The Theranos "rich investor" defense

Conventional wisdom is that richer people make more informed investment decisions than do less-rich people, even if their wealth was inherited or earned outside the capital markets. It's an unproven underpinning of accredited investor rules, and may play a major role in the fraud trial of Theranos founder Elizabeth Holmes.

Between the lines: Fraud trials mostly are about what the defendant knew and when they knew it. But, in this case, those questions might be flipped on their heads — with the defense rhetorically aiming them at Theranos investors who lost over $800 million.

• Holmes' defense attorney Lance Wade set this up last week in his opening statement, according to some of those in the room (no transcript is yet publicly available).
• Specifically, he suggested that investor witnesses called by the prosecution were most likely to be fund managers, because they manage other people's money and are looking for a scapegoat.
• Wealthy investors who put their own money to work are less likely to be called, Wade claimed, because they'd testify to having conducted adequate due diligence; validating defense's central claim that Holmes was the victim of bad luck, not the perpetrator of bad deeds.
• Among the blood testing company's billionaire investors were Rupert Murdoch, Carlos Slim and Bob Kraft.

The bottom line: A big part of the Theranos story has been how the company's cap table and board were stacked with rich and/or powerful men who didn't have medical backgrounds, while Silicon Valley healthcare investors steered clear or were never approached. In other words, Elizabeth Holmes allegedly knew her marks.

• Jurors, though, are going to have their biases tested. If wealthy investors know what they're doing, by virtue of their wealth, then how could they also not know what they're doing?