So imagine you are on one of those innumerable TV cop shows where apparently if you stick a variety of crime scene photos on a wall and stare at them long enough, clarity emerges. (Yes, a fair amount of time spent this year with Netflix.)

Here is your wall:

1. Read this book: The Powerhouse: America, China, and the Great Battery War By Steve LevineIt is a journalistic look at the history of the struggle to develop a “good” electric battery. While not quite a thriller, it encompasses a heady mix of science, government policy, fraud, venture capital and human personality, and interesting, most of which predates Elon Musk and Tesla. Credit Musk for being a genius “applied science” person rather than an inventor of anything. Note to self – better to be the former than the latter. Also note the GM chapter in the book for further reference.

2. Put up a picture of Elizabeth Holmes. Re-read the Wall Street Journal Reporting on this. Or watch the movie.  Read this piece from Bloomberg:

Theranos’s Holmes Insane? That’s Tough to Prove: Noah Feldman

The news that Elizabeth Holmes’s lawyers plan to present an insanity defense in her federal trial for criminal fraud is frankly astonishing.

Maybe the evidence against her is so strong that her lawyers are desperate. Or maybe they are hoping to follow a strategy of making the jury feel sympathy for her, giving them an excuse to acquit. But the reality is that it is extremely difficult for a defendant to prove insanity in federal court.

The criteria are extremely difficult to satisfy. A tougher test was adopted after outrage about the successful insanity defense of John Hinckley, the man who shot President Ronald Reagan. The statute says that a defendant can be found not guilty by showing that “at the time of the commission of the acts constituting the offense, the defendant, as a result of a severe mental disease or defect, was unable to appreciate the nature and quality or the wrongfulness of his acts.” This is an affirmative defense, which means that the defendant has to prove it to the jury by clear and convincing evidence.

The federal version of the insanity defense is sometimes called a “cognitive” test. That means it asks about the defendant’s mental state. And it bifurcates mental state into two parts: whether the defendant knew what she was doing, and whether she knew it was wrong.

The first question allows an acquittal for a defendant who literally did not know what she was doing when she committed the crime. For example, a defendant who fired a gun while believing she was actually waving hello would count as being unable to appreciate the “nature and quality” of her act. She could be acquitted under the federal definition.

I can think of no conceivable way this part of the defense could apply to Holmes. She was running a company and making public statements about her product, and certainly knew that those were the activities in which she was engaged.

The second question allows for acquittal of someone who knows what she’s doing, but doesn’t know it’s morally wrong. (Note that this doesn’t mean she was ignorant of the fact that she was violating the law. Ignorance of the law is generally not an excuse. It means, rather, that she thought there was nothing morally wrong about her conduct.)

Presumably, Holmes’s lawyers will try to maintain that she didn’t know it was wrong to deceive investors and the rest of the world about Theranos’s blood tests. Given that her lawyers are apparently going to introduce testimony from a trauma expert, it seems that they will argue that some traumatic experience in Holmes’s past caused her to believe that lying was perfectly morally acceptable.

What would make this defense so difficult to prove is that, at least based on public reports, there appears to be plenty of evidence that Holmes sought to conceal not only the fact that the company’s devices didn’t work, but also the fact that she was lying about that. Ordinarily, prosecutors can show the jury that a defendant wasn’t insane under the federal definition by demonstrating consciousness of guilt. A defendant who has tried to hide her crimes must’ve known that she did something wrong. And if she knew she was doing something wrong, she wasn’t legally insane under the federal standard.

The U.S. federal law is a descendent of what is called the M’Naghten rule, which can be traced back to a 1843 British murder trial. It’s considered the hardest version of the insanity defense to satisfy. Other rules exist in certain states and in the past were applied in federal cases. The most prominent are the “irresistible impulse” test, which basically asks if the defendant was unable to control herself, and the “substantial capacity” test, which asks if the defendant lacks substantial capacity either to appreciate the criminality (or sometimes, wrongfulness) of her conduct or to conform her conduct to the requirements of law. Hinckley was found not guilty by reason of insanity under the substantial capacity test. This led to a backlash and the replacement of that test with the tougher M’Naghten test.

Holmes might’ve had a better chance if the question was whether she lacked substantial capacity to understand whether her actions were wrong, rather than whether she was unable to appreciate the wrongfulness of her acts. But she is stuck with the current federal standard.

Anything is possible when you get in front of a jury, and Holmes is certainly entitled to raise any defense she wishes. Insanity, however, will be hard for her to prove.

3. Put up a picture of Trevor Milton, the CEO of Nikola, which recently sported a market cap of $25 billion on a zero revenue base. Put up pictures of his “famed” investors and tie little strings to the pictures. Stick another picture of GM on the wall.  Read this  (FYI – we not are vouching for or supporting this piece, it’s just damn interesting to read). And to be fair, read this.

4. Put up a picture of Wirecard.

5. Put up a chart of the Russell 1000 growth vs value.

6. Put up a long-term chart of interest rates.

What do we see?

– JB