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Breaking Down the Charges Against Pharma Bro Martin Shkreli

America hates Martin Shkreli because he jacked up the price on a lifesaving drug, but he was arrested Thursday morning because of an unrelated scheme that the feds say amounts to securities fraud.

by Allie Conti
Dec 18 2015, 7:15pm

Martin Shkreli getting arrested. (AP Photo/Craig Ruttle)

On Thursday morning, America woke to the news that one of the most reviled men in the country, 32-year-old Martin Shkreli, had been arrested. The CEO of Turing Pharmaceuticals stirred up outrage in September when he increased the price of a drug by 5,000 percent, and then again in December for buying the sole copy of a legendary Wu-Tang Clan album, and once more on December 16 for giving a bizarre interview with a hip-hop blog in which he claimed that his provocative antics and greed qualified as performance art.

But when the feds carted away the baby-faced businessman from his Midtown Manhattan apartment in handcuffs, it had nothing to do with any of the things he's made headlines for in the past few months. Although the public is apparently psyched at the prospect of justice for the people suffering from toxoplasmosis—the condition that Daraprim, the price of which he raised from $13.50 to $750, is used to treat—exploiting sick people for profit is perfectly legal in America.

So what exactly is Shkreli in trouble for? On Thursday at noon, brand-new US Attorney Robert Capers presided over a packed press conference in Brooklyn. There, he stood before a flow-chart describing the "Ponzi-like scheme" Shkreli allegedly perpetrated back when he was a hedge fund manager.

The seven-count indictment Capers issued over accused Shkreli of coming up with a three-part plot with the help of an attorney named Evan Greebel. Basically, the government alleges, he started a hedge fund called MSMB Capital Management LP in 2009 that lost a lot of money. Although he told investors he had $35 million in assets under his management, the fund had less than $700 in its bank and brokerage accounts at one point.

In 2011, prosecutors say, Shkreli started another hedge fund called MSMB Healthcare LP and used the $5 million in investments he got for it to pay back the investors he'd already screwed over.

"But because Shkreli had lied to [his] investors about the exceptional performance of his investments, he found himself at a crossroads," Capers explained at the press conference. "Either come clean and have to admit that he lied and lost money and have all those lies discovered, or continue the lies and somehow pay the investors. And like did Shkreli did in the past, he made the wrong choice: He lied."

By then, Shkreli had co-founded yet another enterprise, the biopharmaceutical company Retrophin, which went public in 2012. So he allegedly took shares from Retrophin and used them to pay off his hedge fund investors, therefore providing them with the illusion that he hadn't lost all of their money, prosecutors say. He then cooked his books to make it look like he was charging the investors for consulting fees rather than using his company as a personal piggy bank.

In 2014, Retrophin pushed Shkreli out as CEO and later sued him, alleging that he had started the company just to pay off the people burned by MSMB's failure. (Shkreli called these allegations "preposterous.") The current indictment closely mirrors this civil suit.

Greeble, a 42-year-old attorney who served as Retrophin's outside council, has been charged with one count of conspiracy to commit wire fraud for his participation in all this.

When Shkreli raised the price of Daraprim, he did it in his capacity as the CEO Turing Pharmaceuticals. Capers would not speculate during the press conference as to whether the price-gouging was connected to Shkreli's alleged criminal conduct, but in any case the 32-year-old has resigned from his post at Turing.

The would-be performance artist faces 20 years in prison for securities fraud, securities fraud conspiracy, and wire fraud conspiracy—and there's a possibility for more arrests as the case unfolds, according to Capers.

Richard Brodsky, a lawyer, former member of the New York State Assembly, and one-time candidate for attorney general, said it's not worth getting hung up on the word Ponzi, and that the case is "not complicated stuff." After all, he adds: "You do not have to be a financial wizard to understand that lying about an investment is crime.

"The interesting issue is why he would keeping poking his head above the radar knowing this was going on," Brodsky continued. "I mean at some point. if you know what's happening, you'd have to have an LSD-induced sense of immunity [or keep out of the public eye.]"

Shkreli was released Thursday afternoon on a $5 million bond, and released a defiant statement:

Capers, the newly-minted 45-year-old prosecutor, made it known that he is committed to combatting financial fraudsters of all stripes.

"By unsealing this indictment, we hope that the message is clear to hedge fund managers, corporate executives, and attorneys who may be committing similar crimes or thinking about doing so," he said. "And if it's not clear, here's the message: The message is that we will be tireless—this office, the FBI, and our partners in the SEC, in our efforts to uncover your schemes. No matter how sophisticated, or how long it takes, we will bring you to justice."

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