By Spencer Jakab
When Theranos founder Elizabeth Holmes was on trial for misrepresenting the startup's finances and business prospects, several people tried to put the practice of hyping supposed tech breakthroughs in context. One of them was the federal judge overseeing her case:
"It's common in Silicon Valley for promoters to engage in that type of conduct," said U.S. District Judge Edward Davila.
Even after Holmes's conviction, venture capitalist Tim Draper, an early investor in Theranos, said he was alarmed about the case having a chilling effect on business. "This verdict makes me concerned that the spirit of entrepreneurship in America is in jeopardy," he wrote.
He need not have been. Pushing ethical and legal boundaries is as old as the Republic and going strong. For every Holmes, there are entrepreneurs prone to stretching the truth who are celebrated instead of sitting in prison.
The fact that so many business practices fall into a legal gray area in America is no accident, and arguably a good thing up to a point.
"Unlike many other cultures, we decided we were going to have pretty vague documents," says Frank Partnoy, a law professor at the University of California, Berkeley, who has written extensively on financial shenanigans. The American legal system, he says, is largely based on precedent, not ironclad statutes, leaving some wiggle room for questionable business practices.
"The optimal amount of fraud is not zero," Partnoy says. In other words, a few bad apples among entrepreneurs haven't spoiled the bunch -- and some of them have planted the seeds for growth.
Boom and bust
America's transformation during the 19th century from an agrarian backwater into a global power was captained by men who engaged in maneuvers that would be completely illegal today but weren't at the time. Those tactics included secretly cornering slivers of the financial markets and "watering" stock -- defrauding investors by issuing shares well above their book value.
This drew no small amount of criticism. Railroad magnate and speculator Jay Gould was dubbed "the Mephistopheles of Wall Street" by ministers on the pulpit.
But the tracks and transportation systems that Gould helped build and consolidate through maneuvers like the "Erie War" -- a scheme to issue bogus shares in a vital railroad to gain control of it -- were transformative. He pored over maps, laid down tracks and improved rail service tirelessly.
Not all of Gould's schemes were productive, though. In 1869 he and an accomplice attempted to corner the gold market, sending prices soaring. The plan fell apart after President Ulysses S. Grant got wind of it, triggering the Panic of 1869, with the gold market crashing and stock prices plummeting. Many investors were ruined, but Gould was nimble enough to escape "Black Friday" with a small profit, and he wasn't convicted of a crime.
The markets eventually recovered, as they always do, with even bigger booms rising out of the ashes of the last one. No repetition of that cycle has been more spectacular than the bull market of the Roaring '20s and the crash of 1929, the onset of the Great Depression, a debacle that spurred the creation of securities laws that mostly still apply today.
But those remain very much open to interpretation.
Take Trevor Milton, who founded Nikola in 2014. He lied about nearly every aspect of the hydrogen-fueled-truck company's business, briefly boosting it to a valuation higher than Ford Motor's. During Milton's 2022 trial, Allen Ferrell, an expert defense witness who teaches securities law at Harvard University, argued that, since the stock didn't react on the specific occasions that Milton made many public statements, Milton shouldn't be held liable for them.
"If information is important, it should change the stock price," Ferrell testified.
Power plays
Even when scoundrels are convicted, as Milton was, the prominent people who were in their orbit, if only peripherally, keep their reputations and wealth mostly intact. FTX founder Sam Bankman-Fried, sentenced last year to 25 years in prison for fraud, cavorted with football great Tom Brady and spoke on stage with former President Bill Clinton.
"You tend to have people in the top ranks of American society get involved in these things -- usually not knowingly, but their name's on the marquee," says Edward J. Renehan Jr., who wrote a biography of Jay Gould and other books on that era's robber barons.
Holmes had a who's who of prominent men on her board, including former Secretaries of State George Shultz and Henry Kissinger and former Defense Secretaries Jim Mattis and William J. Perry. In addition to his $150,000 a year board salary and half a million shares in the now-defunct company, Kissinger was paid a $500,000 consulting fee.
In an echo of the robber-baron era, the right political connections can even help you remain free, seemingly against all odds. Milton received a pardon from President Trump this year, which also means he no longer has to pay restitution to investors who lost money on Nikola. Milton and his wife donated $1.8 million to Trump's campaign in October.
Every country has a nexus of money and power, but the relationships generally pass legal muster in America. Usually it is money well spent to pave the way for legitimate businesses. A disproportionate share of those businesses, compared with those in other countries, have become global titans.
And the spectacular busts? They have often received second or third chances from an optimistic public.
"The greatest comeback story in America is about to happen," said Milton in a social-media video after his release.
Stranger things have happened. The fact that they have illustrates much of what is wrong with American capitalism, and what has made it unbeatable for 250 years.
"We're always reinventing ourselves," says Partnoy. "How do you decide where the line is?"
Spencer Jakab writes the WSJ's free Markets A.M. newsletter. Email him at spencer.jakab@wsj.com.
(END) Dow Jones Newswires
October 02, 2025 05:30 ET (09:30 GMT)
Copyright (c) 2025 Dow Jones & Company, Inc.