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This Is Why the Feds Arrested Martin Shkreli

Long before he started drawing public rage for his drug price hike, Shkreli ran a couple of hedge funds.

by Kaleigh Rogers and Rachel Pick
Dec 17 2015, 8:45pm

Shkreli being placed in custody. Image: AP/Craig Ruttle

Investigators revealed more information Thursday afternoon about the arrest of Martin Shkreli, the millionaire pharmaceutical CEO who drew public rage this year for acquiring an HIV treatment drug and then jacking up the price. Shkreli was arrested earlier Thursday—along with his former lawyer Evan Greebel—and charged with seven counts of fraud for allegedly operating what investigators dubbed a "Ponzi-like scheme" through his hedge fund companies.

"These charges in today's indictment highlight the brazenness and the breadth of Shkreli's schemes and the outrageous web of lies and deceit weaved by both defendants: Shkreli and Greebel," said US Attorney Robert Capers at a press conference in Brooklyn.

Earlier this year, Shkreli ignited a public debate over the private pharmaceutical industry when his company, Turing Pharmaceuticals, bought Daraprim: a drug used in HIV treatment. Daraprim had long cost $13.50 a pill—not a bargain, but within the realm of affordability. Turing increased the price to $750 a pop, leading people to call 32-year-old Shkreli everything from a "garbage monster" to "the most hated man in America.

But long before he started drawing public rage for his drug price hike, Shkreli ran a couple of hedge funds, and it's his management of these funds—not his pharmaceutical business—that led to his recent charges. With the help of visual aids, Capers and representatives from the FBI and the SEC provided more details to the allegations laid out in the 30-page criminal indictment that was unsealed ahead of Shkreli's arraignment.

Here's the gist of what the feds are alleging: Shkreli owned a hedge fund called MSMB Capital that he started back in 2009. Investors fed money into that fund (as investors tend to do with hedge funds), but the feds allege Shkreli lost or blew through nearly all of it in the first year.

"Mr. Shkreli spent, misappropriated, or lost through poor trading decisions all but $331 of the $660,000 or so of [initial] investor funds raised," said Andrew Ceresney, the director of enforcement for the SEC.

Over the next few years, investigators allege Shkreli raised about $3 million through MSMB Capital, but lost pretty much all of it

"He didn't tell his investor he lost their money," Capers said. "Instead Shkreli started a new hedge fund called MSMB Healthcare, which he founded in 2011. Here again he lied to the investors in the same way: he concealed from them the prior truth about his performance with MSMB Capital and the fact that he had lost $3 million."

With his new hedge fund, Shkreli raised about $5 million, according to investigators, and kept telling investors in both groups that their money was growing. Shkreli allegedly used the money raised from MSMB Healthcare to pay off debts he had for the poor trades with MSMB Capital, as well as to provide seed money for Retrophin, the pharmaceutical company he started in 2012.

Chart provided by the Department of Justice illustrating Shkreli's alleged scheme.

Prosecutors allege Shkreli then secretly used profits from Retrophin to pay back the shareholders he owed in his two hedge funds, and that he got Greebel to help him cover it all up from Retrophin's board of directors.

The allegations laid out mean Shkreli could face up to 20 years in prison. The whole alleged scheme is a pretty sticky web—and one that has, of course, not yet been proven in court—and investigators illuminated some of the grey areas at the press conference. But there are still a lot of lingering questions. What happened to all the money Shkreli allegedly lost or spent? Was anyone else involved—like the anonymous individuals dubbed "corrupt employee 1" and "corrupt employee 2" in the indictment? Did lingering debts contribute to his decision to increase the cost of that HIV drug 50-fold? On these important details, investigators were being tight-lipped, partly because they're still investigating Shkreli.

"We're following the investigation wherever it takes us. We won't comment on what we're investigating or what avenues we're taking," Capers said, but noted: "It may or may not lead to other arrests."

At Shkreli's arraignment, the room filled quickly, and spectators and members of the press without a seat were ordered to leave and wait outside the room.

Shkreli leaving his arraignment. Image: Rachel Pick/Motherboard

Shkreli came in wearing a black T-shirt and jeans. Both Shkreli and Greebel pled not guilty, and agreed to $5 million and $1 million bond amounts, respectively. Both had already surrendered their passports to the FBI.

The judge read as a condition of the bond agreement that Shkreli and Greebel were to have no contact with current or former Retrophin employees, but as some of those individuals currently work at Turing Pharmaceuticals, the judge was willing to grant an exception in those cases—but conversations have to be restricted to Turing-related business.

Both defendants asked for a time exemption between now and January 20th, their next court date. (Because the right to a speedy trial sets a 70-day maximum period before defendants have to be brought to trial, some defendants opt to delay the start of this 70-day countdown to have more time to mount a defense.) The exemption was granted.

Outside the courthouse, a scrum of reporters and photographers waited in the pouring rain for Shkreli to emerge. Once he did, it was a mad rush to get to Shkreli, who did not answer any questions lobbed at him and wore sunglasses.