Prosecution Witnesses in Theranos Trial to Support Claim Elizabeth Holmes Lied

During continued questioning of Theranos’s longtime corporate controller,

Danise Yam,

Assistant U.S. Attorney

Robert Leach

showed projections given to investors that Theranos would log $140 million in revenue in 2014 and $990 million in 2015.

“Do you have any idea where that number came from?” Mr. Leach asked Ms. Yam, who also goes by the name So Han Spivey.

“No,” Ms. Yam replied, adding that she hadn’t helped prepare it. 

Ms. Yam said during questioning that she gave more modest revenue projections to a company hired to value Theranos stock, ranging from $50 million in 2013 to nearly $132 million in 2016.

The next witness Tuesday was

Erika Cheung,

a former Theranos lab worker who alerted federal regulators to problems at the company. A third witness expected this week, according to court filings, is

Daniel Edlin,

a onetime project manager who reported directly to Ms. Holmes and could testify about technology claims Theranos made to the Defense Department and drugstore operator

Walgreens

WBA -1.95%

Boots Alliance Inc.

Collectively, statements made by the three in this case and other legal proceedings back up the prosecutors’ central arguments that Theranos’s secretive culture fostered deception and coverups, that the company misled investors about its finances and that it skirted federal regulations.

Ms. Holmes faces 10 counts of wire fraud and two counts of conspiracy to commit wire fraud in a white-collar criminal case that has captivated Silicon Valley and been the fodder for a book, movies and podcasts. She has pleaded not guilty. Ms. Holmes’s attorney has portrayed her as a dedicated entrepreneur who may have been a bit naive but whose only crime was that her startup failed, as many startups do.

The trial is expected to last more than three months.

Ms. Cheung declined to comment. Mr. Edlin and Ms. Yam didn’t respond to requests for comment.

The Wall Street Journal’s investigative reporting in 2015 and 2016 exposed how Theranos’s technology didn’t work, how the blood-testing company tried to cover up its failures and how patients’ lives were affected and their health jeopardized.

Ms. Yam managed finances at Theranos for 11 years. During that time, the company suffered losses of hundreds of millions of dollars, prosecutors say, even as it was telling investors it was having great success with its lab testing devices that Theranos said could diagnose more than 200 conditions with a few drops of blood from a finger prick.

Answering prosecutors’ final question, Ms. Yam said the blood-testing company reported accumulated losses on a tax return of $585 million from 2003 to 2015.

Mr. Leach repeatedly asked Ms. Yam if Ms. Holmes was the source of her financial information on the company, and at one point veered into a few questions about how Theranos spent money. Ms. Yam testified that Ms. Holmes’s salary was $200,000 for a number of years, and that Theranos used a private jet. Ms. Holmes also had the majority ownership in her company, with an equity stake that at one point was worth more than $4.5 billion on paper.

During cross examination, Ms. Holmes’s attorney,

Lance Wade,

confirmed with Ms. Yam that Ms. Holmes never sold any stock in the company. He also repeatedly asked Ms. Yam if accounting adjustments can be made after initial projections, and whether revenue can be put on the books in one year for services expected to be delivered in the future.  

Mr. Wade also tried to point the finger at Ramesh “Sunny” Balwani, Ms. Holmes’s former boyfriend and No. 2 executive at Theranos, who faces the same federal charges and a separate trial. Mr. Balwani has pleaded not guilty.

He asked Ms. Yam a series of questions about whether Mr. Balwani was the source of certain financial projections, and called up one exhibit that referred to “Sunny’s estimate” on a financial figure.

But when asked if she also reported to Mr. Balwani, Ms. Yam replied that while she would keep him in the loop: “I reported to

Elizabeth Holmes.

”

Ms. Cheung’s testimony has been highly anticipated. She alerted the main U.S. lab regulator to what she alleged were persistent safety and quality-standard violations in Theranos’s lab.

In court Tuesday, Ms. Cheung recounted an instance when she believes the company cut corners. In November 2013, she testified, she flagged quality-control issues with a Vitamin D test on Theranos’s proprietary device. 

In an email chain shown to jurors that was sent in response to Ms. Cheung’s concerns, Mr. Balwani says, “This is beyond unacceptable performance,” with Ms. Holmes weighing in to say, “How fast can we resolve this issue.”

Ms. Cheung said a patient sample was ultimately run on the Theranos device despite the problems, after an employee omitted some data to make it look like it passed quality control. “I disagreed with it,” Ms. Cheung said of the decision.

In 2015, Ms. Cheung wrote a nearly 1,800-word letter to the Centers for Medicare and Medicaid Services alleging that Theranos ignored standards for staff credentials, frequently used expired lab supplies and that its proprietary testing devices had “major stability, precision and accuracy problems.”

In an inspection report completed after Ms. Cheung’s complaints, CMS described similar findings. Theranos later voided all of the results from tests done on its machines, and reached a settlement with CMS under which Theranos voluntarily closed its labs.

Mr. Edlin was a college friend of Ms. Holmes’s brother, Christian Holmes, who was also employed at Theranos. Mr. Edlin was in charge of managing Theranos’s relationships with the Defense Department and Walgreens as well as pharmaceutical companies, according to court records filed by prosecutors.

In an earlier deposition in a civil lawsuit brought by Theranos investors that was settled, Mr. Edlin described how Ms. Holmes had staged a demonstration of its technology for Walgreens executives. Yet after drawing blood from at least four or five Walgreens officials, Theranos didn’t test their blood on the Theranos devices that had been brought in for the demonstration, Mr. Edlin said. They packed up the samples and brought them to Theranos’s laboratory to test on different devices, Mr. Edlin said.

Despite his high-ranking position and regular communication with Ms. Holmes, Mr. Edlin said in the deposition he was often in the dark about what the company was doing and didn’t learn until 2016 that the company was using third-party devices for many tests, years after that practice started.

Write to Heather Somerville at heather.somerville@wsj.com and Christopher Weaver at Christopher.Weaver@wsj.com