Today, the United States Attorney for the Eastern District of New York unsealed a seven-count indictment Martin Shkreli and his lawyer with securities fraud.
According to the indictment, between September 2009 and January 2011, Shkreli falsely represented to potential investors his company MSMB Capital was a transparent investment vehicle for sophisticated investors with monthly liquidity, that he would receive a one percent management fee and twenty percent of the net profits.
However, Shkreli failed to disclose to investors that he had lost all the money he managed in Elea Capital, his prior hedge fund, and that Lehman Brothers had a $2.3 million default judgment against him. Shkreli also lied to his biggest investor telling him that his company had $35 million in assets when in fact it had less than $700 in its bank and brokerage accounts.
Nonetheless, based on these and other false representations, Shkreli and his co-conspirators induced approximately $3 million in investments from eight investors.
In February 2011, Shkreli failed to settle a short position of more than 11 million shares of Orexigen Therapeutics, Inc. (OREX) that Merrill Lynch ultimately closed at a loss of over $7 million. His company also suffered more than $1 million in other trading losses. Based on these trading losses, not including the Merrill Lynch losses, Shkreli only had $58,500 at the end of February 2011.
Nonetheless, Shkreli continued to send fabricated performance updates to investors that touted profits of as high as forty percent since inception. In September 2012, more than eighteen months after MSMB Capital had lost all everything, Shkreli sent an email to investors informing them that he was winding down the fund and that “original investors have just about doubled their money net of fees.”
Shkreli also misappropriated funds from MSMB Capital by withdrawing more than $200,000 from MSMB Capital, which was far in excess of the one percent management fee and the twenty percent net profit incentive allocation permitted by the partnership agreement.
Thereafter, until at least November 2012, Shkreli solicited investments in MSMB Healthcare but failed to disclose the Elea Capital failure and the $7 million liability that Shkreli owed Merrill Lynch. Instead, Shkreli lied to investors telling them that$55 million in assets under management, and was able to raise approximately $5 million from thirteen investors.
As with MSMB Capital, Shkreli provided investors with performance updates based on an internal inflated valuations of Retrophin, his private biopharmaceutical company, and again misappropriated funds by withdrawing money far in excess of the one percent management fee and the twenty percent net profit incentive allocation permitted by the partnership agreement.
Also, without the investors’ knowledge or consent, Shkreli improperly used MSMB Healthcare assets to pay for obligations that were not the responsibility of MSMB Healthcare, including using at least $900,000 to settle claims brought by Merrill Lynch.
In December 2012, despite the fact that Retrophin’s books and records did not reflect any investments by MSMB Capital, Shkreli and Greebel engaged in a series of fraudulent and backdated transactions to create the appearance of an investment by MSMB Capital in Retrophin. They orchestrated these transactions, in part, to support Shkreli’s false representations to the U.S. Securities and Exchange Commission in November 2012 that MSMB Capital was still in operation and had $2.6 million in assets under management.
Between February 2013 and August 2013, Shkreli and Greebel, together with others, caused Retrophin to enter into settlement agreements with MSMB Capital and MSMB Healthcare investors to resolve their claims and threats of claims which were based on Shkreli’s false representations about the exceptional performance of the funds.
Shkreli also used Retrophin to pay more than $3.4 million in cash and stock to settle claims with MSMB Capital and MSMB Healthcare investors.
In August 2013, when Retrophin’s external auditor questioned the settlement agreements and determined that Retrophin was not responsible for the claims resolved in the settlement agreements, Shkreli and Greebel caused MSMB Capital and MSMB Healthcare to execute indemnification agreements and promissory notes for the benefit of Retrophin even though they knew that the funds had no assets.
Shkreli and Greebel, together with others, then devised an alternative approach to settle with the remaining defrauded hedge fund investors, namely, settlement agreements under the guise of consulting agreements.
On October 16, 2013, when Shkreli initially questioned this new approach, Greebel explained, “We can call it a settlement agreement, but given [the auditor’s] recent behavior they may require it to be disclosed in the financials. I was trying to prevent that issue.”
Between September 2013 and March 2014, Shkreli and Greebel caused Retrophin to enter into four sham consulting agreements with defrauded investors from the funds. Retrophin did not receive any legitimate consulting services based on these sham agreements, but paid more than $7.6 million in cash and RTRX stock to settle claims that the auditors had previously determined were not the responsibility of Retrophin.
