Turing Pharmaceutical Martin Shkreli is Arrested, Faces Criminal and Hedge Fund Fraud Charges

Ex-Retrophin CEO Martin Shkreli has been charged with fraud based on the time he worked as a hedge fund manager. The Securities and Exchange Commission claims the 32-year-old, who has just stepped down as the CEO of Turing Pharmaceutical, misappropriated funds from two hedge funds, made material misrepresentations, and engaged in other misconduct. His former outside counsel Evan Greebel faces SEC charges of aiding and abetting Shkreli’s alleged fraud.

According to the regulator’s complaint, the purported fraud occurred between 2009 and 2014 when Shkreli was portfolio manager for MSMB Capital Management LLP and MSMB Healthcare LP, which he both founded. The Commission claims Shkreli misappropriated about $120K from MSMB Capital Management to pay for personal expenses while misleading investors about the hedge fund and its size and performance. Shkreli said in July 2010 that the fund had returned over 35% when it actually lost about 18%.

Some of the other allegations against Shkreli are that he lied to one of the hedge fund’s executing brokers about its ability to sell a substantial short position in a pharmaceutical stock in an account. Because of this, the broker lost over $7 million, which this person then had to cover in the open market. Shkreli is also accused of misappropriating $900K in 2013 to resolve claims made by said broker from the short selling losses.

As for Greebel, he is accused of helping Shkreli to fraudulently persuade Retrophin, when he was CEO, to pay dissatisfied investors of his hedge fund who were threatening to take legal action. The two men allegedly had investors go into agreements with the pharmaceutical company by claiming that they were paying for consulting service when what they were doing was releasing Shkreli from possible claims. SEC Director Andrew Calamari said that the attorney’s purported involvement in the hedge fund fraud violated legal boundaries as well as ethical and professional duties.

As soon as investors started to ask for their money, Shkreli and Greebel allegedly concealed the losses by taking out millions of dollars from Retrophin. At least $11 million from that company was purportedly used to repay MSMB fund shareholders.

MSMB Background Information
Regarding MSMB Capital, that hedge fund was already in trouble as far back as early 2007 when it could not resolve a short position of over 11 million shares in a pharmaceutical company. Merrill Lynch (MER) closed the position at an over $7 million loss. MSMB Capital lost over $1 million in other investments. Shkreli, however, purportedly continued to claim that the fund was making money, even sending out fake performance reports to investors. That fund is no longer in operation.

As for MSMB Healthcare, Shkreli raised about $5 million from 13 investors. According to prosecutors, he falsely represented that the hedge fund had $55 million under management and used money from the fund to pay Merrill Lynch $900,000 of the $7 million that it owed the firm. This hedge fund also sustained losses.

Criminal Charges
On Thursday, the Federal Bureau of Investigation arrested Shkreli in Manhattan at his apartment in its parallel case. The indictment against Shkreli, submitted by the U.S. attorney’s office, claims that over the years, the ex-hedge fund manager had lost millions of dollars. He pleaded not guilty to seven counts of securities fraud and conspiracy. Greebel has also been arrested. He pled not guilty to one count of wire fraud conspiracy.

Shkreli was under fire even before these charges. As Turing Pharmaceuticals AG’s CEO, he increased the price of an old drug that combats a potentially deadly parasitic infection from 13.50/pill to $750/pill. He said that he did this to maximize profits on investors’ behalf. Shkreli founded the hedge fund Elea Capital in 2006 and got into financial hot water after he bet against stocks big time and equities started to soar. The firm’s main broker, Lehman Brothers, filed a securities case to recoup losses.

Investors say that he failed to tell MSMB investors that he lost all the funds he oversaw at Elea and that Lehman Brothers’ $2.3 million judgment against Shkreli had gone into default.

Shepherd Smith Edwards and Kantas, LTD LLP is a securities fraud law firm.

Pharmaceutical CEO Martin Shkreli Arrested for Securities Fraud, ABC News, December 17, 2015

Read the SEC Complaint Against Shkreli (PDF)