Shkreli's Ponzi Scheme Trifecta: Lies, Deceit And Greed

With the answer to the big question about Martin Shkreli out of the way – The FBI confirmed it didn't seize his $2m one-of-its-kind album of the American hip-hop group Wu-Tang Clan – what investors and patients likely are wondering is where do his companies, Turing Pharmaceuticals AG and KaloBios Pharmaceuticals Inc., go from here?

After Shkreli was "perp-walked" out of his apartment in front of news cameras early on Dec. 17, investors panicked, driving shares of KaloBios down 53% in premarket trading, before the stock was halted.

Shkreli was released from jail on $5m bond on Dec. 17 after being charged with defrauding investors of his former hedge funds, MSMB Capital Management and MSMB Healthcare, and misappropriating more than $11m in assets from Retrophin Inc. – the publicly traded firm he founded and then ultimately was fired from – although his travel is restricted to the southern and eastern districts of New York.

Shkreli, who was ordered to appear in court on Jan. 20, faces a potential maximum of 20 years in prison if convicted for the seven counts against him.

Drug Price Probes Unaffected

It's unclear, for now, what will become of the two companies run by Shkreli, who has been called the "poster boy of price-gouging" and the "most hated man in America" for jacking up the price by more than 5,000% of a critical drug for toxoplasmosis, Daraprim (pyrimethamine).

Prosecutors emphasized the investigation that got Shkreli arrested had nothing to do with probes about Turing's drug pricing practices involving Daraprim.

Sens. Susan Collins (R-ME), chair of the Senate Aging Committee, and Claire McCaskill (D-MO), the ranking member, said Shkreli's arrest and indictment would not affect their bipartisan investigation into the sudden, aggressive price spikes of some decades-old drugs – insisting Turing is just one company among the four they are scrutinizing and the hearing they held earlier this month was just the first in a series.

While Jason Chaffetz (R-UT), chair of the House Oversight and Government Reform Committee, plans to hold a hearing early in 2016 focused on the prices of older drugs – as well as the FDA's priority review vouchers – he's not yet said whether he'll summon Shkreli to appear, which has brought condemnation from Rep. Elijah Cummings, the ranking member.

"Shkreli has lined his own pockets at the expense of patients who desperately need their medications, and he should be ashamed of himself," said Cummings, who had already initiated his own investigation into drug pricing practices of Turing and others.

Given the latest development involving the Turing CEO, the Maryland lawmaker said it was "disgraceful" House Republicans have "refused our multiple requests" over the past year to send Shkreli even a single letter requesting a single document about his "outrageous abuses."

The Plot

Shkreli was charged on Dec. 17 with securities fraud, securities fraud conspiracy and wire fraud conspiracy for orchestrating three interrelated schemes to defraud investors in his two hedge funds and misappropriating Retrophin's assets.

One of Shkreli's alleged co-conspirators in the scheme, Evan Greebel, who was initially retained as an outside lawyer for Retrophin, also was released on a $1m bond after being arrested earlier in the day and charged with wire fraud conspiracy.

Andrew Ceresney, director of enforcement at the Securities and Exchange Commission (SEC), told reporters that because Shkreli had repeatedly violated the law, "he should be barred from working in the securities industry or from being an officer or director of a public company."

Robert Capers, US attorney for the Eastern District of New York, said he hopes the arrests of Shkreli and Greebel sends a message loud and clear to other hedge fund managers, corporate executives and attorneys who may be committing similar crimes or thinking about doing so that the Justice Department, the FBI and the SEC will be "tireless" in their efforts to "uncover your schemes no matter how sophisticated, no matter how long it takes, we will bring you justice."

Shkreli essentially had engaged in a "trifecta of lies, deceit and greed," where he targeted investors and duped them into a scheme involving his hedge funds, which were "essentially worthless," said Michael Harpster, special agent-in-charge at the FBI.

Capers said the two defendants had constructed a Ponzi-like scheme, under which Shkreli used money from MSMB Healthcare to pay off debts from a series of bad trades he'd made under MSMB Capital.

"He did that to conceal the lies he'd told to MSMB Capital investors that their investments were doing well and giving them handsome returns," Capers told reporters, noting the investigation into Shkreli started while he was still at Retrophin.

Shkreli also had dipped into MSMB Healthcare cash to use for "seed" money to start Retrophin, the justice official said.

"He lied to investors about how both funds were doing," Capers said, adding that Shkreli also deceived the MSMB Healthcare investors about "what he was doing with the money – all along, promising their investor they would see exceptional returns."

When the hedge fund investors pressed Shkreli on the supposed exceptional performance he promised on their investments, he "found himself at a crossroads: Either come clean and admit he lied and that he'd lost money, and then have all of his lies discovered, or continue his lies and somehow pay the investors on the returns on his investments," Capers said.

But, he said, "Shkreli did what he had done in the past. He made the wrong choice. He lied."

Capers accused the two defendants of using Retrophin as Shkreli's "personal piggybank to pay back the shareholders at both funds who had repeatedly demanded their initial investments and returns on investments they were told they would receive."

Capers said Shkreli and Greebel "perpetrated their fraud" in a number of ways, including backdating documents, which was done in part to deceive the SEC in November 2012 that MSMB Capital was still in operation and had $2.6m in assets under management.

Officials said that between February 2013 and August 2013, Shkreli and Greebel, along with other yet-to-be identified co-conspirators, used Retrophin resources to pay more than $3.4m in cash and stock to settle claims by seven of the hedge funds' investors that they were misled on the performance of their investments.

After an external auditor for Retrophin questioned those settlements and determined the company was not responsible for the claims, Shkreli and Greebel executed indemnification agreements and issued promissory notes to Retrophin from the hedge funds, even though they knew those entities had no assets.

Shkreli and Greebel also devised an alternative approach to try to resolve things with the remaining defrauded hedge fund investors using "sham" consulting agreements, under which they paid out $7.6m in Retrophin cash and stock to settle claims, which the auditors had previously determined were not the responsibility of the drug company.

Capers said there were some arbitrations that were successfully resolved and others that were not.

"There were investors that were left whole and some that were not," he said.

"Shkreli was entrusted with protecting Retrophin and its shareholders' assets. Instead, he abused that power and used the company's assets to pay off his own personal debts," Capers declared, adding that "Greebel used his law license and training as a cover so Shkreli could perpetrate his fraudulent goals."

But, he said, "At a certain point, when you continue to lie, it catches up with you."