We interviewed Shkreli about possible stock manipulation in the past
An indictment unsealed by federal prosecutors alleges the biotech executive used his companies like a "Ponzi scheme" to pay off disgruntled hedge fund investors.
by Bill Meagher
Turing Pharmaceutical CEO Martin Shkreli, who has come under fire for pharmaceutical price gauging, was arrested Thursday, Dec. 17, by the FBI in midtown Manhattan on securities fraud charges.
The indictment, filed Dec. 14 in U.S. District Court in Brooklyn, stems from allegations made public last year that Shkreli used the assets of biopharmaceutical company Retrophin Inc. (RTRX) to pay off angry former investors in MSMB Capital Management, a hedge fund that Shkreli ran before he founded Retrophin and became its CEO.
The charges against Shkreli are tied to three separate schemes, according to the indictment. The criminal complaint alleges that Shkreli misled investors in MSMB Capital and MSMB Healthcare, another hedge fund he managed, and that he also misappropriated assets from Retrophin.
The indictment includes three counts of conspiracy to commit wire fraud, and two counts each of conspiracy to commit securities fraud and securities fraud. At a Thursday news conference, U.S. Attorney Robert Capers said that Shkreli "ran his companies like a Ponzi scheme where he used each subsequent company to pay off the defrauded investors in the prior company."
A lawyer representing Shkreli did not respond immediately to a phone call and e-mail requesting a comment.
In September, controversy swirled around Shkreli when Turing raised the price of Daraprim, a treatment for parasitic infection and a drug used by some AIDS patients, from $13.50 a pill to $750 after acquiring the 62-year-old drug in August. Democratic presidential candidates Hillary Clinton and Bernie Sanders campaigned on Turing's actions and called out Shkreli for the price hike. At the time, Republican presidential candidate Donald Trump said that Shkreli "looks like a spoiled brat to me."
Two congressional investigations are under way over price gauging in the pharmaceutical industry including the repricing of Daraprim.
The SEC filed a parallel action Thursday charging Shkreli with misappropriating $120,000 from Retrophin for his own use and inducing his company to issue stock and make payments to disgruntled hedge fund investors who were threatening Shkreli with legal action.
The SEC complaint also alleges that investors in MSMB were misled by Shkreli regarding his fund's performance and assets under management. The complaint alleges that Shkreli misappropriated $900,000 from MSMB Healthcare, another hedge fund he controlled, to settle claims by executing brokers over losses from MSMB Capital's short transaction.
Evan Greebel, Retrophin's former outside counsel and corporate secretary, was also named in the SEC complaint as aiding Shkreli. The complaint also named the now defunct funds MSMB Capital and MSMB Healthcare.
Greebel was also arrested Thursday and charged with one count of wire fraud conspiracy.
Shkreli made headlines recently when he and a group of investors began buying shares of microcap KaloBios Pharmaceuticals Inc. (KBIO) in November, quickly snapping up control of the company whose shares were trading as low as 44 cents. Shares climbed above $40 in part due to a short squeeze brought about because Shkreli and his investment group would not lend shares so short investors could cover their transactions. The stock was halted at $23.59 Thursday by Nasdaq with the exchange saying it was seeking more information about the stock. But aftermarket trading in the company dropped it to $11.03, decimating more than half of its market value.
On Wednesday, Dec. 16, South San Francisco, Calif.-based KaloBios said it had upsized its $8.8 million private placement, which included $745,000 of investments by officers, directors and affiliates of the company. Other investors were not identified. According to SEC filings, Shkreli owns more than 10% of the company.
Companies affiliated with Shkreli have often turned to the private placement market. Retrophin, which he brought public in a reverse merger in 2012, raised more than $80 million in private-investment-in-public-equity financings since February 2013, according to PrivateRaise, The Deal's data service that tracks the PIPE market.
Retrophin revealed in 2014 SEC filings that the SEC was investigating Shkreli over allegations he had used consulting agreements as legal settlements. Last August the company sued Shkreli in federal court in Manhattan for $65 million in damages, essentially charging Retrophin was brought public so that its shares could be utilized to pay off MSMB investors. The lawsuit alleged that Shkreli had been a "faithless servant" when he headed up the company. In September the company sent Shkreli packing from the company he founded.
Shkreli denied the allegations at the time, saying his old company included "half-truths and speculative conclusions" in its legal action.
Shkreli knew that the SEC and the Department of Justice were examining his actions at Retrophin. Last February, Retrophin revealed in SEC filings that the Justice Department was probing the company over Shkreli and the relationship between Retrophin and MSMB Capital.
The 32-year-old Shkreli was outspoken in his defense of Turing and his actions in hiking the price of Daraprim by 5,455%. Shkreli said that the drug itself had not changed in decades and new research was needed to more effectively treat toxoplasmosis. He said his company planned on using the profits from the hike to do the R&D. At the time, he said, "This is still one of the smallest pharmaceutical products in the world. It really doesn't make sense to get any criticism for this."
Shkreli took to Twitter to defend himself and his company warning his critics that "Twitter fingers turn into trigger fingers." He also appeared on a variety of TV news shows to defend the hike in an organized campaign. He finally stopped appearing, saying that the controversy had taken up too much of his time and that he had an important job to do. Instead, he took to YouTube to plead his case.
The BBC said he "may be the most hated man in America."
Shkreli told The Deal last March that he was planning to bring Turing public in an initial public offering and that he was interviewing investment bankers as underwriters, but Turing remains privately held.
His time at Retrophin was his first experience as an officer of a biotech company although he had a background in the pharmaceutical industry. He previously made a name for himself as an investor in healthcare and biotech companies, often shorting stocks and acting as an activist investor.
Shkreli began his investment career as a 17-year-old college intern at Cramer, Berkowitz & Co., the hedge fund operated by TheStreet Inc.'s founder and CNBC host Jim Cramer. (The Deal is owned by TheStreet.)
Later, Shkreli went on to work at Intrepid Capital Management for "Tiger Cub" Steve Shapiro.
At MSMB, Shkreli staked out short positions in Cytori Therapeutics Inc. (CYTX) and MannKind Corp. (MNKD), and backed those plays with scathing reports of their prospects on the stock investment website SeekingAlpha.
He also drew the wrath of the non-profit Citizens for Responsibility and Ethics in Washington, known as CREW, by lobbying the Food and Drug Administration to reject an application for a cancer drug developed by Neoprobe Corp. In another instance, Shkreli asked to speak before an FDA panel to argue against the approval of Lorcaserin, a weight loss drug made by Arena Pharmaceuticals Inc. (ARNA).
MSMB had short positions in both Neoprobe and Arena, and CREW argued that Shkreli's lobbying and shorting together essentially amounted to an attempt to manipulate the stocks. CREW took its arguments to the U.S. Attorney's Office in Manhattan and the SEC. The organization previously said it never heard back from the SEC or the Justice Department.
In a previous interview with The Deal, Shkreli defended his interaction with the FDA by saying that he made no secret of his investments and that citizens have the right to speak to the FDA about drug candidates. "At the end of the day, I'm just a guy writing a letter," Shkreli said in 2013.
By February 2013, MSMB had run its course and Shkreli had burned out on hedge funds. "The hedge fund business has changed," he said. "When I started, you could make 50% or 100% returns in a year. It was someplace you could use your intellect to make a lot of money, but not anymore."
In the past week, Shkreli made more headlines as he bragged about paying $2 million for the only copy of an album by rappers Wu-Tang Clan, "Once Upon a Time in Shaolin."
