIGH NET WORTH INDIVIDUALS WHO CHOOSE TO PLACE MONEY INTO THAT FUND; IS THAT RIGHT?
BRIAN GROSSMAN: THAT IS RIGHT.
BRIAN GROSSMAN: I HAVE -- YEAH, YES.
BRIAN GROSSMAN: WELL, LET ME JUST -- I JUST WANT TO MAKE SURE THAT I AGREE WITH THE ASSUMPTION IN YOUR QUESTION. I DON'T MAKE EVERY INVESTMENT DECISION, BUT I HAVE THE FINAL INVESTMENT DECISION FOR THE PORTFOLIO.
MR. WADE: FAIR ENOUGH. AND I GUESS THE POINT I'M TRYING TO MAKE IS THAT WHEN SOMEONE GIVES MONEY TO YOU AS A HEDGE FUND, THEY NO LONGER HAVE CONTROL OVER HOW YOU INVEST THE MONEY. THE DECISION IS YOURS, NOT THE FAMILY OFFICE THAT GAVE YOU THE MONEY; CORRECT?
BRIAN GROSSMAN: UNTIL THEY REQUEST IT BACK, YES.
MR. WADE: FAIR ENOUGH. AND WITH RESPECT TO THE FUND ON THE BOTTOM, THE PRINCIPAL HEALTH CARE, OR THE PFM HEALTHCARE PRINCIPALS FUND, LP, WHO MAKES DECISIONS FOR THAT FUND?
BRIAN GROSSMAN: THE GOVERNANCE FOR THAT FUND IS THE SAME AS THE GOVERNANCE FOR THE PFM HEALTHCARE MASTER FUND.
BRIAN GROSSMAN: YES.
MR. WADE: SO WHEN PEOPLE PUT MONEY INTO THAT FUND, THEY'RE ENTRUSTING YOU TO MAKE THE INVESTMENT DECISION; IS THAT FAIR?
BRIAN GROSSMAN: YES.
MR. WADE: OKAY. AND THEN THE FIRST FUND IS PARTNER INVESTMENT FUNDS -- I'M SORRY, PARTNER INVESTMENTS, LP. DO YOU SEE THAT?
BRIAN GROSSMAN: YES.
BRIAN GROSSMAN: COULD YOU BE A LITTLE MORE SPECIFIC?
MR. WADE: WELL, LET'S USE THERANOS, FOR EXAMPLE. SO THE PEOPLE WHO INVESTED -- I ASSUME THE 55.5 MILLION IS MADE UP OF A NUMBER OF DIFFERENT INVESTORS; IS THAT FAIR?
BRIAN GROSSMAN: YES.
MR. WADE: AND DID THOSE INDIVIDUAL INVESTORS HAVE THE ABILITY TO MAKE THE DECISION TO INVEST IN THERANOS?
BRIAN GROSSMAN: YES.
MR. WADE: OKAY. AND DID THEY DO THAT BASED UPON ANALYSIS AND INFORMATION THAT WAS PROVIDED BY YOU AND YOUR TEAM?
BRIAN GROSSMAN: I, I CAN'T REALLY ANSWER THAT QUESTION. I'M NOT SURE WHAT THE BASIS FOR THOSE INDIVIDUALS MAKING DECISIONS WERE. I DON'T, I DON'T KNOW.
MR. WADE: FAIR ENOUGH. WE'LL GO THROUGH SOME OF THE MATERIALS THAT THEY WERE GIVEN. DO YOU RECALL THAT YOU PREPARED AN ANALYSIS THAT WAS GIVEN TO SOME OF THE PEOPLE WHO INVESTED IN THAT FUND?
BRIAN GROSSMAN: YES.
MR. WADE: OKAY. AND DO YOU HAVE REASON TO BELIEVE THAT SOME OF THE PEOPLE WHO INVESTED IN THAT FUND MADE THE DECISIONS BASED UPON THAT ANALYSIS?
BRIAN GROSSMAN: IT'S POSSIBLE.
MR. WADE: OKAY. NOW, AS SOMEONE WHO MAKES THESE INVESTMENT DECISIONS, I'M SURE YOU UNDERSTAND, YOU KNOW, RISKS ARE COMMON IN INVESTMENTS; IS THAT FAIR?
BRIAN GROSSMAN: YES.
MR. WADE: OKAY. AND ONE OF THE THINGS THAT YOU DO IS ASSESS THE RISKS AND THE REWARDS AND DECIDE WHETHER OR NOT IT'S WORTH PROCEEDING WITH AN INVESTMENT; IS THAT FAIR?
BRIAN GROSSMAN: YES.
MR. WADE: OKAY. AND I -- AND WOULD YOU SAY YOU'VE MADE TENS OF THOUSANDS OF INVESTMENTS DECISIONS IN YOUR CAREER?
BRIAN GROSSMAN: I DON'T KNOW.
BRIAN GROSSMAN: YEAH, I DON'T -- WHAT'S "A LOT"?
BRIAN GROSSMAN: YES.
BRIAN GROSSMAN: YES.
MR. WADE: OKAY. AND IS IT FAIR TO SAY THAT GENERALLY THE MORE RISK THAT YOU TAKE, THE GREATER THE REWARD? IS THAT SORT OF A COMMON THOUGHT WITH AN INVESTMENT PHILOSOPHY?
BRIAN GROSSMAN: YES.
MR. WADE: AND WHEN, WHEN -- JUST SO WE'RE CLEAR, WHEN YOU'RE MAKING THESE INVESTMENT DECISIONS, YOU'RE NOT DOING THIS BASED UPON JUST GUT FEEL; RIGHT?
BRIAN GROSSMAN: UM, NO.
MR. WADE: YOU GO THROUGH A PRETTY EXTENSIVE PROCESS OF ANALYSIS BEFORE YOU MAKE A DECISION TO INVEST OTHER PEOPLE'S MONEY; RIGHT?
BRIAN GROSSMAN: YES.
MR. WADE: AND YOU WANT TO DO YOUR RESEARCH AND BE CAUTIOUS TO MAKE SURE YOU'RE MAKING A SOUND AND PRUDENT INVESTMENT DECISION; CORRECT?
BRIAN GROSSMAN: YES.
MR. WADE: OKAY. AND IN THE HEALTH CARE SPACE IN PARTICULAR, YOU HAVE A FAIR AMOUNT OF EXPERTISE; RIGHT?
BRIAN GROSSMAN: I MEAN, IF, IF YOU'RE ASKING DO I HAVE EXPERIENCE AS A HEALTH CARE INVESTOR, YES.
BRIAN GROSSMAN: I'VE BEEN INVESTING IN THE SPACE SINCE THE LATE '90S.
MR. WADE: OKAY. SO MORE THAN 20 YEARS OF EXPERIENCE IN INVESTING IN HEALTH CARE COMPANIES; IS THAT FAIR?
BRIAN GROSSMAN: YES.
BRIAN GROSSMAN: YES.
MR. WADE: GIVE US JUST A SENSE OF THE RANGE OF DIFFERENT COMPANIES THAT YOU HAVE EXPERIENCE INVESTING IN IN THE HEALTH CARE SPACE.
BRIAN GROSSMAN: FROM THE LARGEST COMPANIES LIKE UNITED HEALTH CARE, LIKE PFIZER, TO, YOU KNOW, SMALL SERIES A SEED INVESTMENTS, THE WHOLE CONTINUUM.
MR. WADE: OKAY. AND PFM IN PARTICULAR IN THE HEALTH CARE SPACE INVESTS PREDOMINANTLY IN PUBLIC MARKET SECURITIES; IS THAT RIGHT?
BRIAN GROSSMAN: MAYBE YOU COULD BE A LITTLE MORE SPECIFIC. WHAT DO YOU MEAN BY "PREDOMINANTLY"?
MR. WADE: WHAT PERCENTAGE OF PFM -- IN THIS TIME PERIOD ROUGHLY, WHAT PERCENTAGE OF PFM'S INVESTMENTS WERE IN PUBLICLY TRADED SECURITIES?
BRIAN GROSSMAN: I DON'T, I DON'T KNOW OFF THE TOP OF MY HEAD.
BRIAN GROSSMAN: I DON'T.
BRIAN GROSSMAN: YES.
BRIAN GROSSMAN: I WAS ONE OF -- THERE WAS ANOTHER PORTFOLIO MANAGER AT PFM AS WELL.
BRIAN GROSSMAN: YES.
BRIAN GROSSMAN: YEP.
BRIAN GROSSMAN: YES.
MR. WADE: OKAY. AND JUST SO WE UNDERSTAND HOW YOUR MODEL WORKS, IF SOMEONE ENTRUSTS YOU WITH THEIR MONEY, YOU'RE COMPENSATED BASED UPON A PERCENTAGE OF THE ASSETS UNDER MANAGEMENT; RIGHT?
BRIAN GROSSMAN: IT IS A FUNCTION OF -- IT'S THE NET PROFITABILITY OF THE BUSINESS AFTER EXPENSES.
BRIAN GROSSMAN: THE BUSINESS HAS TO HAVE PROFITS IN ORDER FOR PARTNERS TO BE COMPENSATED, YES.
MR. WADE: RIGHT. BUT MY QUESTION IS HOW THE BUSINESS MAKES MONEY, NOT NECESSARILY HOW YOU PERSONALLY MAKE MONEY.
BRIAN GROSSMAN: OH, SORRY.
BRIAN GROSSMAN: SORRY.
MR. WADE: I APOLOGIZE. THE BUSINESS MAKES MONEY BASED UPON A PERCENTAGE OF THE MONEY THAT THEY'RE MANAGING FOR A PARTICULAR INVESTOR; CORRECT?
BRIAN GROSSMAN: THE BUSINESS MAKES MONEY WHEN THE REVENUES -- THE CUMULATIVE REVENUES IN ANY GIVEN YEAR ARE IN EXCESS OF OUR CUMULATIVE EXPENSES.
BRIAN GROSSMAN: LIKE ANY BUSINESS.
MR. WADE: ARE YOU -- LET ME TRY A THIRD TIME. MAYBE WE'LL GET IT THIS TIME. YOU'RE COMPENSATED BY YOUR INVESTORS; CORRECT?
BRIAN GROSSMAN: IF THE QUESTION IS, DO OUR INVESTORS PAY FEES, YES, THEY DO PAY FEES.
BRIAN GROSSMAN: INVESTORS PAY A MANAGEMENT FEE, WHICH IS A PERCENTAGE OF THEIR ASSETS. IT CAN BE ANYWHERE FROM 0 TO 2 PERCENT. AND THEN IN ADDITION TO THAT, THEY PAY PERFORMANCE FEES, WHICH ARE A FUNCTION OF HOW THE FUND PERFORMS IN ANY GIVEN YEAR.
MR. WADE: OKAY. SO THERE'S A, THERE'S A SMALL AMOUNT THAT YOU MAKE REGARDLESS OF WHETHER THE INVESTMENT GOES UP OR DOWN; IS THAT FAIR?
BRIAN GROSSMAN: CAN YOU BE A LITTLE MORE CLEAR ABOUT WHAT "MAKE" MEANS?
BRIAN GROSSMAN: YEAH, WE HAVE REVENUES, YES.
MR. WADE: OKAY. AND THEN THERE'S SOME WHERE YOU ONLY GENERATE ADDITIONAL FEES IF YOU PERFORM WELL ON THE INVESTMENT; IS THAT FAIR?
BRIAN GROSSMAN: IT'S NOT AT THE INVESTMENT, IT'S AT THE FUND LEVEL.
BRIAN GROSSMAN: CORRECT.
MR. WADE: OKAY. SO IF THEY HAVE AN INVESTMENT IN A FUND, IT'S BASED UPON THE PERFORMANCE IN THAT FUND; IS THAT RIGHT?
BRIAN GROSSMAN: CORRECT.
MR. WADE: AND IF YOU DO WELL WITH THEIR INVESTMENT WITHIN THAT FUND, THEN YOU RECEIVE MORE MONEY; RIGHT?
BRIAN GROSSMAN: THE FIRM EARNS MORE REVENUES.
MR. WADE: OKAY. THE -- WHEN YOU'RE OUT MARKETING YOUR SERVICES, THE PERFORMANCE IN TERMS OF RETURN ON INVESTMENTS IS A SIGNIFICANT THING THAT YOU MARKET TO PEOPLE WHO ARE CONSIDERING INVESTMENT IN A PFM FUND; IS THAT FAIR?
BRIAN GROSSMAN: UM, IT'S HARD FOR ME TO ANSWER WHAT OTHER PEOPLE THINK ARE SIGNIFICANT, SO I -- I'M NOT SURE HOW TO ANSWER THAT QUESTION.
MR. WADE: OKAY. IS YOUR HISTORICAL INVESTMENT PERFORMANCE SOMETHING THAT YOU FREQUENTLY INCLUDE WITHIN YOUR PROMOTIONAL MATERIALS THAT YOU GIVE TO PEOPLE --
BRIAN GROSSMAN: YES.
BRIAN GROSSMAN: YES.
MR. WADE: OKAY. YOUR HONOR, MAYBE NOW WOULD BE A GOOD TIME FOR OUR 1:30 BREAK AND SEE IF WE CAN RESET WHEN WE COME BACK.
JUDGE DAVILA: I THINK THAT'S A GOOD IDEA. LET'S TAKE OUR BREAK, LADIES AND GENTLEMEN, 30 MINUTES, PLEASE, 30 MINUTES.
(RECESS FROM 1:32 P.M. UNTIL 2:04 P.M.)
JUDGE DAVILA: ALL RIGHT. THANK YOU. WE'RE BACK ON THE RECORD. PLEASE BE SEATED. ALL COUNSEL ARE PRESENT. MS. HOLMES IS PRESENT. OUR JURY IS PRESENT. MR. WADE.
MR. WADE: MR. GROSSMAN, I'D LIKE TO ASK JUST A COUPLE OF QUESTIONS ABOUT THE DUE DILIGENCE TEAM THAT, OR ANALYST TEAM THAT WORKED ON THE INVESTMENT. OKAY?
BRIAN GROSSMAN: OKAY.
MR. WADE: AND YOU MENTIONED MR. KHANNA. HAD HE -- AT THE TIME HE WAS WORKING ON THIS INVESTMENT, HAD HE BEEN AT PFM FOR A SIGNIFICANT PERIOD OF TIME?
BRIAN GROSSMAN: I BELIEVE HE JOINED IN 2013.
BRIAN GROSSMAN: YES.
BRIAN GROSSMAN: YES.
BRIAN GROSSMAN: OR MORE, YEAH.
BRIAN GROSSMAN: YEP.
BRIAN GROSSMAN: HE DID.
MR. WADE: AND HE, HE, HE GOT A BACHELOR'S DEGREE FROM THE MOSCOW INSTITUTE OF PHYSICS AND TECHNOLOGY; IS THAT RIGHT?
BRIAN GROSSMAN: YES.
MR. WADE: AND THEN HE WENT ON TO GET A PH.D. IN BIOENGINEERING FROM MASSACHUSETTS INSTITUTE OF TECHNOLOGY?
BRIAN GROSSMAN: YES.
MR. WADE: AND IS IT FAIR TO SAY THAT HE SERVED ON SOME OF THE TECHNICAL ISSUES AS SORT OF A SUBJECT MATTER EXPERT FOR YOU ON THIS INVESTMENT?
BRIAN GROSSMAN: YES.
BRIAN GROSSMAN: MORE OF A SCIENCE BACKGROUND THAN MR. KHANNA.
BRIAN GROSSMAN: YES.
BRIAN GROSSMAN: YES.
MR. WADE: AND WAS HE THE PERSON WHO DID SORT OF THE TECHNICAL SPREADSHEET WORK AROUND BUILDING THE MODEL AND THE LIKE?
BRIAN GROSSMAN: HE CERTAINLY DID SOME OF IT, AND ALSO -- YOU KNOW, OLD GUYS LIKE ME CAN'T DO POWERPOINT, AND SO HE DID ALL OF THE CHARTS AND PRESENTATIONS. SO HE DID THAT TYPE OF WORK FOR US.
MR. WADE: GREAT. AND THE -- I NOW WANT TO SHIFT AND FOCUS JUST BRIEFLY, IF I CAN, ON THIS PERIOD IN HERE BETWEEN NOVEMBER 1ST AND THAT FIRST MEETING THAT YOU HAD AT THERANOS, AND I HAVE SOME QUESTIONS ON THAT PERIOD. OKAY?
BRIAN GROSSMAN: OKAY.
MR. WADE: DO YOU RECALL THAT IN THE FIRST INSTANCE, ACTUALLY THERANOS DID NOT SOLICIT PFM FOR AN INVESTMENT, DID IT?
BRIAN GROSSMAN: I, I DON'T, I DON'T RECALL EXACTLY HOW THE INTRODUCTION WAS MADE.
BRIAN GROSSMAN: I KNOW WHO HE IS.
BRIAN GROSSMAN: HE'S A -- HE RUNS -- HE'S ANOTHER -- HE'S AN INVESTOR WHO WORKS AT A -- WHO RUNS -- HE WORKS AT ANOTHER HEDGE FUND.
BRIAN GROSSMAN: IT'S COATUE.
MR. WADE: COATUE. AND DO YOU RECALL THAT HE WAS A PERSON WHO INTRODUCED YOUR PARTNER, MR. JAMES, TO THE THERANOS INVESTMENT?
BRIAN GROSSMAN: THAT IS MY MEMORY, YES.
MR. WADE: OKAY. AND THEN ONCE MR. JAMES LEARNED ABOUT THIS POTENTIAL OPPORTUNITY, DO YOU RECALL THAT HE KIND OF PASSED IT ON TO YOUR GROUP TO SEE IF YOU KNEW ANYTHING ABOUT THE COMPANY?
BRIAN GROSSMAN: YES.
JUDGE DAVILA: WHICH VOLUME WILL THAT BE?
BRIAN GROSSMAN: I DO.
MR. WADE: AND DO YOU RECOGNIZE THIS TO BE AN EMAIL ON NOVEMBER 1ST THAT INVOLVES YOU AND SOME OTHER EMPLOYEES OF PFM RELATING TO THERANOS?
BRIAN GROSSMAN: YES, I DO.
MR. LEACH: NO OBJECTION, YOUR HONOR.
JUDGE DAVILA: IT'S ADMITTED. IT MAY BE PUBLISHED.
(DEFENDANT'S EXHIBIT 7353 WAS RECEIVED IN EVIDENCE.)
BRIAN GROSSMAN: YEP.
MR. WADE: AND WE TALKED ABOUT HOW NOVEMBER 1ST WAS THE DATE WHEN YOU FIRST LEARNED ABOUT THERANOS BEFORE THE BREAK. DO YOU RECALL THAT?
BRIAN GROSSMAN: YES.
BRIAN GROSSMAN: I BELIEVE SO, YES.
BRIAN GROSSMAN: I DON'T REMEMBER ACTUALLY BEFORE THAT, NO.
MR. WADE: OKAY. IT ASKS -- MR. LAFFONT, YOU SEE, ASKS MR. JAMES TO LET HIM KNOW IF HE'S INTERESTED IN THE INVESTMENT AND POINTS OUT THE WEBSITE. DO YOU SEE THAT?
BRIAN GROSSMAN: WELL, I'M NOT SURE IF HE SAYS ANYTHING ABOUT THE INVESTMENT, BUT IT SAYS "LET ME KNOW ASAP IF THIS PRIVATE COMPANY IS OF INTEREST TO YOU."
BRIAN GROSSMAN: SO, YEAH.
MR. WADE: AND WHEN IT WAS FORWARDED TO YOU, DID YOU INFER THAT THIS WAS A POSSIBLE INVESTMENT OPPORTUNITY?
BRIAN GROSSMAN: I MEAN, SORT OF. I MEAN, PRIVATE COMPANIES ARE ALWAYS RAISING MONEY, BUT I WOULD SAY THERE WAS MORE -- I'M SORRY, I DIDN'T ANSWER YOUR QUESTION. THE QUESTION IS -- COULD YOU REPEAT THE QUESTION?
MR. WADE: DID YOU -- WHEN THIS WAS SENT TO YOU, DID YOU UNDERSTAND THAT THIS WAS BEING SENT TO YOU AS A POSSIBLE INVESTMENT OPPORTUNITY?
BRIAN GROSSMAN: ACTUALLY, AT THE TIME, NO. NO.
MR. WADE: OKAY. AND -- BUT DO YOU RECALL THAT YOU FORWARDED IT TO SOME MEMBERS OF YOUR TEAM TO ASK IF THEY KNEW ANYTHING ABOUT THE COMPANY?
BRIAN GROSSMAN: YES.
MR. WADE: AND THESE ARE SOME OF THE FOLKS WHOSE NAMES WE'VE BEEN TALKING ABOUT HERE, MR. KHANNA AND MR. RABODZEY. DO YOU SEE THAT?
BRIAN GROSSMAN: YEP. I DO, YES.
BRIAN GROSSMAN: YES.
MR. WADE: DO YOU RECALL WHETHER AT THIS TIME YOU TOOK A LOOK AT THE WEBSITE AND DID A LITTLE INTERNET RESEARCH OR ANYTHING ABOUT THE COMPANY?
BRIAN GROSSMAN: I BELIEVE I DID, YES.
MR. WADE: OKAY. AND, IN FACT, IF WE LOOK AT -- IF YOU LOOK AT THE NEXT DOCUMENT IN YOUR BOOK AT 7354, DO YOU SEE YOU RESPOND TO MR. JAMES?
BRIAN GROSSMAN: OKAY. YES.
MR. WADE: YOU RECOGNIZE THIS EMAIL TO BE A RESPONSE TO MR. JAMES'S INITIAL EMAIL, JUST A DIFFERENT EMAIL CHAIN?
BRIAN GROSSMAN: YES, I DO.
MR. LEACH: NO OBJECTION, YOUR HONOR.
JUDGE DAVILA: IT'S ADMITTED. IT MAY BE PUBLISHED.
(DEFENDANT'S EXHIBIT 7354 WAS RECEIVED IN EVIDENCE.)
BY MR. WADE:
MR. WADE: AND DO YOU SEE THERE, I THINK WE SAW THE RESPONSE FROM MR. JAMES BEFORE, WOWSY. DO YOU SEE THAT?
BRIAN GROSSMAN: YES, I DO.
MR. WADE: AND IF WE LOOK UP BELOW, YOU NOTE ACTUALLY THAT IT WAS PRETTY COOL, BUT YOU HAD NEVER HEARD OF IT BEFORE; RIGHT?
BRIAN GROSSMAN: YES.
MR. WADE: AND WHEN YOU SAID IT WAS PRETTY COOL, WAS THAT BECAUSE YOU HAD DONE A LITTLE POKING AROUND?
BRIAN GROSSMAN: I DON'T REMEMBER, BUT YES, LIKELY.
MR. WADE: AND DO YOU RECALL HAVING ANY CONVERSATIONS WITH MR. JAMES ABOUT THE COMPANY AND WHETHER THIS WAS AN OPPORTUNITY THAT SHOULD BE CONSIDERED?
BRIAN GROSSMAN: I DON'T RECALL HAVING -- I DON'T RECALL DISCUSSING WITH HIM ABOUT AN INVESTMENT IN THE COMPANY AT THIS POINT. IT WAS MORE, DO YOU KNOW ANYTHING ABOUT THIS COMPANY?
BRIAN GROSSMAN: SO --
MR. WADE: AND WHEN YOU SAY "PRETTY COOL," DO YOU REMEMBER WHAT MATERIALS YOU REVIEWED OR INFORMATION YOU REVIEWED DURING THIS TIME PERIOD THAT CAUSED YOU TO FORM THE INITIAL IMPRESSION?
BRIAN GROSSMAN: I DON'T REMEMBER SPECIFICALLY, BUT MOST LIKELY IT WAS WHATEVER WAS ON THE WEB PAGE, YOU KNOW, AT THAT TIME, THE FINGERSTICK, THE MAIN WEB TEMPLATE THEY HAD AND, YOU KNOW, THE FINGERSTICK, ALL OF THE -- MUCH OF THE SAME STUFF THAT WAS IN SOME OF THE MATERIALS THAT THEY SENT US.
BRIAN GROSSMAN: YEAH.
MR. WADE: AND DID YOU -- DO YOU RECALL TAKING A LOOK AT THEIR LOCATIONS OR ANYWHERE YOU MIGHT GO TO GET A TEST --
BRIAN GROSSMAN: I DON'T, NO.
BRIAN GROSSMAN: I DON'T.
BRIAN GROSSMAN: YES.
BRIAN GROSSMAN: UM, YES.
BRIAN GROSSMAN: QUEST, LABCORP. THERE WERE A FEW OTHER COMPANIES IN THE LABORATORY INDUSTRY THAT HAVE BEEN ACQUIRED OVER THE YEARS. THEN ALSO COMPANIES THAT MAKE DIAGNOSTIC ANALYTIC INSTRUMENTS, MOLECULAR TESTING PLATFORMS. SO ALL OF THOSE TYPES OF BUSINESSES WE'VE SEEN AS PART OF OUR NORMAL INVESTMENT ACTIVITIES.
MR. WADE: OKAY. AND YOU RECALL AT SOME POINT THAT THERE WAS A DECISION MADE TO PURSUE THIS FURTHER?
BRIAN GROSSMAN: YES.
MR. WADE: AND DO YOU RECALL THAT THAT WAS DONE BY MR. JAMES EXPRESSING AN INTEREST IN BEING CONNECTED WITH AN INVESTMENT OPPORTUNITY? WERE YOU AWARE OF THAT?
BRIAN GROSSMAN: I ACTUALLY DON'T REMEMBER THAT, BUT -- SO I DON'T REMEMBER THE SPECIFICS OF HOW WE ENDED UP CONNECTED TO THEM.
BRIAN GROSSMAN: NEVER HEARD OF HIM.
MR. WADE: OKAY. BUT IN ANY EVENT, AT SOME POINT YOU OBVIOUSLY WENT TO THE MEETING THAT YOU'VE TESTIFIED ABOUT PREVIOUSLY.
BRIAN GROSSMAN: YEP.
MR. WADE: AND DO YOU RECALL IN THE MEANTIME SOME MEMBERS OF YOUR TEAM MADE A FEW INQUIRIES ABOUT THERANOS?
BRIAN GROSSMAN: YES.
BRIAN GROSSMAN: YES.
BRIAN GROSSMAN: YEAH, I DO. COULD I JUST TAKE A MINUTE TO READ THROUGH IT?
(PAUSE IN PROCEEDINGS.)
BRIAN GROSSMAN: OKAY. YEP.
BY MR. WADE:
MR. WADE: AND DO YOU RECOGNIZE THIS TO BE AN EMAIL CHAIN WITH YOUR ANALYST TEAM ABOUT SOME RESEARCH THAT THEY HAD GATHERED ON THERANOS?
BRIAN GROSSMAN: I DO.
MR. LEACH: NO OBJECTION, YOUR HONOR.
JUDGE DAVILA: IT'S ADMITTED. IT MAY BE PUBLISHED.
(DEFENDANT'S EXHIBIT 7358 WAS RECEIVED IN EVIDENCE.)
BY MR. WADE:
MR. WADE: AND IF WE LOOK AT THE BOTTOM ON NOVEMBER 18TH, DO YOU SEE IN THE SUBJECT MATTER THERE YOU POSED THE QUESTION TO YOUR ANALYST, "IS THIS SOMETHING WE SHOULD WORK UP ON THE PRIVATE SIDE?" DO YOU SEE THAT?
BRIAN GROSSMAN: I DO, YES.
BRIAN GROSSMAN: I MEAN IS IT SOMETHING THAT WE SHOULD DEDICATE RESOURCES TO AND LEARN MORE ABOUT THE BUSINESS.
MR. WADE: OKAY. SO WORK UP, YOU MEAN SORT OF START THAT RESEARCH PROCESS WHERE YOU INFORM YOURSELVES AS TO WHETHER OR NOT TO MAKE THE INVESTMENT DECISION?
BRIAN GROSSMAN: I THINK THAT'S WHAT -- I MEAN, THAT'S GENERALLY WHAT I MEAN BY THAT.
MR. WADE: OKAY. AND DO YOU RECALL WHAT HAPPENED BETWEEN NOVEMBER 1ST AND NOVEMBER 18TH THAT PROMPTED YOU TO START THAT PROCESS OR EXPLORE THAT PROCESS?
BRIAN GROSSMAN: I DON'T, NO.
MR. WADE: OKAY. LET'S TAKE A LOOK UP THE CHAIN. DO YOU SEE THAT MR. KHANNA NOTES THAT HE GOT VERY GOOD FEEDBACK FROM WAG? DO YOU SEE THAT?
BRIAN GROSSMAN: I DO, YES.
BRIAN GROSSMAN: YES.
MR. WADE: AND WAS IT YOUR UNDERSTANDING THAT MR. KHANNA HAD REACHED OUT TO SOMEONE AT WALGREENS TO SEE WHAT THEY COULD TELL HIM ABOUT THERANOS?
BRIAN GROSSMAN: I, I DON'T KNOW WHAT HE WAS REFERRING TO HERE.
BRIAN GROSSMAN: YES.
MR. WADE: AND YOU UNDERSTOOD THAT HE HAD HEARD SOME POSITIVE NEWS ABOUT THE COMPANY IN CONNECTION WITH THE WORK THAT THEY WERE DOING WITH THERANOS; IS THAT FAIR?
BRIAN GROSSMAN: WELL, YES, AND THERE HAD BEEN PUBLIC PRESS RELEASES FROM BOTH WALGREENS AND THERANOS, SO ONE DIDN'T HAVE TO LOOK VERY FAR TO FIND POSITIVE INFORMATION. SO I DON'T -- SO THERE WAS, THERE WAS A LOT OF -- YOU KNOW, THERE WERE THINGS THAT ONE COULD EASILY FIND AT THAT POINT ON BOTH COMPANIES.
MR. WADE: AND JUST SO WE'RE CLEAR, WALGREENS WAS A COMPANY THAT YOU WERE VERY FAMILIAR WITH AT THIS TIME; IS THAT RIGHT?
BRIAN GROSSMAN: YES.
BRIAN GROSSMAN: YES.
MR. WADE: AND WHEN A FUND LIKE YOURS INVESTS IN WALGREENS, IT GENERALLY GETS ANALYST REPORTS AND PERFORMS RESEARCH; IS THAT FAIR?
BRIAN GROSSMAN: YES.
MR. WADE: AND SO YOU HAD SORT OF A BASE LEVEL UNDERSTANDING ABOUT WALGREENS AND HOW IT OPERATED?
BRIAN GROSSMAN: YES.
BRIAN GROSSMAN: OUR VIEWS OF COMPANIES CHANGE ALL THE TIME, SO IT'S HARD FOR ME TO KNOW EXACTLY WHAT WE WERE THINKING AT THAT POINT IN TIME. BUT THE RETAIL PHARMACY BUSINESS IS A TOUGH BUSINESS AND HAS BEEN FOR YEARS, AND SO I THINK WE, WE'VE GENERALLY BEEN SKEPTICAL OVER THE YEARS ABOUT THEIR ABILITY TO SURVIVE IN A WORLD WITH AMAZON AND OTHER COMPETITIVE PRESSURES. BUT WALGREENS IS A GREAT FRANCHISE, A GREAT BUSINESS, AND SO, YOU KNOW, FROM TIME TO TIME WE COULD BE POSITIVE, WE COULD BE NEGATIVE. IT JUST SORT OF DEPENDED. I DON'T BELIEVE WE HAD ANY PARTICULAR POINT OF VIEW ON WALGREENS AT THIS POINT, BUT THAT'S JUST SORT OF A GENERAL MEMORY OF THAT POINT IN TIME.
BRIAN GROSSMAN: YES.
BRIAN GROSSMAN: YES.
BRIAN GROSSMAN: YES.
BRIAN GROSSMAN: YES.
MR. WADE: AND SO WHEN YOU STARTED EXPLORING THIS CONNECTION BETWEEN THERANOS AND WALGREENS, YOU SORT OF -- DID YOU SEE THAT AS A POSITIVE?
BRIAN GROSSMAN: A POTENTIAL POSITIVE, YES.
BRIAN GROSSMAN: WELL, IT WAS, IT WAS A NEW REVENUE SOURCE FOR A BUSINESS THAT, AS I SAID BEFORE, WAS -- YOU KNOW, HAD SOME STRUCTURAL PRESSURES, AND SO GETTING INTO THE REFERENCE LABORATORY SPACE WAS, WAS INTERESTING. AND I MEAN, I DON'T WANT TO -- THIS IS A LONG TIME AGO, BUT WE WEREN'T -- I DON'T THINK WE REALLY WERE INVOLVED MUCH. WE DIDN'T THINK ANYTHING AT THAT TIME. I DON'T BELIEVE WE HAD A POSITION IN WALGREENS. SO, YOU KNOW, IT WAS SOMETHING THAT JUST WASN'T THAT INTERESTING TO US. AND THIS WAS SOMETHING THAT WAS INTERESTING. ALL OF A SUDDEN WALGREENS WAS -- MAYBE THERE WAS SOMETHING INTERESTING ABOUT THE BUSINESS. SO I THINK THAT WAS KIND OF THE GENESIS OF THIS EMAIL, SHOULD WE TRY TO UNDERSTAND THIS? AND IT ALSO HAD IMPLICATIONS FOR OTHER COMPANIES IN THE SPACE, SO WE WANTED TO KIND OF UNDERSTAND WHAT THIS COULD MEAN FOR THE REFERENCE LAB INDUSTRY, DIAGNOSTIC EQUIPMENT. SO I THINK WE WERE CURIOUS ABOUT THIS PARTNERSHIP.
MR. WADE: AND YOU WERE CURIOUS BECAUSE IT PRESENTED SOME INTERESTING -- AN INTERESTING DEVELOPMENT FOR WALGREENS; RIGHT?
BRIAN GROSSMAN: POTENTIALLY.
MR. WADE: BUT IT WAS ALSO A SIGNIFICANT FACTOR RELATING TO A POTENTIAL INVESTMENT IN THERANOS, WAS IT NOT?
BRIAN GROSSMAN: YES, I GUESS. I SUPPOSE.
MR. WADE: I MEAN, ULTIMATELY THE ABILITY TO STAND UP A RETAIL OPERATION, IT'S GOOD TO HAVE A VERY WELL ESTABLISHED RETAIL PARTNER WORKING WITH YOU; CORRECT?
BRIAN GROSSMAN: CAN YOU REPHRASE THE QUESTION OR ASK THE QUESTION AGAIN? I'M SORRY.
MR. WADE: WELL, YOU CAME TO LEARN THAT THERANOS WAS GOING TO OPERATE COMMERCIALLY THROUGH A RETAIL ESTABLISHMENT; RIGHT?
BRIAN GROSSMAN: YES.
MR. WADE: AND, AND FOR A YOUNG COMPANY LIKE THERANOS TO DO THAT, DID YOU VIEWS IT AS A POSITIVE FACTOR THAT THEY WERE PARTNERED WITH A COMPANY LIKE WALGREENS?
BRIAN GROSSMAN: UH, I DID.
MR. WADE: IN FACT, DO YOU RECALL COMING TO THE VIEW OF IF IT WERE NOT FOR WALGREENS, YOU PROBABLY WOULDN'T HAVE EVEN CONSIDERED THIS INVESTMENT OPPORTUNITY; IS THAT FAIR?
BRIAN GROSSMAN: UH, I DON'T REMEMBER SPECIFICALLY THINKING THAT OR DISCUSSING THAT. SO IT'S HARD FOR ME TO ANSWER THAT. BUT WALGREENS WAS CERTAINLY IMPORTANT.
MR. WADE: THE -- IF WE CAN WORK OUR WAY UP THE CHAIN TO THE NEXT EMAIL. DO YOU SEE -- YOU ASK WHAT, YOU ASK WHAT THE GOOD FEEDBACK MEANT; RIGHT? AND THEN YOU ALSO NOTE, "WHAT DOES IT MEAN FOR LH/DGX LONGER TERM?" DO YOU SEE THAT?
BRIAN GROSSMAN: YES, I DO.
BRIAN GROSSMAN: WELL, I THINK I'M RESPONDING TO MY COLLEAGUE, VIVEK'S EMAIL, HE SAYS, "GOOD FEEDBACK FROM WAG," SO I'M ASKING HIM TO SORT OF ELABORATE ON THAT. HE'S NOT ALWAYS THE MOST -- HE DOESN'T ALWAYS OFFER UP A LOT OF INFORMATION. HE TENDS TO BE VERY KIND OF DIRECT IN EMAIL. SO I'M ASKING FOR MORE INFORMATION. AND THE ANSWER TO YOUR SECOND QUESTION IS LH AND DGX ARE THE STOCK SYMBOLS FOR QUEST -- WELL, LABCORP OF AMERICA, WHICH IS LH, AND THEN QUEST DIAGNOSTICS. BOTH OF THOSE ARE THE PUBLICLY TRADED REFERENCE LABORATORY COMPANIES.
BRIAN GROSSMAN: WE HAD AT DIFFERENT POINTS, YES.
MR. WADE: OKAY. AND SO YOU'RE JUST KIND OF GETTING INTO HOW THIS FITS WITHIN THE LAB SPACE; IS THAT FAIR?
BRIAN GROSSMAN: YES.
MR. WADE: AND YOU'RE TRYING TO PULL INFORMATION OUT OF MAYBE A RELUCTANT MR. KHANNA, AND HE ACTUALLY COMPLIES. LET'S TAKE A LOOK AT HIS RESPONSE. AND THIS IS -- DO YOU KNOW WHAT HE'S INCLUDING WITHIN THIS EMAIL? DO YOU RECOGNIZE THIS FORM OF INFORMATION?
BRIAN GROSSMAN: I DO.
BRIAN GROSSMAN: WELL, YOU MEAN -- THIS IS AN EMAIL THAT HE'S --
MR. WADE: RIGHT. I MEANT -- I'M SORRY, MR. GROSSMAN. I WAS REFERRING TO THE PORTION THAT IS EXCERPTED THERE. DO YOU UNDERSTAND THAT TO BE HIS TEXT, OR IS HE CUTTING AND PASTING SOMETHING FROM SOMEWHERE ELSE, IF YOU KNOW?
BRIAN GROSSMAN: I DO KNOW. HE'S CUTTING AND PASTING IT FROM SOMEWHERE ELSE.
BRIAN GROSSMAN: THIS IS ANOTHER EMAIL THAT WE RECEIVED, I DON'T KNOW IF IT WAS THAT DAY, BUT LIKELY THAT DAY OR CONTEMPORANEOUS WITH THIS EMAIL CHAIN FROM SOMEONE ELSE.
BRIAN GROSSMAN: FROM WHAT I REMEMBER, THIS IS AN INDIVIDUAL NAMED JAY SCHNEIDER.
BRIAN GROSSMAN: JAY SCHNEIDER IS WHAT YOU WOULD CALL AN INSTITUTIONAL EQUITY SALESPERSON.
BRIAN GROSSMAN: HE WORKS FOR A COMPANY CALLED COWEN, C-O-W-E-N.
BRIAN GROSSMAN: THEY'RE A BROKER DEALER. THEY'RE WHAT MOST PEOPLE WOULD CALL A BOUTIQUE INVESTMENT BANK. THEY HAVE -- THEY SERVICE AND FOCUS ON THE HEALTH CARE AND TECHNOLOGY SECTORS. THEY HAVE INVESTMENT BANKING OPERATIONS IN THOSE AREAS. THEY HAVE SALES AND TRADING OPERATIONS. THEY DON'T HAVE A RETAIL -- THEY DON'T OFFER RETAIL BROKERAGE ACCOUNTS, SO THEIR BUSINESS IS FOCUSSED ON INSTITUTIONAL CLIENTS LIKE OUR FIRM AND COMPANIES IN THIS SECTOR THAT ARE LOOKING TO -- OR THAT NEED BANKING ADVICE OR BANKING SERVICES.
BRIAN GROSSMAN: YES.
BRIAN GROSSMAN: THAT'S DEBATABLE. BUT MR. RHYEE WAS AN ANALYST AT COWEN. HE'S A VERY NICE GUY. WE DIDN'T ALWAYS AGREE WITH HIS VIEWS. BUT IN THIS CASE HE HAD JUST BEEN MARKETING WITH THE COMPANY, SO HE HAD JUST SPENT -- WHAT THE FIRST LINE IS REFERRING TO IS HE REMAINS BULLISH POST MARKETING WITH THE IR TEAM. I'M SORRY, THIS IS ALL THE VERNACULAR OF OUR BUSINESS. SO IR REFERS TO INVESTOR RELATIONS. SO CHARLES, THE ANALYST, WAS TAKING THE INVESTOR RELATIONS TEAM FROM WALGREENS AROUND TO MEET WITH INVESTORS. SO INVESTOR RELATIONS IS ACTUALLY A PRETTY IMPORTANT ROLE. IT TENDS TO BE KIND OF A VICE PRESIDENT TYPE ROLE WITHIN COMPANIES LIKE WALGREENS. THEY'RE THE INTERFACE BETWEEN INVESTORS LIKE US, MUTUAL FUNDS LIKE FIDELITY OR OTHER LARGE INSTITUTIONAL ASSET MANAGERS AND THE COMPANY. SO THEY OFTEN ARE THE -- IT'S HARD, ESPECIALLY FOR LARGER COMPANIES, TO GET ACCESS TO THE CEO, THE CFO. AND SO THE INVESTOR RELATIONS TEAM, THEY'RE KIND OF A LIAISON AND THEY ARE ABLE TO ANSWER QUESTIONS AND THEY KNOW WHAT THEY CAN DISCLOSE AND CAN'T DISCLOSE PUBLICLY AND WHAT IS IN THE PUBLIC DOMAIN AND WHAT ISN'T IN THE PUBLIC DOMAIN. AND IN THIS CASE CHARLES RHYEE, HE HAD BEEN TRAVELLING WITH THE IR TEAM, AND SO THEY HAD MADE STATEMENTS TO INVESTORS OVER THE COURSE OF, I DON'T KNOW IF IT WAS A DAY OR A COUPLE OF DAYS, ABOUT THERANOS. AND SO JAY SCHNEIDER, WHO IS THE INSTITUTIONAL PERSON AT COWEN, IS PARAPHRASING FROM CHARLES RHYEE THE COMMENTS THAT WALGREENS WAS MAKING TO OTHER INVESTORS ABOUT THIS PARTNERSHIP AND THIS TECHNOLOGY, AND SO THAT'S WHAT THIS IS REFERRING TO.
MR. WADE: AND THAT -- BECAUSE OF THAT, BECAUSE IT WAS ACTUALLY COMING FROM WALGREENS, THAT WAS SIGNIFICANT INTEL FOR YOU?
BRIAN GROSSMAN: WELL, IT'S -- I MEAN, IT'S ALSO -- THEY WERE POSITIVE, AND CHARLES HIMSELF IS POSITIVE, TOO. SO THEY BOTH SEEM TO BE EXCITED ABOUT THIS PARTNERSHIP. AND THEN THERE ARE SPECIFIC COMMENTS HERE ABOUT, YOU KNOW, SOME OF THE TECHNOLOGICAL CAPABILITIES THAT, YOU KNOW, OF THERANOS.
MR. WADE: AND IF WE JUST LOOK QUICKLY AT YOUR RESPONSE, YOU NOTED THAT IT WAS QUITE AN ENDORSEMENT AT THE TIME; CORRECT?
BRIAN GROSSMAN: YES.
MR. WADE: AND THE -- IN ADDITION TO THAT, DO YOU RECALL THAT THERE WAS SOME OUTREACH DONE TO LABCORP ITSELF?
BRIAN GROSSMAN: I DON'T RECALL SPECIFICALLY.
MR. WADE: LET'S TAKE A LOOK AT, TAKE A LOOK AT 7359 AND JUST READ IT TO YOURSELF FOR A SECOND. LET ME KNOW ONCE YOU'VE HAD A CHANCE TO DO THAT.
BRIAN GROSSMAN: OKAY. YEP.
MR. WADE: DOES THAT REFRESH YOUR RECOLLECTION THAT MR. KHANNA WAS REACHING OUT TO LABCORP TO GET SOME INTEL AS WELL?
BRIAN GROSSMAN: YES.
BRIAN GROSSMAN: BINDER 1?
BRIAN GROSSMAN: OKAY.
MR. WADE: AND DO YOU RECOGNIZE THIS TO BE AN EMAIL WHERE MR. KHANNA IS RELAYING SOME INTELLIGENCE THAT HE HAD GATHERED RELATING TO THERANOS?
BRIAN GROSSMAN: I'M SORRY, COULD YOU ASK THE QUESTION AGAIN?
MR. WADE: SURE. DO YOU RECOGNIZE THIS TO BE AN EMAIL WHERE MR. KHANNA WAS RELAYING TO YOU SOME MARKET INTELLIGENCE THAT HE HAD GATHERED AS A RESULT OF HIS RESEARCH?
BRIAN GROSSMAN: YES.
MR. LEACH: NO OBJECTION, YOUR HONOR.
JUDGE DAVILA: IT'S ADMITTED. IT MAY BE PUBLISHED.
(GOVERNMENT'S EXHIBIT 4052 WAS RECEIVED IN EVIDENCE.)
BY MR. WADE:
MR. WADE: AND ON THE BOTTOM OF THIS EMAIL, IF WE CAN START THERE, DO YOU SEE THAT IT'S DECEMBER 9TH, 2013? AND YOU NOTE THAT YOU WERE ACTUALLY GOING TO GO HAVE THAT MEETING THAT YOU TESTIFIED ABOUT. DO YOU SEE THAT?
BRIAN GROSSMAN: I DO, YES.
MR. WADE: AND YOU WERE ASKING MR. KHANNA IF HE PICKED UP ANY INFORMATION THAT WOULD BE HELPFUL TO YOU IN ADVANCE OF THAT MEETING; RIGHT?
BRIAN GROSSMAN: YES.
BRIAN GROSSMAN: YES.
BRIAN GROSSMAN: YES.
BRIAN GROSSMAN: YES.
MR. WADE: AND THEY TOLD HIM THAT THERE WAS A LIMITED MENU BY COMPARISON TO THEIR ROBUST OFFERING; CORRECT?
BRIAN GROSSMAN: YES.
BRIAN GROSSMAN: YES.
BRIAN GROSSMAN: ACCORDING TO THIS EMAIL, THEY THINK IT IS VERY EXCITING AND WILL LIKELY BUNDLE WITH THEIR EXISTING PAYOR CONTRACTS.
BRIAN GROSSMAN: I'M NOT SURE WHO "THEY" IS REFERRING TO. WAG IS DEFINITELY REFERRING TO WALGREENS. "THEY THINK IT IS VERY EXCITING." I'M ASSUMING HE'S REFERRING TO THERANOS AND THEIR TECHNOLOGY. "BUNDLE WITH EXISTING PAYOR CONTRACTS," WHAT HE'S REFERRING TO THERE IS THE ABILITY TO OFFER THIS LAB SERVICE AS PART OF EXISTING CONTRACTS THEY HAVE WITH COMPANIES LIKE UNITED HEALTH CARE, ANTHEM, CIGNA, BLUE SHIELD OF CALIFORNIA WHERE THEY ALREADY HAVE A PHARMACY CONTRACT FOR DISPENSING BRAND PHARMACEUTICALS, GENERIC PHARMACEUTICALS, AND SO THEY CAN FOLD THIS -- HE'S SUGGESTING THAT THEY MAY BE ABLE TO FOLD LAB SERVICES INTO THOSE EXISTING CONTRACTS.
BRIAN GROSSMAN: IT COULD BE.
MR. WADE: OKAY. AND SO THIS WAS INFORMATION THAT YOU HAD IN ADVANCE OF THAT MEETING THAT YOU ATTENDED WITH MS. HOLMES AND MR. BALWANI?
BRIAN GROSSMAN: YES.
MR. WADE: CORRECT? AND I THINK YOU ALSO TESTIFIED YOU HAD READ SOME OF THE PRESS RELEASES THAT WALGREENS HAD PUT OUT; RIGHT?
BRIAN GROSSMAN: YES.
MR. WADE: AND THOSE WERE SIGNIFICANT TO YOU IN TERMS OF GATHERING INTELLIGENCE AND YOUR INVESTMENT DECISION; IS THAT FAIR?
BRIAN GROSSMAN: YES.
MR. WADE: AND YOU KNOW THAT A COMPANY LIKE WALGREENS -- OR YOU ASSUME A COMPANY LIKE WALGREENS IS NOT GOING TO ENTER INTO A BUSINESS RELATIONSHIP WITHOUT DOING DUE DILIGENCE AND THE LIKE; CORRECT?
BRIAN GROSSMAN: YES.
MR. WADE: AND, AND THAT THEY'RE NOT GOING TO DO IT WITHOUT DOING THEIR OWN VETTING OF THE TECHNOLOGY AND THE PEOPLE AT THERANOS; IS THAT RIGHT?
BRIAN GROSSMAN: YES.
BRIAN GROSSMAN: YES.
MR. WADE: THE -- IF WE GO TO -- I WANT TO SHIFT TO THE -- ASK YOU SOME QUESTIONS ABOUT THE NOVEMBER 13TH MEETING -- I'M SORRY, THE DECEMBER 13TH, 2013, MEETING. BUT BEFORE I DO THAT, I WANT TO ASK YOU A COUPLE QUESTIONS ABOUT SORT OF CONFIDENTIALITY AT THERANOS IF I COULD.
BRIAN GROSSMAN: YEAH, OKAY.
MR. WADE: DO YOU RECALL ON YOUR DIRECT TESTIMONY YOU TALKED ABOUT THAT THERANOS TOOK CONFIDENTIALITY VERY SERIOUSLY; IS THAT RIGHT?
BRIAN GROSSMAN: WELL, AND ALSO SECURITY.
BRIAN GROSSMAN: PHYSICAL SECURITY.
MR. WADE: AND I BELIEVE -- DO YOU RECALL THAT THERANOS WAS NOT COMFORTABLE SHARING INFORMATION OR HAVING THEIR INFORMATION SHARED WITH OTHERS WITHOUT A CONFIDENTIAL DISCLOSURE AGREEMENT BEING SIGNED PRIOR TO THE DISCLOSURE?
BRIAN GROSSMAN: YES.
MR. WADE: AND DO YOU RECALL THAT BEING IMPORTANT TO THERANOS AT THE TIME THAT THEY WERE -- YOU WERE INTERACTING WITH THEM IN YOUR INVESTMENT DECISION?
BRIAN GROSSMAN: YES.
MR. WADE: AND SO, FOR EXAMPLE, WHEN YOU BROUGHT CERTAIN CONSULTANTS IN TO PROVIDE SERVICES, THEY INSISTED THAT YOU HAVE THEM SIGN A CONFIDENTIAL DISCLOSURE AGREEMENT BEFORE THEY COULD REVIEW THERANOS INFORMATION; CORRECT?
BRIAN GROSSMAN: YES.
MR. WADE: AND THAT EVEN INCLUDED MEMBERS OF YOUR TEAM? CONFIDENTIAL, HIGHLY CONFIDENTIAL INFORMATION WOULDN'T BE SHARED WITH YOUR TEAM UNTIL A CONFIDENTIAL DISCLOSURE AGREEMENT WAS SIGNED; RIGHT?
BRIAN GROSSMAN: I MEAN, I'M NOT A LEGAL EXPERT SO I DON'T KNOW EXACTLY WHAT WAS IN THOSE DOCUMENTS THAT WE SIGNED, BUT IN GENERAL THEY WERE VERY PROTECTIVE OF THEIR, THEIR INFORMATION.
MR. WADE: AND THAT'S WHY THEY -- YOU UNDERSTOOD THAT'S WHY THEY WANTED THOSE AGREEMENTS SIGNED; IS THAT RIGHT?
BRIAN GROSSMAN: I'M, I'M NOT SURE WHY THEY WERE SO SPECIFIC ON EVERYONE SIGNING THOSE, BUT -- SO I DON'T KNOW. IT'S HARD FOR ME TO KNOW EXACTLY WHY THEY WANTED -- WHY THAT WAS SO IMPORTANT TO THEM.
MR. WADE: FAIR ENOUGH. YOU DON'T KNOW WHY THEY WERE SPECIFIC, BUT YOU DO KNOW THAT BEFORE THEY WERE SHARING CONFIDENTIAL INFORMATION, THEY ASKED THAT THE DOCUMENT BE SIGNED FIRST; CORRECT?
BRIAN GROSSMAN: YES.
MR. WADE: OKAY. AND IN CONNECTION WITH THAT MEETING ON DECEMBER 13TH, 2013, I BELIEVE YOU SAID THAT WAS IN PALO ALTO AT THE THERANOS HEADQUARTERS; IS THAT RIGHT?
BRIAN GROSSMAN: YES.
BRIAN GROSSMAN: YEP.
MR. WADE: YOU DIDN'T DO -- YOU DID A LITTLE INITIAL RESEARCH THAT WE'VE SEEN HERE BEFORE THE MEETING; CORRECT?
BRIAN GROSSMAN: YES.
MR. WADE: BUT YOU DIDN'T DO ANY SORT OF, YOU KNOW, ROBUST VETTING OR RESEARCH IN ADVANCE OF THAT?
BRIAN GROSSMAN: THAT'S CORRECT.
BRIAN GROSSMAN: YEAH.
MR. WADE: AND DO YOU RECALL THAT IN ADDITION TO THERANOS TALKING A LITTLE BIT ABOUT ITSELF, THEY ASKED QUESTIONS ABOUT PFM AND YOUR INVESTMENT PHILOSOPHY. DO YOU RECALL THAT?
BRIAN GROSSMAN: I DON'T SPECIFICALLY REMEMBER THAT, BUT, YES, THAT'S NORM -- THAT WOULD BE TYPICAL IN A FIRST MEETING LIKE THAT.
MR. WADE: AND WITHOUT INTENDING ANY OFFENSE, YOU UNDERSTAND THAT THERE ARE SOME COMPANIES WHO HAVE SOME HESITANCE ABOUT HEDGE FUND INVESTORS FOR REASONS WITHOUT GETTING TO KNOW THEM; IS THAT FAIR?
BRIAN GROSSMAN: I DON'T KNOW. I DON'T KNOW WHY THERE'S A BIG DIFFERENCE BETWEEN A HEDGE FUND AND A MUTUAL FUND IF YOU'RE A PRIVATE COMPANY.
MR. WADE: OKAY. BUT YOU UNDERSTOOD IN THIS CASE THAT THERANOS WAS LOOKING FOR LONGER TERM INVESTORS; RIGHT?
BRIAN GROSSMAN: I GUESS, YEAH. THEY WANTED FIRMS THAT COULD PARTNER WITH THEM FOR -- YEAH, FOR THE JOURNEY FROM BEING, YOU KNOW, AS THEY GROW OR GREW AND COMMERCIALIZED.
MR. WADE: AND SO DO YOU RECALL THEM ASKING QUESTIONS THAT WENT TO, YOU KNOW, WHETHER PFM AS A HEDGE FUND WAS INTERESTED IN MORE OF A LONGER TERM RELATIONSHIP WITH THE COMPANY?
BRIAN GROSSMAN: I DO REMEMBER THAT.
MR. WADE: AND, IN FACT, PFM SPECIFICALLY HAS STRUCTURES WITHIN ITS ORGANIZATION TO PERMIT LONGER TERM INVESTMENT IN COMPANIES BY INVESTING IN SIDE POCKETS; RIGHT?
BRIAN GROSSMAN: THAT'S CORRECT.
MR. WADE: AND THAT IS WHERE PFM PUTS MORE ILLIQUID INVESTMENTS SO THAT -- AND IT KEEPS THE MORE LIQUID INVESTMENTS IN THE MAIN FUNDS. IS THAT FAIR?
BRIAN GROSSMAN: YEAH, WE SEPARATE THE PRIVATE INVESTMENTS FROM THE PUBLIC INVESTMENTS. SO WE HAVE A LIQUID SECURITIES PORTFOLIO, AND WE HAVE AN ILLIQUID SECURITIES PORTFOLIO. SO, YES, WE DO SEPARATE THOSE.
MR. WADE: OKAY. AND DO YOU RECALL PFM COMMUNICATING TO THERANOS IN THIS MEETING THAT IT WAS INTERESTED IN A, OR MAYBE AFTER THE MEETING, THAT IT WAS INTERESTED IN EXPLORING THE POTENTIAL LONGER TERM INVESTMENT RELATIONSHIP WITH THE COMPANY?
BRIAN GROSSMAN: I'M NOT EXACTLY SURE HOW WE PHRASED IT, BUT, YEAH, WE WERE -- BASED ON THE REPRESENTATIONS FROM THAT FIRST MEETING, WHAT THEY TOLD US THEY WERE CAPABLE OF DOING, WE WERE VERY INTERESTED IN LEARNING MORE ABOUT THE COMPANY.
BRIAN GROSSMAN: I DON'T I DON'T REMEMBER EXACTLY, BUT --
BRIAN GROSSMAN: IF THE QUESTION IS RELATIVE TO SUBSEQUENT MEETINGS THAT WE HAD WITH THE COMPANY, IT WAS MORE HIGH LEVEL THAN THE SUBSEQUENT MEETINGS. BUT WE WENT THROUGH THE WHOLE BUSINESS.
MR. WADE: AT A HIGH LEVEL. BUT YOU RECALL THAT YOU HADN'T YET SIGNED THE CONFIDENTIAL DISCLOSURE AGREEMENT AT THAT MEETING, AND SO THEY WERE A LITTLE HESITANT TO SHARE WITH YOU THE MORE SENSITIVE INFORMATION. DO YOU RECALL THAT?
BRIAN GROSSMAN: I DON'T RECALL THAT ACTUALLY. SORRY.
MR. WADE: LET ME SEE, LET ME SEE IF I CAN REFRESH YOUR RECOLLECTION. IF YOU TAKE A LOOK IN YOUR BOOK AT EXHIBIT 1422.
JUDGE DAVILA: IS THIS IN VOLUME 2?
BRIAN GROSSMAN: 1422?
BRIAN GROSSMAN: I DON'T THINK I HAVE THAT.
JUDGE DAVILA: IT'S NOT IN MY 1.
BRIAN GROSSMAN: I MEAN, IT'S GETTING LATE IN THE DAY, BUT I THINK MY EYES ARE STILL WORKING.
BY MR. WADE:
MR. WADE: WELL, GIVE ME A SECOND HERE AND I'LL SEE IF I CAN HELP THE COURT AND THE WITNESS. WHILE WE'RE DOING THAT, WHY DON'T WE START BY LOOKING AT EXHIBIT 14 -- WHILE I'M LOOKING FOR THE RIGHT EXHIBIT THAT I WAS POINTING TO YOU FIRST -- MY APOLOGIES -- WHY DON'T YOU TAKE A MINUTE TO LOOK AT EXHIBIT 1434. DO YOU HAVE THAT ONE?
BRIAN GROSSMAN: YES.
MR. WADE: OKAY. TAKE A MINUTE TO FAMILIARIZE YOURSELF WITH THAT, AND I'M PARTICULARLY FOCUSSED ON THE ATTACHMENTS TO THAT JUST SO --
MR. DOWNEY: YOUR HONOR, WILL YOU JUST EXCUSE ME FOR ONE SECOND?
JUDGE DAVILA: SURE.
(DISCUSSION AMONGST DEFENSE COUNSEL OFF THE RECORD.)
JUDGE DAVILA: SURE.
(DISCUSSION AMONGST DEFENSE COUNSEL OFF THE RECORD.)
BY MR. WADE:
BRIAN GROSSMAN: YES.
MR. WADE: AND DO YOU RECALL THE COVER EMAIL WAS AN EMAIL THAT, OR A COPY OF AN EMAIL THAT MR. LEACH HAD ASKED YOU SOME QUESTIONS ABOUT? DO YOU RECALL THAT?
BRIAN GROSSMAN: I DON'T, BUT -- NO, I'M SORRY.
MR. WADE: OKAY. YOU SEE THAT ATTACHED TO THIS -- YOU SEE THIS IS AN EMAIL FROM MR. BALWANI TO YOU?
BRIAN GROSSMAN: YES.
MR. WADE: AND YOU SEE ATTACHED TO THIS EMAIL ARE CONFIDENTIAL DISCLOSURE AGREEMENTS THAT ARE SIGNED BY VARIOUS PFM EMPLOYEES?
BRIAN GROSSMAN: YES.
MR. LEACH: NO OBJECTION, YOUR HONOR.
JUDGE DAVILA: IT'S ADMITTED. IT MAY BE PUBLISHED.
(GOVERNMENT'S EXHIBIT 1434 WAS RECEIVED IN EVIDENCE.)
BY MR. WADE:
MR. WADE: AND LET'S JUST FOCUS ON THE DATE. WE'LL COME BACK TO THE SUBSTANCE OF THE EMAIL LATER. BUT YOU SEE THIS IS AN EMAIL FROM MR. BALWANI TO YOU ON JANUARY 7TH, 2014? DO YOU SEE THAT?
BRIAN GROSSMAN: IT'S NOT JANUARY 7TH.
BRIAN GROSSMAN: YES.
BRIAN GROSSMAN: YES.
MR. WADE: AND THIS WAS FOLLOWING UP ON THE MEETING, THE SECOND MEETING THAT YOU HAD AT THERANOS; CORRECT?
BRIAN GROSSMAN: I BELIEVE THAT IS CORRECT, YES.
MR. WADE: OKAY. AND IF YOU JUST TURN YOUR ATTENTION TO THE ATTACHMENT WHICH IS AT PAGE 5 OF THE EXHIBIT.
BRIAN GROSSMAN: OKAY.
MR. WADE: DO YOU RECOGNIZE THAT TO BE A CONFIDENTIAL DISCLOSURE AGREEMENT THAT YOU SIGNED ON 1-10-2014?
BRIAN GROSSMAN: YES.
BRIAN GROSSMAN: YES.
MR. WADE: OKAY. AND LET ME, LET ME NOW TRY TO BRING YOU TO 1422, WHICH I THINK MIGHT BE, JUST TO REALLY MAKE LIFE DIFFICULT FOR YOU, IS GOING TO BE IN THE GOVERNMENT'S BINDER.
BRIAN GROSSMAN: OKAY.
BRIAN GROSSMAN: SAME NUMBER?
BRIAN GROSSMAN: OKAY.
BRIAN GROSSMAN: I DO.
MR. WADE: AND DO YOU RECOGNIZE THAT TO BE AN EMAIL BETWEEN YOU AND MR. BALWANI ALSO ON JANUARY 13TH, 2014?
BRIAN GROSSMAN: WOULD YOU JUST GIVE ME A MINUTE TO REVIEW IT?
(PAUSE IN PROCEEDINGS.)
BRIAN GROSSMAN: OKAY. YES.
MR. LEACH: NO OBJECTION, YOUR HONOR.
JUDGE DAVILA: IT'S ADMITTED. IT MAY BE PUBLISHED.
(GOVERNMENT'S EXHIBIT 1422 WAS RECEIVED IN EVIDENCE.)
BY MR. WADE:
MR. WADE: AND LET ME FOCUS ON THE BOTTOM EMAIL, THE FIRST COUPLE OF PARAGRAPHS THERE. DO YOU SEE THAT'S AN EMAIL FROM YOU TO MR. BALWANI? DO YOU SEE THAT?
BRIAN GROSSMAN: YES, I DO.
MR. WADE: AND IF I JUST LOOK AT THAT VERY FIRST PARAGRAPH, I'M SORRY, THE PARAGRAPH THAT STARTS WITH THE WORD "FIRST." DO YOU SEE THERE IT SAYS, "FIRST, WE TAKE COMPLIANCE EXTREMELY SERIOUSLY. AS SUCH WE'D LIKE TO UNDERSTAND WHAT WE ACTUALLY SIGNED WHEN WE REGISTERED FOR OUR ON SITE MEETING. IS IT POSSIBLE FOR OUR GENERAL COUNCIL, KIMBERLY SUMME, TO REVIEW THAT DOCUMENT?" DO YOU SEE THAT?
BRIAN GROSSMAN: YES.
MR. WADE: AND DOES THAT REFRESH YOUR RECOLLECTION THAT IT WAS IN THAT SECOND MEETING THAT YOU SIGNED THE CONFIDENTIAL DISCLOSURE AGREEMENT WITH THERANOS?
BRIAN GROSSMAN: YES.
MR. WADE: OKAY. YOU CAN SET THAT BOOK ASIDE. DO YOU -- LET ME ASK YOU A COUPLE OF THINGS ABOUT THE GENERAL TOPICS THAT CAME UP IN THAT FIRST MEETING ON DECEMBER 13TH, 2013. SO I'M BACK TO THE DECEMBER 13TH, 2013 MEETING.
BRIAN GROSSMAN: OKAY.
MR. WADE: OKAY. DO YOU RECALL THAT THERE WAS DISCUSSION ABOUT -- WELL, LET ME STRIKE THAT. THE WALGREENS LAUNCH WAS PUBLIC AT THAT POINT; CORRECT?
BRIAN GROSSMAN: YES.
MR. WADE: AND YOU RECALL THAT THERE WAS SOME DISCUSSION ABOUT THE WALGREENS RELATIONSHIP AND THAT LAUNCH?
BRIAN GROSSMAN: YES.
BRIAN GROSSMAN: YES.
MR. WADE: AND DO YOU RECALL THE COMPANY TELLING YOU THAT GIVEN THE PRESSURE OF THAT INITIAL COMMERCIAL LAUNCH, THAT THEY WERE GOING TO BE PAUSING THEIR WORK ON MILITARY AND PHARMA PROJECTS AND PUT THOSE ON HOLD? DO YOU RECALL THAT?
BRIAN GROSSMAN: YES.
BRIAN GROSSMAN: YES.
MR. WADE: AND THEY WANTED TO FOCUS THEIR BEST ASSETS ON THAT PROJECT. IS THAT YOUR UNDERSTANDING?
BRIAN GROSSMAN: THAT AND THE HOSPITAL BUSINESS.
BRIAN GROSSMAN: AND THE PHYSICIAN BUSINESS.
BRIAN GROSSMAN: I DON'T REMEMBER SPECIFICALLY WHEN THEY ANNOUNCED THAT DEAL, BUT --
MR. WADE: OKAY. AND I THINK YOU TESTIFIED ON DIRECT THAT THERE MAY HAVE BEEN A FEW SLIDES THAT WERE SHOWN IN THAT MEETING; IS THAT RIGHT?
BRIAN GROSSMAN: I BELIEVE SO. YEAH.
BRIAN GROSSMAN: I DON'T, I DON'T REMEMBER SPECIFICALLY WHICH SLIDES WERE SHOWN.
MR. WADE: OKAY. AND IS IT FAIR TO SAY THAT THIS WAS GENERALLY -- THIS WAS A RAPPORT BUILDING EXERCISE IN PART AS WELL?
BRIAN GROSSMAN: THAT WAS A PART OF THE MEETING, YES.
BRIAN GROSSMAN: YES.
MR. WADE: OKAY. AND THE -- AND DO YOU RECALL COMING OUT OF THE MEETING AND BEING INTERESTED IN EXPLORING THE INVESTMENT MORE?
BRIAN GROSSMAN: YES.
MR. WADE: OKAY. LET'S FOCUS ON SOME OF THE EVENTS AFTER THAT MEETING, SO BETWEEN DECEMBER 12TH AND THE SECOND MEETING, AND SOME OF THE WORK THAT YOU ALL AT PFM WERE DOING. OKAY?
BRIAN GROSSMAN: OKAY.
BRIAN GROSSMAN: I DO.
MR. WADE: AND DO YOU RECOGNIZE THAT TO BE ANOTHER REPORT FROM MR. KHANNA ON MATTERS RELATING TO THERANOS AND WALGREENS?
BRIAN GROSSMAN: I DO.
MR. LEACH: NO OBJECTION, YOUR HONOR.
JUDGE DAVILA: IT'S ADMITTED. IT MAY BE PUBLISHED.
(DEFENDANT'S EXHIBIT 7376 WAS RECEIVED IN EVIDENCE.)
BY MR. WADE:
BRIAN GROSSMAN: I DO.
BRIAN GROSSMAN: I BELIEVE IT REFERS TO THE WALGREENS EARNINGS CALL.
MR. WADE: AND THE WALGREENS EARNINGS CALL IS A CALL WHERE THE SENIOR MANAGEMENT OF THE COMPANY GOES ON A TELEPHONE CALL; IS THAT RIGHT?
BRIAN GROSSMAN: YEAH, FOUR TIMES A YEAR IN THE U.S.
BRIAN GROSSMAN: YEAH. FOUR TIMES A YEAR, QUARTERLY, THE S.E.C. REQUIRES COMPANIES IN THE U.S. THAT ARE PUBLICLY LISTED, SO ON A STOCK EXCHANGE, THEY'VE GONE THROUGH THE IPO PROCESS, TO HAVE -- TO REPORT QUARTERLY RESULTS, FILE THAT WITH THE S.E.C. AND ABOVE AND BEYOND THAT, MANY, MOST LARGE COMPANIES HOST AN EARNINGS CALL. THEY'LL ISSUE A PRESS RELEASE. THEY DON'T HAVE TO DO THAT, BUT THEY HAVE TO FILE WHAT IS CALLED FORM 10Q WITH THE S.E.C., WHICH IS AN UPDATE OF THEIR BUSINESS. BUT IN ADDITION TO THAT, ALMOST EVERY COMPANY, LARGE COMPANY, MAJOR COMPANY, THEY HOLD A QUARTERLY CONFERENCE CALL. THEY'LL ISSUE A PRESS RELEASE THAT INFORMS INVESTORS ON HOW THE BUSINESS PERFORMED OVER THAT THREE MONTH PERIOD. AND THEN FOR THE CONFERENCE CALLS, THEY'LL OFTEN GIVE INVESTORS AN OPPORTUNITY TO ASK QUESTIONS. ALMOST ALWAYS IT'S SELL-SIDE ANALYSTS, NOT PEOPLE LIKE US. SO THAT'S THE TYPICAL PROCESS. SO THIS IS THE WALGREENS HOLDS AND EARNINGS CALL. THEIR QUARTERLY CALENDAR IS DIFFERENT FROM THE VAST MAJORITY OF COMPANIES. I BELIEVE THEY'RE ON AN AUGUST FISCAL YEAR, OR THEY WERE AT THIS POINT. SO THIS WAS THEIR -- WHAT -- IT WOULD HAVE BEEN THEIR FISCAL Q1, I THINK, THEIR FISCAL FIRST QUARTER CALL IN LATE DECEMBER.
MR. WADE: AND DO YOU RECALL THAT THIS WOULD BE, THIS WOULD PROBABLY BE THE FIRST CALL AFTER THE LAUNCH WITH THERANOS?
BRIAN GROSSMAN: YES.
MR. WADE: OKAY. AND MR. KHANNA -- AND IN MORE LAYMAN'S TERMS, IT'S A CALL IN WHICH INFORMATION IS PROVIDED, QUESTIONS ARE ASKED, AND YOU GET, YOU GET TO LEARN WHAT IS GOING ON AT THE COMPANY. IS THAT FAIR?
BRIAN GROSSMAN: YES.
MR. WADE: AND SOMETIMES IT'S GENERAL, BUT OFTENTIMES IT GETS VERY SPECIFIC ON FINANCIAL PERFORMANCE AND BUSINESS METRICS AND THE LIKE. IS THAT FAIR?
BRIAN GROSSMAN: YES.
MR. WADE: OKAY. AND MR. KHANNA WATCHED OUT OR LISTENED IN ON THE WALGREENS CALL, IT WOULD APPEAR?
BRIAN GROSSMAN: YES.
MR. WADE: AND IS THAT SOMETHING -- DID HE USUALLY LISTEN IN ON WALGREENS CALLS GIVEN THE SIGNIFICANCE OF THE COMPANY IN THE HEALTH CARE SPACE?
BRIAN GROSSMAN: YEAH, HE LISTENS TO A LOT -- YES, ALL OF THE MAJOR COMPANIES HE'S RESPONSIBLE FOR COVERING, HE LISTENS TO THOSE CONFERENCE CALLS.
BRIAN GROSSMAN: YES.
MR. WADE: AND BECAUSE YOU ALL WERE EXPLORING A POSSIBLE INVESTMENT WITH THERANOS, HE PROVIDED THIS REPORT?
BRIAN GROSSMAN: YES.
BRIAN GROSSMAN: I MEAN, I'M JUST READING FROM WHAT HE WROTE. SO "WE ARE VERY POSITIVE ON THERANOS." YEAH, I THINK HE'S ATTEMPTING TO PARAPHRASE FROM THE WALGREENS CONFERENCE CALL.
MR. WADE: FAIR ENOUGH. BUT IS IT, IS IT FAIR TO SAY THAT THIS IS A -- THIS IS A POSITIVE REPORT THAT IS COMING OUT OF THE THERANOS -- OR THE WALGREENS ANALYST CALL WITH RESPECT TO THERANOS?
BRIAN GROSSMAN: YES.
MR. WADE: AND WAS THAT MEANINGFUL INFORMATION TO YOU WHEN YOU WERE MAKING THE INVESTMENT DECISION?
BRIAN GROSSMAN: YES, YES.
MR. WADE: AND IF WE CAN LOOK, AND I APOLOGIZE TO THE COURT AND COUNSEL, I'M GOING TO PUT UP AN EXHIBIT THAT IS ALREADY IN EVIDENCE. I FAILED TO BRING A COPY OF THIS. IF WE CAN LOOK QUICKLY AT 12510.
BRIAN GROSSMAN: BINDER 2?
MR. WADE: WE'LL BRING IT UP ON THE SCREEN. IT'S IN EVIDENCE. AND I TAKE IT YOU'VE SEEN A FEW TRANSCRIPTS OF ANALYST CALLS IN YOUR DAY.
BRIAN GROSSMAN: YES.
BRIAN GROSSMAN: YES.
MR. WADE: AND I JUST WANT TO NOTE A COUPLE OF QUICK THINGS HERE. DO YOU SEE ON THE SECOND PAGE IN THE MIDDLE WALGREENS AND THERANOS? DO YOU SEE THAT? THIS WAS SOMETHING THAT WAS RAISED BY THE CEO IN HIS OPENING COMMENTS ON THE COMPANY; IS THAT RIGHT?
BRIAN GROSSMAN: IT APPEARS TO BE, YES.
MR. WADE: AND GENERALLY -- IS IT FAIR TO SAY THAT GENERALLY THE CEO, YOU KNOW, INCLUDES SOMETHING IN KIND OF THE OPENING COMMENT THAT THE COMPANY CONSIDERS IT TO BE, YOU KNOW, AN IMPORTANT INITIATIVE FOR THE COMPANY?
BRIAN GROSSMAN: YES.
MR. WADE: AND DO YOU KNOW -- LET'S TAKE A LOOK AT EXHIBIT 12, OR PAGE 12. IF WE CAN BLOW UP THE Q AND A STARTING WITH THE NEXT ONE DOWN, RIGHT THERE (INDICATING). DO YOU KNOW WHO RICKY GOLDWASSER IS?
BRIAN GROSSMAN: I DO.
BRIAN GROSSMAN: YES.
BRIAN GROSSMAN: YES.
BRIAN GROSSMAN: YES.
MR. WADE: AND DO YOU SEE HERE THAT HE GIVES A REPORT ON THE THERANOS RELATIONSHIP? DO YOU SEE THAT?
BRIAN GROSSMAN: DO YOU MIND IF I JUST READ THIS?
(PAUSE IN PROCEEDINGS.)
BRIAN GROSSMAN: OKAY.
BY MR. WADE:
MR. WADE: OKAY. AND IS IT FAIR TO SAY THAT MR. MIQUELON IS GIVING A PRETTY POSITIVE REVIEW OF THERANOS ON THIS CALL?
BRIAN GROSSMAN: YES.
MR. WADE: AND DO YOU RECALL LEARNING THAT AT THE TIME THAT YOU WERE CONSIDERING THE THERANOS INVESTMENT, THAT SENIOR LEADERSHIP OF WALGREENS WAS POSITIVE ON THE THERANOS RELATIONSHIP?
BRIAN GROSSMAN: YES.
MR. WADE: AND DO YOU SEE IN THE BOTTOM OF THE FIRST PARAGRAPH UNDER MR. MIQUELON'S COMMENTS, HE SAYS, "WE'LL KEEP LEARNING AND PERFECTING THE PATIENT EXPERIENCE WHICH IS REALLY THE" CASE -- "THE KEY THING." DO YOU SEE THAT?
BRIAN GROSSMAN: I DO.
MR. WADE: AND DID YOU RECOGNIZE, GIVEN YOUR EXPERIENCE WITH RETAILERS, THAT BEFORE YOU'RE GOING TO ROLL OUT A CONCEPT LIKE THE THERANOS CONCEPT, THAT YOU WANTED TO MAKE SURE THAT YOU NAILED THE PATIENT EXPERIENCE BEFORE YOU TOOK IT NATIONWIDE?
BRIAN GROSSMAN: I MEAN, I'M NOT -- CAN YOU REPHRASE -- CAN YOU ASK THE QUESTION AGAIN? I'M SORRY.
MR. WADE: SURE. YOU RECOGNIZED THAT, WHEN YOU WERE CONSIDERING THE THERANOS RETAIL SERVICES, THAT PATIENT EXPERIENCE WAS IMPORTANT; CORRECT?
BRIAN GROSSMAN: YES, I AGREE WITH THAT.
MR. WADE: AND DID YOU RECOGNIZE ALSO THAT IT WAS IMPORTANT TO PERFECT THAT PATIENT EXPERIENCE BEFORE YOU EXPAND WIDELY?
BRIAN GROSSMAN: THAT SEEMS LIKE A REASONABLE BUSINESS PRINCIPLE.
MR. WADE: OKAY. LET'S LOOK NEXT AT 125 -- OH, I'M SORRY. LET'S LOOK NEXT AT 1360. AND THAT MAY BE IN THE GOVERNMENT BINDER IF IT'S NOT IN YOUR BINDER.
BRIAN GROSSMAN: OKAY. I'VE GOT THE EXHIBIT.
MR. WADE: AND DO YOU RECOGNIZE THIS TO BE AN EMAIL FOLLOWING UP ON THAT FIRST MEETING THAT YOU HAD AT THERANOS?
BRIAN GROSSMAN: LET ME JUST READ IT.
BRIAN GROSSMAN: IT'S TINY. JEEZ.
BRIAN GROSSMAN: NO, NOT YET.
(PAUSE IN PROCEEDINGS.)
BRIAN GROSSMAN: OKAY.
BY MR. WADE:
MR. WADE: DO YOU RECOGNIZE THIS TO BE AN EMAIL FOLLOWING UP ON THAT INITIAL MEETING THAT YOU HAD AT THERANOS?
BRIAN GROSSMAN: YES.
MR. LEACH: NO OBJECTION.
JUDGE DAVILA: IT'S ADMITTED. IT MAY BE PUBLISHED.
(GOVERNMENT'S EXHIBIT 1360 WAS RECEIVED IN EVIDENCE.)
BY MR. WADE:
BRIAN GROSSMAN: I'M GOING TO BE BLIND BY THE END OF THIS.
MR. WADE: DO YOU SEE AT THE BOTTOM MR. JAMES FOLLOWS UP ON THAT MEETING AND HE SAYS HE IS JUST CHECKING TO SEE IF WE CAN MOVE THE PROCESS FORWARD. DO YOU SEE THAT?
BRIAN GROSSMAN: YES, YES.
MR. WADE: AND COMING OUT OF THAT MEETING, THERANOS WASN'T, YOU KNOW, BANGING ON YOUR DOOR TRYING TO DEMAND AN INVESTMENT. YOU JUST HAD THE MEETING AND YOU MOVED ON; RIGHT?
BRIAN GROSSMAN: THEY WERE NOT BANGING DOWN OUR DOOR, I AGREE WITH THAT.
MR. WADE: RIGHT. AND MR. JAMES WAS THE ONE WHO ACTUALLY CIRCLED BACK TO THE INVESTMENT; CORRECT?
BRIAN GROSSMAN: YES, THAT APPEARS TO BE TRUE.
MR. WADE: AND HE NOTES THERE, DO YOU SEE AT THE END, "WE HAVE SHOWN TO BE GREAT LONG-TERM," AND THEN HE CUTS OFF PARTNERS, I THINK. DO YOU RECALL THAT BEING AN ISSUE OF CONCERN TO THERANOS AT THE TIME?
BRIAN GROSSMAN: I DON'T.
MR. WADE: OKAY. DO YOU HAVE ANY RECOLLECTION AS TO WHY MR. JAMES WAS PROVIDING THOSE ASSURANCES?
BRIAN GROSSMAN: I HAVE NO IDEA.
MR. WADE: OKAY. AND THEN DO YOU SEE THAT MS. HOLMES RESPONDS AND SHE THANKS, SHE THANKS MR. JAMES FOR THE NOTE AND SAYS THAT THEY WILL BE IN TOUCH TO FOLLOW UP; RIGHT?
BRIAN GROSSMAN: I'M SORRY. THE QUESTION IS WHAT?
MR. WADE: THERE WAS AN AGREEMENT -- MS. HOLMES EXPRESSED AN INTEREST IN RESPONSE TO MR. JAMES'S EMAIL --
BRIAN GROSSMAN: YES.
BRIAN GROSSMAN: YES.
MR. WADE: AND INTERNALLY IN RESPONSE TO THIS, DO YOU RECALL YOU KIND OF ACTIVATED YOUR ANALYST TEAM TO START TO DIG IN IN A LITTLE MORE DEPTH COMING OUT OF THAT DECEMBER MEETING?
BRIAN GROSSMAN: I BELIEVE THAT IS, THAT IS RIGHT.
BRIAN GROSSMAN: YES.
MR. WADE: DO YOU RECALL ON I THINK IT WAS CHRISTMAS EVE HE DROVE UP TO THE WALGREENS IN PALO ALTO? DO YOU RECALL THAT?
BRIAN GROSSMAN: I DON'T RECALL THAT.
MR. WADE: ALL RIGHT. WELL, LET'S TAKE A LOOK. LET'S TAKE A LOOK AT 14025, WHICH I THINK IS IN YOUR SECOND BINDER. AS YOU'RE GATHERING IT, THIS ISN'T AN EMAIL -- PLEASE DO GATHER IT, BUT THIS ISN'T AN EMAIL ON THE CHRISTMAS VISIT TO WALGREENS. THIS EMAIL ACTUALLY REFERS -- THIS IS A DISCUSSION WHERE YOU AND MR. JAMES TALK ABOUT CONTINUING TO EXPLORE THE WALGREENS INVESTMENT; IS THAT RIGHT?
BRIAN GROSSMAN: YES.
MR. LEACH: NO OBJECTION, YOUR HONOR.
JUDGE DAVILA: IT'S ADMITTED. IT MAY BE PUBLISHED.
(DEFENDANT'S EXHIBIT 14025 WAS RECEIVED IN EVIDENCE.)
BY MR. WADE:
MR. WADE: DO YOU SEE IN THE MIDDLE -- THIS IS A RESPONSE TO THE EMAIL THAT CAME FROM MS. HOLMES WHERE YOU AND MR. JAMES TALK ABOUT PULLING TOGETHER A DUE DILIGENCE TEAM AND PULLING TOGETHER A LIST OF QUESTIONS AND STARTING TO THINK ABOUT THE SIZE OF THE INVESTMENT; CORRECT?
BRIAN GROSSMAN: YES.
MR. WADE: AND THERE'S SOME DISCUSSION ABOUT THE POTENTIAL SIZE OF THE INVESTMENT. DO YOU SEE THAT THERE?
BRIAN GROSSMAN: YES.
BRIAN GROSSMAN: YES.
BRIAN GROSSMAN: THAT'S CORRECT.
BRIAN GROSSMAN: YES.
MR. WADE: AND UP AT THE TOP, IF WE LOOK AT THE TOP TWO EMAILS, YOU TALK ABOUT WANTING TO GET SOME ADDITIONAL INFORMATION FROM THE COMPANY SO THAT YOU CAN DIG IN MORE; RIGHT?
BRIAN GROSSMAN: YES.
MR. WADE: AND ULTIMATELY -- AND YOU TALK ABOUT PREPARING A LIST OF QUESTIONS SO THAT YOU CAN HAVE ADDITIONAL DISCUSSIONS WITH THE COMPANY; RIGHT?
BRIAN GROSSMAN: I'M SORRY, WHICH -- THE QUESTION TO ME IS WHAT?
MR. WADE: YOU TALK ABOUT ADDITIONAL -- YOU TALK ABOUT PREPARING A LIST OF QUESTIONS TO HELP FACILITATE A DISCUSSION WITH THE COMPANY.
BRIAN GROSSMAN: I THINK THAT'S ACTUALLY CHRIS EMAILING ME.
MR. WADE: OKAY. BUT YOU AND MR. JAMES ARE HAVING THE DIALOGUE ABOUT TRYING TO GET INFORMATION AND PREPARE A LIST OF QUESTIONS; RIGHT?
BRIAN GROSSMAN: YES.
BRIAN GROSSMAN: YES.
MR. WADE: AND THAT'S A STANDARD APPROACH THAT YOU WOULD, YOU WOULD TAKE AT PFM BEFORE MAKING A MAJOR INVESTMENT; IS THAT FAIR?
BRIAN GROSSMAN: YES.
MR. WADE: OKAY. AND THE DUE DILIGENCE TEAM IS THE TEAM OF ANALYSTS WE'VE TALKED ABOUT BEFORE; RIGHT?
BRIAN GROSSMAN: YES.
MR. WADE: AND, AND PART OF THE STANDARD DUE DILIGENCE PROCESS IS PREPARING THOSE LISTS OF QUESTIONS ALONG THE LINES THAT MR. LEACH WAS READING TO YOU EARLIER; CORRECT?
BRIAN GROSSMAN: YES.
MR. WADE: THERE WASN'T ANYTHING SPECIAL ABOUT THE THERANOS INVESTMENT WITH RESPECT TO THOSE QUESTIONS; CORRECT?
BRIAN GROSSMAN: WELL, THE QUESTIONS WERE SPECIFIC TO THE THERANOS INVESTMENT.
MR. WADE: FAIR ENOUGH. BUT IS IT FAIR TO SAY THAT WHENEVER YOU CONSIDER A MAJOR INVESTMENT, YOU PREPARE A LIST OF DUE DILIGENCE QUESTIONS; CORRECT?
BRIAN GROSSMAN: YES.
BRIAN GROSSMAN: IT DOESN'T ALWAYS WORK LIKE THAT, BUT THAT'S CERTAINLY A REASONABLE APPROACH.
BRIAN GROSSMAN: WELL, WE HAD A LOT OF QUESTIONS TO GO THROUGH, SO WE WANTED TO MAKE SURE THAT IT WAS A PRODUCTIVE MEETING. WITHOUT FRAMING THE ISSUES THAT WE HAD, THAT WE WANTED TO DISCUSS, SOMETIMES A MEETING, EVEN IF IT'S AN HOUR AND A HALF OR TWO HOURS, CAN BE UNPRODUCTIVE.
BRIAN GROSSMAN: YES.
MR. WADE: -- SO GOING INTO THAT MEETING YOU WOULD HAVE A SENSE FOR WHAT EXACTLY IT WAS THAT WOULD BE FOCUSSED ON?
BRIAN GROSSMAN: SO THEY WOULD HAVE A SENSE OF WHAT WE WANTED TO FOCUS ON.
BRIAN GROSSMAN: YES.
MR. WADE: AND THERE WERE A COUPLE OF INSTANCES WHERE YOU ASKED TO GET ACCESS TO INFORMATION, THE CONTRACTS. DO YOU RECALL THAT?
BRIAN GROSSMAN: YES.
MR. WADE: AND THEY TOLD -- OR THEY ASKED -- LET ME STRIKE THAT. YOU ASKED TO TALK TO SOME OF THE PEOPLE WITH WHOM THEY HAD BUSINESS RELATIONSHIPS?
BRIAN GROSSMAN: SORT OF, YES.
BRIAN GROSSMAN: WE WANTED TO SPEAK TO THE PEOPLE WHO DID THE TECHNICAL DUE DILIGENCE ON THERANOS'S TECHNOLOGY. WE WANTED TO SPEAK TO PEOPLE WHO WERE INVOLVED IN THE BUSINESS DEVELOPMENT DECISION TO PARTNER, CONTRACT WITH THOSE TYPES OF ACTIVITIES.
MR. WADE: I UNDERSTAND. BUT MY QUESTION WAS THAT YOU ASKED TO SPEAK SPECIFICALLY TO UNITED HEALTH; RIGHT?
BRIAN GROSSMAN: YES.
BRIAN GROSSMAN: YES.
BRIAN GROSSMAN: THAT IS CORRECT.
MR. WADE: AND YOU AT THAT POINT COULD WALK AWAY FROM THE INVESTMENT IF THAT WAS NOT SATISFACTORY TO YOU; CORRECT?
BRIAN GROSSMAN: CORRECT.
BRIAN GROSSMAN: THAT'S CORRECT.
MR. WADE: THE -- BUT YOU DID GATHER A LOT OF INFORMATION FROM OTHER SOURCES, INCLUDING THE COMPANY; RIGHT?
BRIAN GROSSMAN: YES.
MR. WADE: AND IN THE DAYS TO FOLLOW, YOU GATHERED INFORMATION ABOUT THE REGULATORY ENVIRONMENT; RIGHT?
BRIAN GROSSMAN: WELL, WE JUST -- IT FORCED US TO RELY ON THE REPRESENTATIONS THAT THEY MADE TO US. SO IT JUST -- BY NOT LETTING US TO TALK TO THOSE PEOPLE, WE HAD TO RELY ON WHAT THEY TOLD US IN THE DUE DILIGENCE MEETINGS.
BRIAN GROSSMAN: YES, WE DID.
BRIAN GROSSMAN: YES.
BRIAN GROSSMAN: WHAT SPECIFICALLY ARE YOU REFERRING TO? WHICH MEETING?
MR. WADE: FAIR POINT. SOME OF THE DUE DILIGENCE WORK YOU DID HAPPENED BETWEEN THESE TWO MEETINGS THAT WE WERE TALKING ABOUT; RIGHT?
BRIAN GROSSMAN: THE DECEMBER 13TH AND THE JANUARY 10TH?
BRIAN GROSSMAN: I, I, I DON'T RECALL SPECIFICALLY WHAT HAPPENED IN BETWEEN THE FIRST AND SECOND VERSUS THE SECOND AND THE THIRD. SO THAT'S -- BUT WE WERE WORKING THROUGH THAT PERIOD, ESPECIALLY ONCE THE NEW YEAR STARTED. THINGS GET SLOW AT THE END OF THE YEAR, RIGHT? IT'S THE HOLIDAYS. PEOPLE NEED A BREAK. SO I THINK WE KIND OF GAVE EVERYONE A LITTLE VACATION AT THE END OF THE YEAR.
MR. WADE: FAIR ENOUGH. LET'S TAKE A LOOK AT EXHIBIT 7378, AND WE'LL SEE IF YOU CAN GIVE DR. RABODZEY AS MUCH OF A BREAK AS SOME OF THE OTHER FOLKS.
BRIAN GROSSMAN: OKAY.
MR. WADE: AND THIS IS AN EMAIL ON CHRISTMAS EVE OF 2013 THAT -- IN WHICH DR. RABODZEY EMAILS WITH YOU AND MR. KHANNA ABOUT GOING UP TO THE PALO ALTO WALGREENS; CORRECT?
BRIAN GROSSMAN: YES.
MR. LEACH: NO OBJECTION, YOUR HONOR.
JUDGE DAVILA: IT'S ADMITTED. IT MAY BE PUBLISHED.
(DEFENDANT'S EXHIBIT 7378 WAS RECEIVED IN EVIDENCE.)
BY MR. WADE:
MR. WADE: IF YOU LOOK AT THAT EMAIL -- WELL, LET'S START IN THE EMAIL BELOW THIS ON THE BOTTOM. THIS GIVES YOU THE GREEN LIGHT TO MOVE FORWARD ON THE DUE DILIGENCE; CORRECT? THIS GIVES YOUR TEAM THE GREEN LIGHT?
BRIAN GROSSMAN: YES.
BRIAN GROSSMAN: IT APPEARS TO BE, YES.
MR. WADE: AND IT LOOKS LIKE, IF YOU GO UP THE CHAIN, DR. RABODZEY WITHIN A COUPLE OF HOURS IS ON HIS WAY TO THE WALGREENS IN PALO ALTO; RIGHT?
BRIAN GROSSMAN: YES.
BRIAN GROSSMAN: HE LIVES IN PALO ALTO.
BRIAN GROSSMAN: YEAH, IT'S NOT THAT FAR FROM --
BRIAN GROSSMAN: HE WAS -- I BELIEVE HE WAS AT HOME AND JUST WENT -- PROBABLY HAD TO GO TO THE DRUG STORE.
MR. WADE: OKAY. BUT HE WAS ACTUALLY -- HE SAID HE'S GOING TO SEE IF HE CAN GET A LITTLE INTEL; RIGHT?
BRIAN GROSSMAN: YEAH, HE'S LOOKING FOR INFORMATION ON THE SYSTEM, AND IT LOOKS LIKE HE HAD SOME QUESTIONS, OR A LIST OF QUESTIONS.
MR. WADE: AND ULTIMATELY -- AND HE ACTUALLY NOTES IN THIS EMAIL THAT HE WAS GOING TO GET THE TEST, BUT HE COULDN'T GET THE TEST BECAUSE I GUESS THEY WEREN'T DOING THEM ON CHRISTMAS EVE; RIGHT?
BRIAN GROSSMAN: I GUESS NOT.
MR. WADE: BUT HE HAD A CHANCE TO TALK TO SOMEONE THERE AND GOT SOME FEEDBACK FROM HOW THE SYSTEM WORKED WHEN HE WENT TO THE WALGREENS; RIGHT?
BRIAN GROSSMAN: YES.
MR. WADE: AND AGAIN, THIS IS YOUR EFFORT TO TRY TO GATHER INTEL THAT IS INDEPENDENT OF YOUR INTERACTIONS WITH THE COMPANY; RIGHT?
BRIAN GROSSMAN: YES.
MR. WADE: AND MR. RABODZEY DIDN'T NOTIFY ANYBODY AT THE COMPANY THAT HE WAS GOING, RIGHT, TO YOUR KNOWLEDGE?
MR. WADE: AND ALTHOUGH HE DIDN'T GET A TEST ON THIS OCCASION, DO YOU RECALL THAT HE DID GET A TEST SUBSEQUENTLY?
BRIAN GROSSMAN: I DO RECALL THAT HE GOT A TEST SUBSEQUENTLY.
BRIAN GROSSMAN: I BELIEVE THAT HE DID.
MR. WADE: AND WE'LL LOOK AT SOME DOCUMENTS LATER. BUT DO YOU RECALL THAT WERE THERE SOME DELAYS IN GETTING THAT TEST; IS THAT RIGHT?
BRIAN GROSSMAN: I DON'T RECALL SPECIFICALLY.
BRIAN GROSSMAN: YES.
BRIAN GROSSMAN: YES.
MR. WADE: AND YOU UNDERSTOOD THAT THERANOS WAS PERFORMING VENOUS DRAWS IN THIS TIME PERIOD; RIGHT?
BRIAN GROSSMAN: YES.
MR. WADE: AND WHAT WAS YOUR UNDERSTANDING OF THE MACHINERY ON WHICH THEY WERE PERFORMING VENOUS DRAWS?
BRIAN GROSSMAN: MY UNDERSTANDING IS THAT THEY WERE PERFORMING VENOUS DRAWS ON THEIR PROPRIETARY TECHNOLOGY.
MR. WADE: WELL, YOU UNDERSTOOD THAT THE BASIS -- THE FRAME OF THEIR PROPRIETARY TECHNOLOGY WAS FINGERSTICK BASED TECHNOLOGY; RIGHT?
BRIAN GROSSMAN: THAT WAS ONE WAY TO ACQUIRE THE SAMPLE, BUT NOT THE ONLY WAY TO ACQUIRE THE SAMPLE.
MR. WADE: OKAY. DID YOU EVER SPECIFICALLY ASK THE QUESTION OF WHETHER THE VENOUS DRAWS WERE PERFORMED ON COMMERCIAL ANALYZERS?
BRIAN GROSSMAN: I DON'T RECALL.
MR. WADE: OKAY. AND SO WE'RE CLEAR, THE FACT THAT THEY WERE PERFORMING VENOUS DRAWS WAS NOT A SECRET IN THIS PROCESS; RIGHT?
BRIAN GROSSMAN: WE COULD REVIEW THAT IF YOU WOULD LIKE. I DON'T HAVE THAT. I DON'T REMEMBER. I DON'T HAVE THAT DOCUMENT.
MR. WADE: WELL, WHY DON'T YOU TAKE A LOOK AT 1113. ACTUALLY, I THINK THIS ONE IS IN EVIDENCE. WE CAN PUT IT RIGHT UP ON THE SCREEN. AND DO YOU SEE ON THE BOTTOM THERE IT SAYS, "THE SAMPLES ARE EITHER TAKEN FROM A TINY FINGERSTICK OR A MICRO-SAMPLE TAKEN FROM TRADITIONAL METHODS, ELIMINATING THE NEED FOR LARGER NEEDLES AND NUMEROUS VIALS OF BLOOD." DO YOU SEE THAT?
BRIAN GROSSMAN: YES, I DO.
BRIAN GROSSMAN: NO, I DON'T THINK THAT'S CORRECT.
BRIAN GROSSMAN: MY UNDERSTANDING OF THAT IS MICRO-SAMPLE TAKEN FROM TRADITIONAL METHODS MEANS THAT YOU'RE TAKING MUCH LESS BLOOD THAN IS TRADITIONALLY TAKEN USING VENOUS DRAW. AND IF YOU TAKE MUCH LESS BLOOD USING VENOUS DRAW, YOU CAN'T USE IT ON CONVENTIONAL EQUIPMENT.
MR. WADE: WELL, DID YOU ACTUALLY UNDERSTAND THAT THERANOS COULD TAKE MUCH LESS BLOOD BY VENOUS DRAW AND USE IT ON COMMERCIAL EQUIPMENT?
BRIAN GROSSMAN: I WOULD FIND THAT VERY TROUBLESOME BECAUSE THAT EQUIPMENT IS FDA APPROVED TO BE USED WITH THE COLLECTION DEVICES THAT ARE IN THE MARKET, THE LARGER VENOUS DRAWS. SO I WOULD BE CONCERNED THAT IF SOMEONE WAS USING A MICRO-SAMPLE TAKEN FROM TRADITIONAL METHODS AND USING THAT ON CONVENTIONAL LAB EQUIPMENT, THAT WOULD BE CONCERNING TO ME. THAT'S NOT HOW IT WAS APPROVED.
MR. WADE: WELL, DID YOU HAVE -- I BELIEVE YOU TESTIFIED THAT YOU READ THIS PRESS RELEASE; CORRECT?
BRIAN GROSSMAN: YES.
MR. WADE: AND DID YOU ASK ANYONE ABOUT ANY OF THIS LANGUAGE WHEN YOU WERE DOING YOUR DUE DILIGENCE?
BRIAN GROSSMAN: I DON'T RECALL SPECIFICALLY.
MR. WADE: OKAY. AND DO YOU RECALL HAVING DISCUSSIONS WITH THEM ABOUT HOW THEY PERFORM THEIR VENOUS TESTING AT ALL?
BRIAN GROSSMAN: I, I DON'T RECALL SPECIFICALLY. I DON'T RECALL.
BRIAN GROSSMAN: YES.
BRIAN GROSSMAN: I DON'T.
BRIAN GROSSMAN: I DON'T.
BRIAN GROSSMAN: I BELIEVE IT'S A SMALLER NEEDLE.
BRIAN GROSSMAN: YES.
MR. WADE: AND YOU KNOW THAT OFTENTIMES THE AMOUNT OF BLOOD THAT COMES OUT OF A BUTTERFLY NEEDLE IS SMALLER THAN THE MULTIPLE VIALS OF BLOOD THAT COME OUT OF A TRADITIONAL NEEDLE?
BRIAN GROSSMAN: YES.
MR. WADE: OKAY. AND DO YOU UNDERSTAND THAT THE AMOUNT OF BLOOD THAT COMES OUT OF A BUTTERFLY NEEDLE IS FREQUENTLY RUN ON COMMERCIAL DEVICES?
BRIAN GROSSMAN: I DON'T KNOW THAT.
BRIAN GROSSMAN: I DON'T KNOW IF THOSE ARE APPROVED, IF THOSE DEVICES ARE APPROVED TO BE RUN SPECIFICALLY ON A BUTTERFLY, A BUTTERFLY COLLECTION DEVICE.
BRIAN GROSSMAN: I WOULD HOPE -- IF I WERE THE LAB OPERATING THAT, I WOULD HOPE THAT THEY WERE.
BRIAN GROSSMAN: WHICH LAB ARE YOU REFERRING TO?
BRIAN GROSSMAN: YES.
BRIAN GROSSMAN: CORRECT.
MR. WADE: OKAY. LET'S TAKE A LOOK -- AND DO YOU UNDERSTAND THAT SAME LANGUAGE IS IN THE NOVEMBER WALGREENS PRESS RELEASE AS WELL?
BRIAN GROSSMAN: I DON'T, I DON'T RECALL THAT DOCUMENT, SO I DON'T HAVE -- I DON'T REMEMBER THAT DOCUMENT.
BRIAN GROSSMAN: OKAY. I'VE GOT IT.
MR. WADE: AND DO YOU RECOGNIZE THAT TO BE A PRESS RELEASE RELATING TO THE WALGREENS EXPANSION INTO THE PHOENIX MARKET?
BRIAN GROSSMAN: I DO.
MR. LEACH: NO OBJECTION, YOUR HONOR.
JUDGE DAVILA: IT'S ADMITTED. IT MAY BE PUBLISHED.
(GOVERNMENT'S EXHIBIT 4036 WAS RECEIVED IN EVIDENCE.)
BY MR. WADE:
MR. WADE: AND, AGAIN, THE DATE HERE IS NOVEMBER 13TH, 2013. DO YOU SEE THAT? AND THIS IS THERANOS AND WALGREENS JOINT RELEASE; CORRECT?
BRIAN GROSSMAN: YES.
MR. WADE: AND LET'S LOOK AT THE SECOND PARAGRAPH. DO YOU SEE THERE IN THE SECOND LINE IT SAYS, "LAB TESTING FROM A BLOOD SAMPLE AS SMALL AS A FEW DROPS"?
BRIAN GROSSMAN: YES.
BRIAN GROSSMAN: YES.
MR. WADE: AND IT THEN TALKS ABOUT THE MICRO-SAMPLES COLLECTED BY CERTIFIED PHLEBOTOMISTS; CORRECT?
BRIAN GROSSMAN: IT SAYS THAT, YES.
MR. WADE: AND THEN IT TALKS ABOUT IT CAN BE TAKEN FROM A FINGERSTICK OR TRADITIONAL METHODS; RIGHT?
BRIAN GROSSMAN: YES.
BRIAN GROSSMAN: YES.
MR. LEACH: OBJECTION. FOUNDATION.
JUDGE DAVILA: SUSTAINED.
BY MR. WADE:
MR. WADE: DO YOU RECALL SEEING A PICTURE IN THE SLIDE DECK THAT MR. LEACH SHOWED YOU OF THE USE OF A BUTTERFLY NEEDLE AS A THERANOS METHOD?
BRIAN GROSSMAN: I DON'T.
MR. WADE: OKAY. WE'LL GO THROUGH IT IN A BIT. LET'S LOOK AT EXHIBIT 1400, WHICH I BELIEVE IS IN THE GOVERNMENT'S BINDER.
BRIAN GROSSMAN: OKAY.
MR. WADE: AND THIS WAS -- THIS IS THAT LIST OF QUESTIONS THAT MR. LEACH -- THIS IS IN EVIDENCE, I BELIEVE.
MR. LEACH: I THINK IT'S 1404.
BRIAN GROSSMAN: I BELIEVE THAT'S CORRECT, YES.
BRIAN GROSSMAN: YES.
MR. WADE: AND IS IT FAIR THAT THE CATEGORIES RELATE TO RISKS THAT YOU WANT TO ASSESS IN CONSIDERING YOUR INVESTMENT?
BRIAN GROSSMAN: SOME OF THEM RELATE TO RISKS.
BRIAN GROSSMAN: YEAH.
BRIAN GROSSMAN: WELL, IT'S -- I SUPPOSE. BUT IT'S ALSO A STRENGTH, RIGHT?
BRIAN GROSSMAN: SO IT'S NOT ALL RISKS. SOME OF THESE ARE RISKS AND SOME OF THESE ARE JUST UNDERSTANDING THE NATURE OF THE BUSINESS SO THAT WE CAN MAKE A MORE INFORMED INVESTMENT DECISION.
MR. WADE: RIGHT. AND, AND YOU SAID ABOUT EXPLORING ALL OF THOSE THINGS, AND THAT'S WHY YOU LISTED THESE SEVEN CATEGORIES OF QUESTIONS THAT YOU SENT TO THE TEAM; CORRECT?
BRIAN GROSSMAN: WELL, WE LISTED THESE JUST TO MAKE IT EASIER FOR THEM TO PROCESS. I THINK WE HAD OVER 60 QUESTIONS. SO TRYING TO ORGANIZE THEM SO THEY COULD PROCESS THEM.
MR. WADE: RIGHT. AND THESE QUESTIONS WERE COMING IN FROM -- YOU ASKED ALL OF THE MEMBERS OF YOUR TEAM TO PROVIDE INPUT INTO ALL OF THESE QUESTIONS; CORRECT?
BRIAN GROSSMAN: THAT'S CORRECT.
BRIAN GROSSMAN: YES.
MR. WADE: AND JUST SO WE'RE CLEAR, THERE'S NO -- THE PHARMACEUTICAL PARTNERSHIPS ARE NOT MENTIONED THERE; CORRECT?
BRIAN GROSSMAN: THAT'S CORRECT.
BRIAN GROSSMAN: THAT'S CORRECT.
BRIAN GROSSMAN: YES.
BRIAN GROSSMAN: I -- THAT'S MY GENERAL MEMORY.
MR. WADE: A LOT OF QUESTIONS THOUGH; RIGHT? AND SOME OF THESE YOU COULD DISCUSS FOR SOME TIME; RIGHT?
BRIAN GROSSMAN: YES.
MR. WADE: AND YOU DISCUSSED THESE -- IN TERMS OF MS. HOLMES, YOU DISCUSSED THOSE FOR ABOUT AN HOUR AT THAT MEETING WITH HER IN JANUARY AT THE THERANOS FACILITY; RIGHT?
BRIAN GROSSMAN: I DON'T REMEMBER THE ORDER OF QUESTIONS, BUT, YES, SOME OF THOSE.
MR. WADE: BUT SHE WAS PRESENT I THINK YOU SAID FOR ABOUT AN HOUR, HOUR AND A HALF AT THAT MEETING?
BRIAN GROSSMAN: YES.
MR. WADE: OKAY. AND AS YOU WERE PREPARING FOR THIS, YOU ALSO CONTINUED TO DO OTHER WORK OUTSIDE OF YOUR COMMUNICATIONS WITH THE COMPANY; RIGHT?
BRIAN GROSSMAN: YES.
BRIAN GROSSMAN: YES.
MR. WADE: RIGHT? AND DO YOU RECALL THAT IN THIS PERIOD YOU ALSO STARTED TO GATHER MARKET INTELLIGENCE SO THAT YOU COULD CONSTRUCT A MODEL?
BRIAN GROSSMAN: YES.
BRIAN GROSSMAN: OKAY.
BRIAN GROSSMAN: I DO.
BRIAN GROSSMAN: COULD I HAVE A MINUTE JUST TO READ THROUGH IT?
(PAUSE IN PROCEEDINGS.)
BRIAN GROSSMAN: OKAY.
BY MR. WADE:
MR. WADE: AS YOU'RE READING, MAYBE I CAN HELP YOU, DO YOU RECOGNIZE THIS TO BE EARLY DISCUSSIONS ABOUT MARKET DATA THAT WOULD FEED INTO A MODEL?
BRIAN GROSSMAN: YES.
MR. LEACH: NO OBJECTION, YOUR HONOR.
JUDGE DAVILA: IT'S ADMITTED. IT MAY BE PUBLISHED.
(DEFENDANT'S EXHIBIT 14021 WAS RECEIVED IN EVIDENCE.)
BY MR. WADE:
BRIAN GROSSMAN: YES.
MR. WADE: AND YOU ALL WERE WORKING TOWARDS BUILDING A MODEL EVEN BEFORE THAT SECOND MEETING WITH THERANOS; CORRECT?
BRIAN GROSSMAN: I DON'T KNOW WHETHER WE WERE BUILDING A MODEL. I, I ACTUALLY DON'T THINK THAT WE WERE, BUT I THINK THIS IS MORE TRYING TO UNDERSTAND THE SIZE OF THE MARKET.
BRIAN GROSSMAN: I DO.
MR. WADE: AND DO YOU RECALL YOUR MODEL ACTUALLY HAS A DIFFERENT PHILOSOPHY IN TERMS OF HOW IT APPROACHED THE VALUATION FROM THERANOS'S; CORRECT?
BRIAN GROSSMAN: UM, I JUST WANT TO MAKE SURE I ANSWER YOUR QUESTION. WHAT -- I DON'T -- I DON'T -- I'M HAVING A HARD TIME ANSWERING BECAUSE I'M NOT EXACTLY CLEAR WHAT I'M COMPARING IT TO.
MR. WADE: OKAY. WELL, DO YOU UNDERSTAND THAT, SEPARATE AND APART FROM THE THERANOS MODEL THAT MR. BALWANI SENT YOU, YOU ACTUALLY DEVELOPED YOUR OWN PROPRIETARY MODEL; RIGHT?
BRIAN GROSSMAN: NO, NOT REALLY. I MEAN, CAN I EXPLAIN?
MR. WADE: WELL, LET ME ASK THIS, DO YOU RECALL GIVING TESTIMONY BEFORE IN A DEPOSITION THAT YOU BUILT YOUR OWN PROPRIETARY MODEL?
MR. LEACH: OBJECTION, YOUR HONOR. HEARSAY.
JUDGE DAVILA: SUSTAINED.
JUDGE DAVILA: SO YOU CAN ASK ANOTHER QUESTION.
JUDGE DAVILA: THAT'S HOW IT GOES.
BY MR. WADE:
MR. WADE: DO YOU RECALL BUILDING YOUR OWN PROPRIETARY MODEL WITHIN PFM TO PLACE A VALUATION ON THERANOS?
BRIAN GROSSMAN: YES.
BRIAN GROSSMAN: YES.
MR. WADE: OKAY. THE -- IN ADVANCE OF THIS MEETING IN JANUARY, DO YOU RECALL ENCOURAGING DR. RABODZEY TO GO INTO THE MEETING AND REALLY DRILL FOR INFORMATION TO MAKE SURE THAT HE UNDERSTOOD EVERYTHING?
BRIAN GROSSMAN: I DON'T SPECIFICALLY REMEMBER.
BRIAN GROSSMAN: HE WAS -- I WANTED -- HIS DOMAIN EXPERTISE, HIS SUBJECT MATTER EXPERTISE WAS IN DATA ANALYSIS, BIO STATISTICS, THE STATISTICAL CALCULATIONS WITHIN THE FIELD OF BIO -- BIOLOGY. AND SO HIS -- HE WAS -- HIS SKILL SET WAS WELL MATCHED TO ANALYZING THE DATA THAT THEY HAD, THEIR PROPRIETARY, THEIR PROPRIETARY DATA ON THEIR PROPRIETARY TECHNOLOGY.
BRIAN GROSSMAN: YES.
BRIAN GROSSMAN: YES.
BRIAN GROSSMAN: I BELIEVE THOSE WERE THE AREAS THAT WE WANTED HIM TO FOCUS ON, YES.
BRIAN GROSSMAN: YES.
BRIAN GROSSMAN: HE WASN'T THE ONLY ONE FOCUSSED ON REGULATORY, BUT THAT WAS CERTAINLY WITHIN THE REALM OF THE TYPES OF THINGS THAT HE WAS LOOKING AT.
BRIAN GROSSMAN: OKAY.
MR. WADE: AND DO YOU RECOGNIZE THIS TO BE AN EMAIL WHERE YOU WERE GIVING SOME DIRECTION TO MR. -- DR. RABODZEY IN ADVANCE OF THAT THERANOS MEETING?
BRIAN GROSSMAN: YES.
MR. LEACH: NO OBJECTION, YOUR HONOR.
JUDGE DAVILA: IT'S ADMITTED. IT MAY BE PUBLISHED.
(DEFENDANT'S EXHIBIT 7390 WAS RECEIVED IN EVIDENCE.)
MR. WADE: THERE'S A LOGISTICAL COMPONENT WHERE YOU WERE JUST NOTING THAT YOU WERE GOING TO MEET AT THE FACILITY; RIGHT?
BRIAN GROSSMAN: YES.
BRIAN GROSSMAN: YES.
MR. WADE: AND THEN YOU ENCOURAGE HIM TO BRING YOUR A GAME. YOU SAY, "U ARE THE TECHNICAL EXPERT, NEED U TO BE REALLY BE SKEPTICAL (BUT NOT AN A HOLE)"? RIGHT?
BRIAN GROSSMAN: YES.
MR. WADE: AND THAT WAS SORT OF THE MISSION THAT YOU SENT HIM DURING THE DUE DILIGENCE PROCESS; IS THAT FAIR?
BRIAN GROSSMAN: YES.
BRIAN GROSSMAN: YES.
MR. WADE: AND WHEN HE WENT INTO THAT MEETING AT THERANOS, DO YOU RECOGNIZE THAT ABOUT HALF OF THE MEETING WAS ACTUALLY SPENT WITH HIM AND MR. BALWANI GOING OVER DETAILED DATA?
BRIAN GROSSMAN: I DON'T RECALL THAT.
BRIAN GROSSMAN: I DON'T RECALL IT WAS A SIGNIFICANT PART OF THE MEETING.
MR. WADE: AND DO YOU RECALL YOU LEARNED -- WE TALKED ABOUT THE CPT CODES. DO YOU RECALL YOUR TESTIMONY ON THAT?
BRIAN GROSSMAN: YES.
BRIAN GROSSMAN: YES.
BRIAN GROSSMAN: I BELIEVE THAT IS TRUE.
BRIAN GROSSMAN: CORRECT.
MR. WADE: AND IT'S USED IN THE HEALTH CARE INDUSTRY USUALLY RELATING TO REIMBURSEMENT FROM HEALTH INSURANCE COMPANIES OR MEDICARE AND MEDICAID; CORRECT?
BRIAN GROSSMAN: YEAH, IT RELATES TO -- THERE ARE CODES THAT ARE USED FOR MEDICAL INVENTION, SURGICAL INTERVENTION, AND DIAGNOSTIC INVENTIONS, AND THEY'RE GOVERNED BY THE AMERICAN MEDICAL ASSOCIATION AND, YES, THEY'RE USED AS BILLING CODES FOR THE GOVERNMENT.
MR. WADE: RIGHT. AND SO WHEN YOU MENTIONED, FOR EXAMPLE, A THOUSAND CPT CODES, THAT'S NOT A THOUSAND ASSAYS, THAT'S A THOUSAND DIFFERENT BILLING NUMBERS; RIGHT?
BRIAN GROSSMAN: WELL, I DIDN'T MENTION THAT. MS. HOLMES MENTIONED THAT.
MR. WADE: NO. WHEN YOU TALKED ABOUT IT, I MEANT IN YOUR DIRECT TESTIMONY; RIGHT? YOU RECALL TALKING ABOUT CPT CODES WITH MR. LEACH?
BRIAN GROSSMAN: I DO. I DON'T REMEMBER SPECIFICALLY WHAT HE WAS ASKING, BUT, YES.
MR. WADE: OKAY. AND IN THIS MEETING, DO YOU RECALL THAT -- BEING INFORMED THAT THERANOS'S ANALYSIS WAS THAT 96 PERCENT OF THE TESTING VOLUME WAS COVERED BY 70 ASSAYS?
BRIAN GROSSMAN: I DON'T RECALL THAT.
MR. WADE: UM, DO YOU RECALL THAT THERANOS DISCUSSED THAT THEY HAD 70 SMALL SAMPLE ASSAYS THAT THEY WERE USING IN THEIR ROLLOUT AT THAT POINT?
BRIAN GROSSMAN: I DON'T SPECIFICALLY RECALL THAT.
MR. WADE: AND DO YOU RECALL THAT THERE WAS DISCUSSION WITHIN THIS MEETING ABOUT HOW THEY HAD JUST OVER 200 ASSAYS THAT THEY WERE OFFERING IN THE CLIA LAB?
BRIAN GROSSMAN: I, I DON'T REMEMBER SPECIFICALLY. BUT I DO REMEMBER THAT THEY SAID THAT THEY COULD COVER 99.9 PERCENT OF THE TESTS THAT WERE DONE IN A REFERENCE LAB SETTING.
MR. WADE: WELL, WE'LL COME BACK TO THE PERCENTAGES. BUT YOU RECALL THAT -- DO YOU RECALL A DISCUSSION ABOUT THE FACT THAT TO GET FROM 96 PERCENT TO 99 PERCENT REQUIRED A LOT OF ADDITIONAL ASSAYS AND THAT THE CORE ASSAYS, THE CORE 70 ASSAYS WOULD COVER 96 PERCENT OF THE TEST ACQUISITIONS BASED UPON THERANOS'S DATA ANALYSIS?
BRIAN GROSSMAN: I DON'T RECALL THAT.
MR. WADE: DO YOU RECALL WHEN YOU CAME OUT OF THAT MEETING, DO YOU RECALL BEING IN A DEBRIEF MEETING WITH YOUR ANALYST TEAM ABOUT THE THERANOS MEETING?
BRIAN GROSSMAN: I DON'T REMEMBER.
MR. WADE: OKAY. DO YOU RECALL -- BUT YOU INTERACTED WITH THE MEMBERS OF THE ANALYST TEAM AFTER THE MEETING; RIGHT?
BRIAN GROSSMAN: YES.
MR. WADE: AND DO YOU RECALL WHETHER DR. RABODZEY INFORMED YOU OF HIS UNDERSTANDING THAT THERE WERE 70 SMALL SAMPLE ASSAYS THAT THERANOS WAS USING AT THAT TIME?
BRIAN GROSSMAN: I DON'T, I DON'T RECALL.
MR. WADE: DO YOU RECALL LEARNING AT SOME POINT THAT HE WAS OF THE UNDERSTANDING THAT THERANOS WAS USING 70 SMALL SAMPLE ASSAYS AT THAT TIME?
BRIAN GROSSMAN: I DON'T REMEMBER.
MR. WADE: OKAY. DO YOU RECALL WHETHER -- I THINK YOU TALKED ABOUT YOUR WEBSITE REVIEW WHEN YOU FIRST LEARNED OF THE THERANOS INVESTMENT. DO YOU RECALL THAT?
BRIAN GROSSMAN: I MEAN, VAGUELY.
MR. WADE: OKAY. DO YOU KNOW WHETHER AFTER, WHEN YOU WERE MORE SERIOUSLY CONSIDERING THE INVESTMENT, WHETHER YOU WENT BACK TO THAT THERANOS WEBSITE AT ALL?
BRIAN GROSSMAN: I DON'T REMEMBER.
MR. WADE: OKAY. DO YOU RECALL WHETHER YOU EVER LEARNED THAT THERE WERE 213 ASSAYS LISTED ON THE THERANOS WEBSITE AT THAT TIME?
BRIAN GROSSMAN: YES, I DO RECALL THAT.
MR. WADE: DO YOU REMEMBER DURING THIS MEETING THERE WAS DISCUSSION OF THAT 8100 GOAL, THAT THEY WERE GOING TO ROLL OUT TO 8100 WALGREENS LOCATIONS; RIGHT?
BRIAN GROSSMAN: I DO REMEMBER. THAT WAS ONE OF THE FIRST THINGS THAT THEY TALKED ABOUT, THE SPEED OF THE ROLLOUT.
MR. WADE: RIGHT. AND THAT THAT WAS -- EXECUTION ON THAT WAS A SIGNIFICANT ISSUE FOR THE BUSINESS AT THAT TIME; RIGHT?
BRIAN GROSSMAN: JUST TO BE CLEAR, THOUGH, WHAT MEETING ARE YOU REFERRING TO AT THIS POINT?
MR. WADE: I'M REFERRING TO THE JANUARY MEETING WITH DR. RABODZEY AND THE -- AND YOUR OTHER ANALYSTS.
BRIAN GROSSMAN: SO THIS WAS THE -- YEAH, OKAY, THE JANUARY 10TH.
BRIAN GROSSMAN: YEAH, YES.
BRIAN GROSSMAN: I DO.
BRIAN GROSSMAN: YES.
BRIAN GROSSMAN: I DID NOT.
BRIAN GROSSMAN: I DON'T RECALL.
MR. WADE: OKAY. YOU TALKED ABOUT -- I THINK YOU TALKED ABOUT THE -- HOW THE ANALYZERS -- THE VARIATION WITHIN ANALYZERS BEING THE TOPIC THAT CAME UP. DO YOU RECALL THAT?
BRIAN GROSSMAN: YES.
MR. WADE: AND DO YOU RECALL THAT COMING UP SPECIFICALLY IN CONNECTION WITH THE DISTRIBUTED ANALYZERS WILL NOT HAVE VARIATION?
BRIAN GROSSMAN: I -- IT CAME UP AT MULTIPLE POINTS. I DON'T -- I'M TRYING TO THINK OF THE CONTEXT YOU'RE PUTTING THIS QUESTION IN. MAYBE YOU CAN BE A LITTLE MORE SPECIFIC.
MR. WADE: WELL, LET ME ASK IT THIS WAY, I BELIEVE YOU'VE TESTIFIED THAT THERE WAS A PHASE I AND A PHASE II THAT WAS UNDER DISCUSSION IN YOUR MEETINGS WITH THERANOS; CORRECT?
BRIAN GROSSMAN: YES.
MR. WADE: AND YOU UNDERSTOOD THAT PHASE II WAS WHEN THERE WOULD BE DISTRIBUTED ANALYZERS; RIGHT?
BRIAN GROSSMAN: WELL, THIS IS REFERRING TO THE RETAIL ROLLOUT.
BRIAN GROSSMAN: THIS HAS NOTHING TO DO WITH THE HOSPITAL, THE PHYSICIAN OFFICE BUSINESS, THE CLINICAL TRIAL BUSINESS. THIS IS THE RETAIL ROLLOUT, YEAH.
MR. WADE: THIS IS THE PHASE II OF THE RETAIL ROLLOUT WHERE THEY WERE GOING TO DISTRIBUTE ANALYZERS; RIGHT?
BRIAN GROSSMAN: YEAH.
BRIAN GROSSMAN: WE -- I DEFINITELY REMEMBER DISCUSSING THE PHASES OF THE RETAIL ROLLOUT, YES.
MR. WADE: RIGHT. AND YOU UNDERSTOOD THAT IN THOSE MEETINGS THERE WAS SOME DISCUSSION ABOUT REGULATORY ISSUES RELATING TO THAT; RIGHT?
BRIAN GROSSMAN: I, I DON'T REMEMBER SPECIFICALLY WHAT REGULATORY ISSUES YOU'RE HIGHLIGHTING, BUT REGULATORY IS OFTEN A TOPIC IN MEETINGS LIKE THIS.
MR. WADE: OKAY. DO YOU RECALL IT BEING A TOPIC IN THIS MEETING AS OPPOSED TO MEETINGS LIKE THIS?
BRIAN GROSSMAN: I DON'T.
BRIAN GROSSMAN: WELL, ACTUALLY, I'M SORRY. SO YOU'RE ASKING SPECIFICALLY ABOUT THE REGULATORY RISK AROUND PHASE II?
BRIAN GROSSMAN: IS THAT THE QUESTION?
BRIAN GROSSMAN: YEAH, I DON'T REMEMBER SPECIFICALLY WHAT WE DISCUSSED AROUND THE REGULATORY RISK OF PHASE II.
MR. WADE: DO YOU RECALL AT THAT TIME PERIOD THAT THERANOS WAS TAKING THE POSITION THAT THEY WERE NOT GOING TO ROLL OUT TO PHASE II UNTIL THEY GOT FDA APPROVAL? DO YOU RECALL THAT?
BRIAN GROSSMAN: THAT WAS NOT MY RECOLLECTION.
BRIAN GROSSMAN: I DON'T REMEMBER SPECIFICALLY WHEN THAT ISSUE CAME UP, BUT I DO RECALL THAT IN 2014 THEY HAD NO PLANS TO DISTRIBUTE THE MINILABS IN THE WALGREENS RETAIL SETTING, THAT IT WAS A HUB AND SPOKE MODEL. THAT WAS MY MEMORY OF THAT CONVERSATION.
BRIAN GROSSMAN: THOSE ARE YOUR WORDS. I THINK OF IT AS A HUB AND SPOKE.
MR. WADE: OKAY. BUT THE IDEA IS THAT THE LAB EQUIPMENT IS IN ONE LOCATION, AND THE SAMPLES COME TO THAT ONE LOCATION; CORRECT?
BRIAN GROSSMAN: CORRECT.
MR. WADE: OKAY. AND WHEN YOU WERE DOING YOUR ANALYSIS AND BUILDING YOUR MODEL, YOU WERE DOING IT UNDER THE ASSUMPTION THAT IT WOULD ONLY BE IN THAT PHASE I; CORRECT?
BRIAN GROSSMAN: OUR MODEL WAS BASED ON PHASE I, YES.
BRIAN GROSSMAN: YES.
MR. WADE: AND IN PHASE I, YOU UNDERSTOOD THAT AT THIS POINT IN PHASE I THERANOS WAS JUST GETTING UP AND GOING IN THOSE HANDFUL OF LOCATIONS; RIGHT?
BRIAN GROSSMAN: YES.
BRIAN GROSSMAN: YES.
MR. WADE: OKAY. AND THAT THERE WAS STILL A LEARNING PROCESS THAT THEY WERE GOING THROUGH. DO YOU RECALL?
BRIAN GROSSMAN: I DO.
MR. WADE: OKAY. AND THAT YOU'RE AWARE THAT AS COMPANIES GO THROUGH A LEARNING PROCESS, SOMETIMES THEY CHANGE THEIR APPROACH TO THINGS; RIGHT?
BRIAN GROSSMAN: YES.
BRIAN GROSSMAN: YES, IT IS.
MR. WADE: OKAY. AND AS AN INVESTOR WHO INVESTS IN THE COMPANY, YOU UNDERSTAND THAT SOMETIMES A COMPANY MAY CHANGE ITS APPROACH TO SOMETHING, AND YOU MAY AGREE WITH IT OR DISAGREE WITH IT, BUT ULTIMATELY THAT'S NOT YOUR CALL; RIGHT?
BRIAN GROSSMAN: YES.
MR. WADE: AND YOU'VE SAID THAT THE FOCUS WAS ON PHASE I AND YOUR MODEL WAS FOCUSSED ON PHASE I. DO YOU RECALL LEARNING AT SOME POINT THAT ONE OF THE ISSUES RELATING TO PHASE II WAS A REGULATORY ISSUE, AND THAT A REGULATORY ISSUE NEEDED TO BE ADDRESSED BEFORE PHASE II COULD COMMENCE?
BRIAN GROSSMAN: I DON'T REMEMBER SPECIFICALLY.
MR. WADE: OKAY. DO YOU RECALL IN THIS MEETING THERE WAS SOME DISCUSSION ABOUT THE PRIOR ROUND OF FUNDRAISING THE COMPANY HAD DONE?
BRIAN GROSSMAN: I DO.
MR. WADE: AND DO YOU RECALL THAT THE VALUATION THAT THE COMPANY HAD AT THAT TIME WAS $15 A SHARE? DO YOU RECALL THAT?
BRIAN GROSSMAN: THAT WAS NOT MY RECOLLECTION. THEY TOLD US THE VALUE WAS $17 A SHARE.
BRIAN GROSSMAN: C-2, YES. THE C-2 ROUND. THEY TOLD US THAT THE C-1 ROUND, WHICH HAD CLOSED I THINK -- WELL, THEY TOLD US IT HAD CLOSED A WEEK OR SO, A MONTH -- WITHIN A MONTH OF OUR FIRST MEETING. THEY TOLD US THE C-1 ROUND HAD CLOSED AT 15 AND THEY WERE RAISING THE PRICE OF THE C-2 BASED ON HOW WELL THE C-1 ROLLOUT WAS GOING, AND THEY RAISED IT TWICE SINCE THE WALGREENS PARTNERSHIP WAS ANNOUNCED IN SEPTEMBER.
MR. WADE: I THINK WE'RE TALKING ABOUT THE SAME THING. YOU UNDERSTOOD THAT C-1 WAS BEING OFFERED, THE MOST RECENT C-1 OFFERING WAS AT $15 A SHARE?
BRIAN GROSSMAN: YES.
MR. WADE: OKAY. AND DID YOU ALSO UNDERSTAND THAT ONE OF THERANOS'S COMMERCIAL PARTNERS CONVERTED EQUITY AT THAT POINT AT THAT PRICE?
BRIAN GROSSMAN: I, I DID NOT.
BRIAN GROSSMAN: WELL, I SHOULD SAY I DON'T REMEMBER.
MR. WADE: OKAY. DO YOU RECALL WALGREENS MAKING AN EQUITY CONVERSION AT THAT PRICE IN THAT TIMEFRAME?
MR. LEACH: OBJECTION, YOUR HONOR. ASKED AND ANSWERED.
JUDGE DAVILA: WELL, IT WAS, BUT I'LL ALLOW HIM TO ANSWER. YOU CAN ASK YOUR QUESTION AGAIN.
BY MR. WADE:
MR. WADE: DO YOU RECALL -- I BELIEVE YOU SAID YOU DIDN'T RECALL LEARNING THAT, AND I WAS WONDERING IF THE FACT THAT IT WAS WALGREENS, WHETHER THAT WOULD REFRESH YOUR RECOLLECTION.
MR. WADE: OKAY. AND WHEN YOU CAME OUT OF THIS, THIS MEETING, YOU HAD NOT YET MADE AN INVESTMENT DECISION; RIGHT?
BRIAN GROSSMAN: THAT'S CORRECT.
BRIAN GROSSMAN: YES.
MR. WADE: AND ONE OF THE THINGS THAT YOU WANTED TO DO COMING OUT OF THAT WAS GET ADDITIONAL INFORMATION FROM THE COMPANY THAT WOULD HELP AID YOUR DUE DILIGENCE PROCESS; IS THAT RIGHT?
BRIAN GROSSMAN: YES.
MR. WADE: AND SPECIFICALLY THERE WAS THE FINANCIAL MODEL THAT MR. LEACH REFERRED TO. HAD THAT BEEN DISPLAYED IN THE MEETING?
BRIAN GROSSMAN: YES.
BRIAN GROSSMAN: I ACTUALLY DON'T KNOW WHAT IT WAS. IT WAS ON THE LAPTOP.
BRIAN GROSSMAN: IT WAS A PRESENTATION ON A LAPTOP.
MR. WADE: BUT IN ANY EVENT, YOU ASKED -- YOU CAME OUT OF THE MEETING AND YOU ASKED THEM FOR A COPY OF THAT SPREADSHEET; RIGHT?
BRIAN GROSSMAN: YES.
BRIAN GROSSMAN: THEY DID GIVE IT TO US, YES.
MR. WADE: AND YOU UNDERSTAND THAT A MODEL IS A PROJECTION OF FUTURE POTENTIAL GROWTH OF A COMPANY; RIGHT?
BRIAN GROSSMAN: YES.
BRIAN GROSSMAN: YES.
MR. WADE: BUT YOU ALSO UNDERSTOOD THAT TO DO A MODEL, THERE ARE A LOT OF FACTUAL ASSUMPTIONS THAT YOU NEED TO BUILD INTO THE MODEL THAT GET TO THE ULTIMATE VALUATION OR ULTIMATE PROJECTIONS; RIGHT?
BRIAN GROSSMAN: IF IT'S A COMPLICATED COMPANY, THERE ARE OFTEN MANY ASSUMPTIONS. IF IT'S A SIMPLE SINGLE PRODUCT COMPANY, THERE ARE OFTEN VERY FEW ASSUMPTIONS. SO IT JUST DEPENDS ON THE NATURE OF THE BUSINESS THAT WE'RE LOOKING AT.
MR. WADE: AND YOU ASKED TO SEE FROM THERANOS THEIR PROJECTIONS WITH THE DATA THAT INCLUDED ALL OF THE UNDERLYING ASSUMPTIONS; RIGHT?
BRIAN GROSSMAN: WE WANTED TO UNDERSTAND THE MODEL THAT THEY SHOWED US, THE FINANCIAL FORECAST THAT THEY SHARED WITH US AND, MORE IMPORTANTLY, HOW THEY GOT THERE. WHAT WERE THE ASSUMPTIONS UNDERPINNING THOSE FINANCIAL FORECASTS THAT THEY SHARED WITH US?
MR. WADE: RIGHT. AND DO YOU RECALL THAT ALL OF THOSE ASSUMPTIONS WERE INCLUDED IN THE MATERIALS THAT THEY SHARED WITH YOU AFTER THE MEETING?
BRIAN GROSSMAN: YES, I THINK THEY PROVIDED THAT MATERIAL TO US AFTER THAT MEETING.
MR. WADE: FAIR ENOUGH. AND THEN ONE OF THE THINGS THAT DR. RABODZEY WANTED AS WELL IS HE WANTED TO LOOK AT THE TESTING DATA; RIGHT?
BRIAN GROSSMAN: YES.
MR. WADE: AND HE -- THERE HAD BEEN SOME TESTING DATA, MAYBE WE CAN AGREE, THAT WAS SHOWN IN THE MEETING; RIGHT?
BRIAN GROSSMAN: YES.
MR. WADE: AND THERE WERE SOME SLIDES THAT DEPICTED THE PERFORMANCE OF CERTAIN ASSAYS ON CHARTS; RIGHT?
BRIAN GROSSMAN: YES.
BRIAN GROSSMAN: I DON'T -- MY MEMORY OF THAT MEETING IS THAT WE SPENT VERY LITTLE TIME ON THAT DATA, AND THAT'S WHY WE ASKED FOR IT IN FOLLOWUP SO THAT WE COULD REVIEW THAT MORE CAREFULLY WITH MORE TIME. SO THE ANSWER TO YOUR QUESTION IS -- I THINK THE ANSWER TO YOUR QUESTION IS -- ACTUALLY, I DON'T KNOW WHAT THE ANSWER TO YOUR QUESTION IS. IS IT YES OR NO? I DON'T KNOW.
MR. WADE: I THINK THE ANSWER TO THE QUESTION IS THAT YOU DON'T REMEMBER HOW MUCH TIME YOU SPENT GOING OVER THE DATA IN THE MEETING. IS THAT RIGHT?
BRIAN GROSSMAN: YES.
BRIAN GROSSMAN: YES.
MR. WADE: AND IN THAT SLIDE DECK THAT MR. LEACH SHOWED YOU AND YOU WENT THROUGH SOME OF THE SLIDES, DO YOU RECALL THAT THERE WAS MAYBE ABOUT 150 PAGES OF DATA WITHIN, WITHIN THE MATERIALS THAT WERE PROVIDED TO YOU?
BRIAN GROSSMAN: THAT, THAT SOUNDS REASONABLE. I DON'T KNOW EXACTLY.
MR. WADE: AND, AND WE'LL GO OVER IT. I'M NOT GOING TO START IT AT 3:54 WHEN THIS JURY LEAVES. WE CAN PICK UP ON THAT TOMORROW. BUT ONE OF THE REASONS THAT DR. RABODZEY WANTED IT IS THAT HE WANTED TO ASSESS, HE WANTED TO ASSESS THE ACCURACY AND PERFORMANCE OF THERANOS'S ASSAYS; CORRECT?
BRIAN GROSSMAN: WELL, WE WANTED HIM TO ASSESS, TO ANALYZE THAT, YES.
BRIAN GROSSMAN: WELL, AT FIRST HE DIDN'T, YEAH.
MR. WADE: OKAY. AND YOU WANTED HIM TO TAKE ALL OF THAT TECHNICAL DATA AND LOOK AT IT AND GET A READ ON THE PERFORMANCE OF THE THERANOS TESTS; RIGHT?
BRIAN GROSSMAN: YES.
MR. WADE: AND ONE OF THE THINGS THAT YOU, YOU TASKED HIM WITH OR THAT HE VOLUNTEERED FOR WAS TO DO THAT AND TO LOOK AT OTHER ASSAYS AND SEE HOW THERANOS PERFORMED VIS-A-VIS OTHER ASSAYS?
BRIAN GROSSMAN: I DON'T RECALL GIVING SPECIFIC INSTRUCTIONS ON OTHER NON-THERANOS ASSAYS.
BRIAN GROSSMAN: YES.
MR. WADE: AND DO YOU RECALL SENDING YOUR ANALYSTS OFF TO LOOK AT THE REGULATORY ISSUES IN GREATER DETAIL?
BRIAN GROSSMAN: YES.
MR. WADE: AND DO YOU RECALL THAT, IN CONNECTION WITH THAT, THEY RETAINED EXPERTS FROM A CONSULTING FIRM TO CONSULT WITH ON THAT?
BRIAN GROSSMAN: YES.
MR. WADE: OKAY. AND YOU ULTIMATELY GOT THE FEEDBACK ON THOSE ISSUES, AND WE CAN TALK ABOUT THAT TOMORROW AS WELL. DO YOU RECALL THAT WHEN YOU CAME OUT OF THAT SECOND MEETING AND YOU STARTED TO DRILL IN ON THESE ISSUES -- IF I COULD HAVE THE ELMO. THANK YOU. IN THIS PERIOD BETWEEN JANUARY 10TH AND YOUR INVESTMENT DECISION, DO YOU RECALL THAT THERE WERE, THERE WERE ACTUALLY A LOT OF ISSUES THAT AROSE THAT GAVE YOU CONCERN WITH RESPECT TO WHETHER OR NOT YOU SHOULD INVEST IN THERANOS?
BRIAN GROSSMAN: I DON'T REMEMBER SPECIFICALLY, BUT -- SO I SUPPOSE -- I GUESS THE ANSWER TO YOUR QUESTION IS THAT THERE WERE, THERE WERE OPEN ITEMS ON THE DUE DILIGENCE LIST THAT WE NEEDED TO COMPLETE. SO, YES, WE HAD NOT FINISHED OUR WORK.
MR. WADE: OKAY. AND YOU CONTINUED TO DRILL IN ON THE MATERIALS AS YOU WENT THROUGH IN THAT PERIOD FOLLOWING THAT; RIGHT?
BRIAN GROSSMAN: YES.
MR. WADE: YOUR HONOR, THAT IS SORT OF EMBARKING UPON A NEW SECTION THAT PROBABLY DOESN'T MAKE SENSE WITH THREE MINUTES LEFT.
JUDGE DAVILA: LET'S TAKE OUR EVENING RECESS NOW, LADIES AND GENTLEMEN. LET ME REMIND YOU OF THE ADMONITION AGAIN, PLEASE. DO NOT DO ANY RESEARCH, DO NOT FORM ANY OPINION, DO NOT READ, LISTEN, OR DISCUSS ANYTHING TO DO WITH THIS CASE. I'LL ASK YOU IF THAT HAPPENED TOMORROW MORNING AGAIN. LET ME REMIND YOU OF OUR SCHEDULE. TOMORROW WE'LL START AT 9:00 O'CLOCK. SO I'LL ASK YOU TO RETURN, SIR, SUCH THAT YOU CAN CONTINUE YOUR EXAMINATION AT 9:00 A.M. LADIES AND GENTLEMEN, WE WILL BE TAKING A BREAK TOMORROW. PLEASE RECALL -- I THINK IT'S FOR AN HOUR AND IT WILL PROBABLY BE SOME TIME BETWEEN 10:30 AND 11:50, SOMETHING LIKE THAT, BUT WE WILL NEED TO TAKE THAT BREAK. AND THEN TOMORROW WE END AT 3:30. 3:30 IS THE END OF OUR DAY TOMORROW. AND I'LL KEEP YOU APPRISED OF ANY OTHER CHANGES IN SCHEDULES. I THINK THE OTHER ONE I HAVE A NOTE OF IS ON THE 29TH OF NOVEMBER WE START AT 10:00 A.M., I BELIEVE. I THINK I HAVE A NOTE TO THAT EFFECT, BUT WE CAN UPDATE THAT AS WE MOVE ALONG. SO THANK YOU VERY MUCH. HAVE A GOOD EVENING. THANK YOU, SIR. YOU CAN STAND DOWN. AND WE'LL SEE YOU TOMORROW MORNING.
(JURY OUT AT 3:59 P.M.)
JUDGE DAVILA: PLEASE BE SEATED. THANK YOU. SIR, YOU CAN LEAVE. THANK YOU. ALL RIGHT. THANK YOU. THE RECORD SHOULD REFLECT THAT OUR JURY HAS LEFT FOR THE DAY. OUR WITNESS HAS LEFT FOR THE DAY. ALL COUNSEL REMAIN AND MS. HOLMES REMAINS. MR. DOWNEY, DID YOU WANT TO TALK ABOUT SOMETHING?
MR. DOWNEY: I DID IN PART WANT TO TOUCH ON A SEALED PROCEEDING WE HAD EARLIER IN THE CASE. I DON'T KNOW IF YOU WANT TO DO THAT NOW OR IN SOME OTHER FORUM.
JUDGE DAVILA: OKAY. WELL, LET'S DO THAT IN -- IS THIS REGARDING A SEALED MATTER THAT WE --
MR. DOWNEY: A SEALED MATTER THAT WE DEALT WITH IN CAMERA EARLIER IN THE TRIAL.
JUDGE DAVILA: MAYBE WE CAN DO THAT. WE'LL GO IN CAMERA AGAIN IF IT TOUCHES ON THAT. WOULD THIS INVOLVE MR. SCHENK THEN?
MR. DOWNEY: I THINK IT WILL INVOLVE MR. SCHENK. I ALSO THINK IT WILL BE QUITE BRIEF.
JUDGE DAVILA: ALL RIGHT. DO YOU HAVE TIME, MR. SCHENK?
MR. SCHENK: YES, YOUR HONOR.
MR. DOWNEY: AND I'VE ALERTED MR. SCHENK OF THE ISSUE.
JUDGE DAVILA: ANYTHING ELSE?
MR. DOWNEY: NOTHING FROM THE DEFENSE, YOUR HONOR.
JUDGE DAVILA: OKAY. ANYTHING FROM THE GOVERNMENT BEFORE WE BREAK?
MR. LEACH: ONLY, YOUR HONOR, IF WE CAN PLEASE GET AN ESTIMATE OF THE REMAINDER OF THE CROSS FOR MR. GROSSMAN. I THINK THE GOVERNMENT'S DIRECT WAS APPROXIMATELY 2 HOURS AND 15 MINUTES, AND I THINK WE HAVE ALREADY EXCEEDED THAT IN THE CROSS-EXAMINATION, AND IN THE INTEREST OF BEING ABLE TO MANAGE THE REMAINING WITNESSES, I WAS JUST HOPING IF WE COULD GET A TIME ESTIMATE.
JUDGE DAVILA: ALL RIGHT.
JUDGE DAVILA: WHAT CAN YOU TELL ME RIGHT NOW?
JUDGE DAVILA: AND I WANT TO KNOW A LOT. THAT'S A PITY.
(LAUGHTER.)
JUDGE DAVILA: I DO WANT TO -- I NOTE THAT THERE HAVE BEEN MANY QUESTIONS -- AND I'M NOT INTERFERING WITH YOUR DEFENSE -- BUT THERE ARE MANY QUESTIONS THAT HAVE BEEN ASKED AND ANSWERED ON DIRECT, AND I RECOGNIZE MUCH OF THAT IS FOUNDATIONAL FROM YOUR PERSPECTIVE, AND I RESPECT THAT. BUT SOME OF THE MATERIAL HERE, I JUST DON'T -- I'M NOT ASKING YOU TO REVEAL WHAT YOUR DEFENSE IS, BUT YOU NEED TO DO WHAT YOU HAVE TO DO. THERE ARE TWO BINDERS HERE THAT ARE ABOUT THREE INCHES THICK WITH MATERIALS. SO WILL YOU FINISH WITH THIS WITNESS THIS WEEK? LET'S START THERE.
MR. WADE: I BELIEVE I WILL FINISH WITH THIS WITNESS TOMORROW, AND IT MAY WELL BE ANOTHER WITNESS IS NECESSARY. I'LL ADVISE MR. LEACH MORE PRECISELY TO THAT.
JUDGE DAVILA: OKAY.
MR. WADE: BUT OFTENTIMES THE INQUIRY OF COUNSEL IS WHETHER THEY SHOULD HAVE A WITNESS READY. MY GUESS, AS WE SIT HERE TODAY, IS THAT THEY SHOULD HAVE ANOTHER WITNESS READY. THEY MAY GET TO ANOTHER WITNESS TOMORROW.
JUDGE DAVILA: OKAY. WHAT WE'VE EXPERIENCED IN THE TRIAL IS CROSS-EXAMINATION FINISHING ABOUT A QUARTER TILL OR ABOUT THE TIME WE'RE GOING TO CLOSE WITH 30 MINUTES LEFT TO CLOSE FOR THE DAY. I DON'T KNOW, CAN YOU TELL ME, IS THAT THE SITUATION WE'LL BE IN TOMORROW?
MR. WADE: IT'S CERTAINLY NOT BY DESIGN THAT WE WOULD DO THAT, YOUR HONOR. I DON'T KNOW IF MR. LEACH ANTICIPATES A REDIRECT THAT IS LENGTHY OR NOT, BUT IT'S HARD FOR ME TO BE MORE PRECISE THAN I HAVE BEEN APART FROM, YOU KNOW, WE'LL TRY TO FINISH WITH THE WITNESS TOMORROW.
JUDGE DAVILA: WELL, WE KNOW WE FINISH TOMORROW AT 3:30, AND WE'VE GOT THIS HOUR BREAK.
MR. WADE: I WAS TRYING TO THINK THROUGH -- AS THE COURT WAS RAISING THE BREAK AND THE EARLY START, I WAS TRYING TO THINK THROUGH EXACTLY HOW LONG IT WILL BE. SO I TAKE IT WE HAVE ABOUT AN HOUR AND A HALF IN THE MORNING, AND THEN WE'LL HAVE THREE AND A HALF HOURS IN THE AFTERNOON. WE SHOULD, WE SHOULD EASILY BE ABLE TO FINISH THE WITNESS BY THEN.
JUDGE DAVILA: AND WHEN YOU SAY THAT, WHEN YOU SAY "WE," IS THAT THE ROYAL WE OR IS THAT YOU?
MR. WADE: THE ROYAL WE IN THIS CASE, AND I'LL REFER TO MYSELF AND MR. LEACH. SO I THINK THERE SHOULD BE MORE THAN ENOUGH TIME.
JUDGE DAVILA: OKAY.
MR. LEACH: WE'LL HAVE ADDITIONAL WITNESSES READY FOR TOMORROW, YOUR HONOR.
JUDGE DAVILA: OKAY. GREAT. ALL RIGHT. WHY DON'T I SEE, MR. DOWNEY, YOU AND MR. SCHENK, AND WE'LL HAVE OUR REPORTER MEET YOU IN CHAMBERS. MS. DIBBLE WILL ESCORT YOU BACK IN JUST A MOMENT. THANK YOU.
(SEALED PROCEEDINGS HELD IN CAMERA.)