OREANDA-NEWS. December 21, 2015. The Securities and Exchange Commission today charged Martin Shkreli, former CEO of pharmaceutical company Retrophin, with committing fraud during a five-year period when he also was working as a hedge fund manager.

The SEC alleges that Martin Shkreli misappropriated money from two hedge funds he founded and made material misrepresentations to investors among other widespread misconduct.  The SEC also charged Retrophin’s former outside counsel and corporate secretary Evan Greebel with aiding and abetting certain aspects of Shkreli’s alleged fraud.

In a parallel action, the U.S. Attorney’s Office for the Eastern District of New York today announced criminal charges against Shkreli and Greebel.

“Over a five-year period, Shkreli is alleged to have perpetrated a series of frauds on investors in his hedge funds and Retrophin’s shareholders in order to cover up his poor trading decisions,” said Andrew J. Ceresney, Director of the SEC’s Division of Enforcement.

Andrew M. Calamari, Director of the SEC’s New York Regional Office, added, “Greebel’s alleged role in facilitating Shkreli’s fraud on Retrophin’s shareholders not only crossed legal boundaries but also grossly violated both his professional and ethical obligations.”

According to the SEC’s complaint filed in federal district court in Brooklyn:

  • Shkreli was portfolio manager for the hedge fund MSMB Capital Management LP from October 2009 to March 2014, and also served as portfolio manager of another hedge fund he founded and controlled named MSMB Healthcare LP.
  • Shkreli misappropriated about \\$120,000 from MSMB Capital Management from October 2009 to July 2011 to unlawfully pay for food, clothing, medical expenses, clothing, office rent, and cash withdrawals.
  • Shkreli misled investors and prospective investors in MSMB Capital Management about the fund’s size and performance, claiming for example in July 2010 to have “returned +35.77% since inception on 11/1/2009.”  In fact, the fund generated losses of about 18 percent.
  • In another example, Shkreli falsely stated in December 2010 that the fund had \\$35 million in assets under management.  In fact, the fund had less than \\$1,000 in assets in its bank and brokerage accounts.
  • Shkreli lied to one of MSMB Capital Management’s executing brokers in February 2011 about the fund’s ability to settle a sizeable short sale in a pharmaceutical stock in MSMB Capital Management’s account.  This transaction resulted in losses of more than \\$7 million to the executing broker who had to cover the short position in the open market.
  • Shkreli misappropriated \\$900,000 from MSMB Healthcare in 2013 to settle claims asserted by MSMB Capital Management’s executing broker arising out of the losses suffered in the short selling transaction.
  • From September 2013 to March 2014, Shkreli, with assistance from Greebel, fraudulently induced Retrophin to issue stock and make cash payments to certain disgruntled investors in Shkreli’s hedge funds who were threatening legal action.  Shkreli and Greebel had investors enter into agreements with Retrophin misleadingly stating the payments were for consulting services when in fact the purpose was the release of potential claims against Shkreli.

The SEC’s complaint charges Shkreli with violating Sections 17(a)(1) and 17(a)(2) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Rules 10b-5 and 10b-2.  He also is charged with violating Sections 206(1), 206(2), and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8.  Greebel is charged with aiding and abetting Shkreli’s violations of Exchange Act Section 10(b) and Rule 10b-5.  Two Shkreli-owned entities that served as investment advisers to the hedge funds, MSMB Capital Management LLC and MSMB Healthcare Management LLC, are charged with violations of the antifraud provisions of the Investment Advisers Act, and Shkreli is charged with aiding and abetting those violations.

The SEC’s investigation has been conducted by Gerald Gross and Eric Schmidt.  The SEC’s litigation will be led by Paul Gizzi and Mr. Schmidt.  The case is being supervised by Sanjay Wadhwa.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the Eastern District of New York, the Federal Bureau of Investigation, and FINRA.