Shkreli “Pharma Bro” Trial Defense: Can Enrichment of “victims” be Fraud?

By: Stephanie Duran

Martin Shkreli, the hedge-fund investor and co-founder of the biotechnology firm Retrophin, known affectionately as “Pharma Bro,” first caught the public’s attention by increasing the price of a vital drug used by AIDS patients by 5,000 percent.

Shkreli now faces eight counts of securities and wire fraud for purportedly lying to investors about how he was going to spend their money and using Retrophin assets to pay off disgruntled investors in his hedge fund, MSMB Capital. MSMB Capital sustained significant losses in 2011 following a bad investment. Rather than tell his investors about the losses, Shkreli gave them over $10 million in Retrophin money and stock. According to the Complaint filed by the Securities and Exchange Commission:

  • Shkreli misappropriated about $120,000 from MSMB Capital Management (for which he was portfolio manager) from October 2009 to July 2011 to unlawfully pay for food, clothing, medical expenses, clothing, office rent, and cash withdrawals.
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  • 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.”
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  • 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.
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  • 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.
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  • 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.
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  • 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 prosecutors will have to show that Shkreli intentionally lied to investors, which thus far includes testimony from investors that Shkreli mischaracterized the size of his hedge fund, that he lied about having an independent auditor and exaggerated his connections to high-ranking pharmaceutical executives.

What makes this case interesting (aside from Shkreli being considered one of the most hated men in America) is Shkreli’s defense: that his investors did not lose money. Rather, many investors made enormous profit from Shkreli’s alleged crimes. This defense would be adequate or at least fitting in the civil context, however, in the criminal context, a substantial financial loss to investors is not required for a guilty verdict. Nonetheless, a jury may find it difficult to convict Shkreli after listening to his victims lament about how much profit they ultimately made.

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