Why Character Matters

  • Elizabeth Holmes was convicted of four counts of fraud.
  • Her deceit fuels criticism of entrepreneurship, capitalism, and medical science.
  • We must police our own.

It’s a beautiful hump day here in Cebu.

We’re prepping to ship out in March, and the going is a bit slow.

But at least the lights are on.

I read with great interest in the Journal that Elizabeth Holmes was found guilty on four charges of fraud for her stunning duplicity in running Theranos.

Each charge carries a 20-year prison sentence.

While I’m pretty sure she won’t get 80 years, she’ll get some robust prison term… I hope.

I won’t go into the case’s specifics too much, but I’ll instead use it as a basis for my arguments that character matters more than expertise in running a business.

London, Autumn 2001

“Mate, my company’s shares are trading at $2.  I think it’s a bargain.”

“Dude, your company is about to declare bankruptcy.  It’s over.  Save your cash.”

I remember that conversation like it was yesterday.

The sequence of events that led up to it still makes me giggle.

So here we go.

When I moved to London in 1999, I immediately befriended a work colleague, AA.  He was Australian, handsome, and loved pints of beer as much as I did.

He had a beautiful wife and several beautiful girlfriends.

But as I got promoted onto a trading desk, he was still stuck in operations.

He was desperate to get out, as I was only 12 months before.

As is the time-honored strategy to get on a trading desk, operations people sidle up as best they can.

And sometimes, they overstep the mark.

I was sitting on my desk one day, and the dealer board lit up.

I picked up the phone.

“Hey, mate.”


I heard the swirling, gale-force wind that hits Canary Wharf in London, where our offices were.

“Where are you?”

“I’m outside.  I just got sacked.”

Later that afternoon, I found out AA had sent a “dubious” email to his trader buddy, and the guy reported him to Human Resources.

I was indignant on his behalf, as I didn’t think – and still don’t – people should get fired for sending joke emails… even if there’s objectionable stuff in them.

Call me old-fashioned.

Anyway, the question was what his next steps were.

AA didn’t have a finance degree or anything like that.  He was just a smart, handsome Aussie dude.  The kind of man British Human Resources professionals take a chance with.

No idea why.  (Wink, wink.)

About a month later, he buzzed me on my old Nokia.

“Matey, I’m so lucky.  Things happen for a reason.  I’m so glad I got sacked.  I just landed the job of my dreams!”

“Awesome.  I’m so happy for you.  That’s great.  Who are you working for?”


This was September 2001, I hasten to add.

“We are the good guys. We are on the side of angels”.

Ah, Jeffrey Skilling.

Remember that bastard?

He was the CEO of Enron, formerly the seventh-largest company in the United States.

What was scary about the Enron scandal was that the top 3 people running the company perpetrated the fraud.

Chairman Kenneth Lay, CFO Andrew Fastow, and CEO Skilling were the guys who were found guilty.

Lay had the good sense to die before he went to prison.

But Skilling served 14 years in federal prison, and Fastow served six.  Fastow cut a deal with the prosecutors.  So impressed were they with his performance – that is, skewering his former colleagues – the prosecutors lobbied for a lower sentence.

We still talk about that case in my graduate classes.  Though the kids I teach were toddlers around the time the scandal broke, “Enron” has become a byword for fraud.

And that’s exactly as it should be.

Richard Mayberry gets this right in his Uncle Eric books.

“Do all you have agreed to do, and do not encroach on other persons or their property.”

This directive covers everything, really.

Uphold contracts and don’t rob people.

Of course, my friend AA didn’t benefit from working for people like that at his new company.  He was looking for a new job a mere three months later.

Heck, Enron used to stage their trading floor for CNBC interviews.  That is, they’d pack it with people who weren’t traders just to make it look like a bank trading floor.


And there was the issue of Skilling calling a fund manager an “asshole” for having the audacity to ask him where Enron’s balance sheet was.

This is what Skilling said about it:

The specific fellow that I was not real happy with is a short-seller in the market. I don’t think it is fair to our shareholders to give someone a platform like that they are using for some personal vested interest related to their stock position. I get a little exasperated with that sort of thing, and I want people to know I am exasperated.

When in reality, he resorted to namecalling to cover up his fraud.

I was positively thrilled when Skilling and Fastow went to prison.  This wasn’t a so-called “victimless crime.”

Enron workers lost their houses betting on Enron stock because they thought Enron’s Big 3 guys were the be-all and end-all of business.

Sure, you can call them “co-conspirators,” but did they really know what was going on?

Heck, Arthur Andersen, Enron’s auditors, didn’t call them out.  (Auditors’ incentives are another topic entirely.)

Investors lost billions of dollars.

Character and Trust

Character is who you are, and reputation is what everyone thinks of you.

Both are important, but character is controllable.  It’s upgradable.

As a father, I tell my son every day, to tell the truth.  He’s at that stage where he tries to wiggle out of everything.

Good character leads to trust.

And trust is critical to free markets.

Lipton Matthews wrote a great article on this.  Here’s a quote:

Trust makes it easier to do business by lowering transaction costs. When entrepreneurs trust each other, they are likely to collaborate and reap the fruits of innovation. In a trusting environment, businesspeople form lucrative deals before signing a contract, knowing that both parties will comply with the agreement. For instance, Macauley (1963) argues that entrepreneurs rarely depend on legal enforcement to solve disputes and in many cases actually fail to create contracts stipulating conditions with customers.

Trust greases the wheels of our economy.

It genuinely makes the world a better place.

Of course, there will always be the odd Enron scandal.  That’s why it’s essential to prosecute these criminals as vigorously as possible.

They genuinely stain the world we live in.

And that’s why I’m thrilled Elizabeth Holmes got smacked in the mouth, legally speaking, of course.

We can’t have this sort of behavior go unpunished.

Luckily, Theranos wasn’t publicly traded, and most of the evaporated wealth was paper.

But it could’ve been much worse.

May she spend a good decade or so behind bars.

Until tomorrow.

All the best,


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