12.17.15 | Forbes
By Steve Brozak
To read the entire article on Forbes, please click here.
The arrest of Martin Shkreli for securities fraud involving alleged misuses of funds from his former company, Retrophin Inc., raises more questions than it answers–and as the case plays out in federal court this gap will only increase. Although the indictment that the Department of Justice released on December 17th, 2015 was riveting in its description of the cult of Martin Shkreli and his alleged illegal “trifecta,” the allegations didn’t tell us what multiple investors and biotech industry insiders missed.
Shkreli and his outside counsel were arrested for illegally using several millions of dollars from Retrophin, a biotech company he founded in 2011, to settle losses for investors in a hedge fund, MSMB Capital, according to the federal indictment. That allegation is similar to the complaint in a civil lawsuit filed in August by Retrophin against Shkreli. Retrophin fired Shkreli as its CEO in 2014.
From the specific charges it seems that lies, damned lies and fake returns were Shkreli’s alleged currency. To emphasize this the U.S. Attorney in Brooklyn during a press conference described Shkreli’s activities as “Ponzi-like,” using some of his firm’s funds to pay off debts of others, lying to investors about the use of various monies and promising “exceptional” returns. With an eerie similarity, the counts in the indictment sounded a bit like those in the Bernie Madoff case, and like the Madoff mess, this will have a lot of fallout.
What other pharma companies could be touched by this case? Who else will be pulled into this fracas as a victim of Shkreli’s alleged behavior? Who else enabled Shkreli? How did leading financial institutions buy into Shkreli’s plans? And what happens to Shkreli’s current holdings, i.e., Turing Pharmaceuticals and KaloBios Pharmaceuticals, Inc.?
Retrophin said early this year that it had received a subpoena, and Shkreli’s also been under fire for publicly “shorting” a number of biotech companies over the last few years. But those significant issues were largely ignored by the public and media, and he only became famous/infamous this fall, after he jacked up of the price of the critical AIDS drug Daraprim by north of 4,000% shortly after acquiring rights to it. Suddenly Congress was angry at him, presidential candidates including Hillary Clinton and Donald Trump were denouncing him, and PhRMA and BIO were trying to distance themselves as quickly as possible.
But Shkreli insinuated himself into so many relationships and parlayed them into further empire building. According to the Retrophin lawsuit, even high-stakes biotech player Lindsay Rosenwald was among investors who were defrauded by Shkreli’s MSMB. Shkreli and his attorney used funds from Retrophin to help repay some MSMB investors’ losses, according to the indictment.
Retrophin’s investors included Fred Hassan, former CEO of Schering Plough, and his protégé there, Brent Saunders, who is now CEO of Allergan, according to published reports (including one in Forbes). Shkreli told Forbes Senior Editor Matt Herper that the most important “affirmation” Shkreli needed in order to start Retrophin was Hassan’s. “I asked them do you think I can do this? They said you must do this. We really want you to do this.”
However, Shkreli played fast and loose with name-dropping, apparently. He listed Saunders as a member of Retrophin’s board on his website without Saunders’ consent or knowledge, Forbes has written. And what banks have been touched by Shkreli? Even Merrill Lynch had to sue MSMB’s “disastrous investment” in a biotech. He settled with Merrill, using Retrophin funds, according to an 8-K filing from Retrophin this year. He owed $2.3 million to Lehman Brothers before its collapse. Have any other financial institutions been misled? And while we are at this, how many investors followed Shkreli’s advice when he told them to short certain biotech companies?
More questions: Can Turing, Shkreli’s privately owned company, operate in the same fashion under these new circumstances? Shkreli set up Turing in the wake of his firing from Retrophin. Turing owns rights to Daraprim, whose price was hiked more than 4,000% this fall. Shkreli recently bought a publicly traded company, KaloBios, but Turing’s fate hadn’t been finalized by the date of his arrest.
So, what happens now with Turing? Will it be acquired by another company, or folded? Who will end up owning Daraprim? What happens to KaloBios?
Martin Shkreli will need money to defend himself, but where will he turn? What can he sell to raise that money? The indictment says that the U.S. government is basically asking for everything he owns. Who gets the Wu-Tang album he recently bought for $2 million?
Shkreli misrepresented almost every hard number he gave his investors, according to the federal indictment and statements by the U.S. Attorney. He allegedly misrepresented his investments’ potential returns. Most importantly, he misrepresented himself to Wall Street and biotech experts and players as a genius, a “boy genius,” as he’s been called. How he pulled that off is the biggest question in this mire, and the one nobody wants to answer.
Here’s a final question given Shkreli’s previous social media history of his exploits: What will he tweet next?