A grand jury has indicted hedge fund manager Martin Shkreli on multiple charges of securities fraud, conspiracy to commit securities fraud, and conspiracy to commit wire fraud. The charges pertain to his work as portfolio manager at hedge funds Elea Capital Management, MSMB Capital Management, and MSMB Healthcare and Retrophin, a publicly traded biopharmaceutical company.

Attorney Evan Greebel, who served as lead outside counsel for Retrophin, was also named as a defendant in the case, according to court documents reviewed by ValueWalk.

Charges against Martin Shkreli revealed

In a press release today, the Securities and Exchange Commission announced that it has charged Shkreli with fraud over a period of five years while he was working as a hedge fund manager and as CEO of Retrophin. The agency accuses him of misappropriating money from two hedge funds he founded and misleading investors, “among other widespread misconduct.” The SEC charged Greebel with aiding and abetting him in some of his alleged fraudulent schemes.

The SEC Enforcement Division’s director, Andrew Calamari, accused Shkreli of perpetrating “a series of frauds” for the purpose of covering up “his poor trading decisions.” He added that Calamari has been accused of facilitating the alleged fraud on shareholders of Retrophin. He also hung up on an FBI special agent…

Widely-hated CEO Martin Shkreli got a call from someone claiming to be an FBI agent last night.Shkreli hung up on him.Hours later, the CEO was in handcuffs — arrested on fraud charges.The whole thing was caught on tape.

Posted by INSIDER on Thursday, December 17, 2015

Retrophin released a press release stating:

A new chapter for Retrophin began the day the company replaced Martin Shkreli more than a year ago—and that decision has been vindicated by today’s indictment. Upon discovering potential misconduct by Mr. Shkreli, we authorized an independent investigation, filed a lawsuit against him, and fully cooperated with the government investigations. As the indictment says, Mr. Shkreli engaged in “a scheme to defraud Retrophin.”

 

 

Martin Shkreli's Actual Hedge Fund Returns Were Not That Great
Source: Bloomberg Video Screenshot

Martin Shkreli accused of misleading investors

Court documents reveal that the SEC alleges that Martin Shkreli misappropriated approximately $120,000 in funds between October 2009 and July 2011 while at MSMB Capital Management to pay for food, medical expenses, office rent, clothing, and cash withdrawals. Regulators also accuse him of misleading investors into MSMB about the size and performance of the hedge fund. For example, he said in July 2010 that the fund had “returned +35.77” since its inception on Nov. 1, 2009. However, the SEC said the fund had generated approximately 18% in losses.

In another case, he allegedly told an investor that MSMB Capital had $35 million worth of assets when in actuality, it had less than $1,000 in assets in both its brokerage and bank accounts. Regulators say the investor relied on his report and gave him $1 million via wire transfer into the hedge fund’s brokerage account. About a month later, the same investor sent another $250,000 into the account. Based on Shkreli’s alleged misrepresentations, three more individuals invested another $1 million in the hedge fund. The complaint states that in all, eight people invested about $3 million into MSMB Capital.

Shkreli is also accused of lying to brokerage firm Merrill Lynch in February 2011 about whether the fund would be able to settle a large short sale on a pharmaceutical stock which resulted in more than $7 million in losses for the broker who had to pay to cover that position. The former hedge fund manager is also accused of misappropriating another $900,000 from MSMB Healthcare in 2013 to settle allegations raised by a broker of MSMB Capital related to the losses sustained in that transaction.

Martin Shkreli accused of defrauding Retrophin

The court documents also state that Shkreli is accused of defrauding Retrophin by causing the company to transfer some of its shares to MSMB Capital even though the hedge fund had never actually invested in the biopharmaceutical company.

Regulators also say that between September 2013 and March 2014, Greebel assisted Shkreli in inducing Retrophon to “issue stock and make cash payments to certain disgruntled investors” in his hedge funds. The investors had apparently been threatening legal action, and the complaint alleges that both Shkreli and Greebel misled investors in getting them to enter the agreements with Retrophin by saying the payments were for consulting when actually the purpose of the payments was to release possible claims against Shkreli.

Martin Shkreli  forms MSMB Healthcare

In September 2012, Shkreli reportedly admitted that MSMB Capital had no assets in a settlement with Merrill Lynch on a case involved in the trading losses associated with the short position in Orexigen Therapeutics. Just days later, he allegedly informed investors that he had decided to wind down the hedge fund partnerships and said that original investors “just about doubled their money net of fees” and that “investors will have their limited partnership interests redeemed by the fund for cash.” However, the SEC states that the fund’s original investors had actually lost their investments.

After MSMB Capital collapsed as a result of the bad trade on Orexigen, the SEC states that Shkreli and others formed another hedge fund called MSMB Healthcare and began soliciting investments between February 2011 and November 2012. Regulators say he misrepresented his past performance as a portfolio management. In all, 13 individuals invested about $5 million into the fund.

The LA Times notes:

The LA Times notes:Shkreli’s biggest blunder was an enormous short position in Orexigen Therapeutics, a La Jolla biopharma firm with an obesity drug. Shkreli shorted 32 million shares of Orexigen on Feb. 1, 2011, when it was trading about $2.50 per share.

This was a massive bet that it would fall from there. But what was curious about this trade was that Orexigen shares had just taken a huge hit, falling from $9.09 the day before, when the Food and Drug Administration had issued a report questioning the obesity drug’s cardiovascular safety. Shkreli, in other words, shorted at the low. Orexigen bounced back, gaining more than 50% from its lows over the next few days and ending the month up more than 30% from where Shkreli had shorted. Because short-trades lose money when the stock rises, Shkreli’s trade was blown to smithereens.

The complaint also states that he misrepresented the fund’s assets under management. In one case in April 2012, he allegedly told one employee to tell a potential investor that the hedge fund had $55 million in assets under management, but regulators say the fund never had more than $6 million in investments at any time during its existence.

And the complaint goes on and on with a multitude of similar allegations lodged against Martin Shkreli over a period of years. The full legal complaint can be viewed here.