AUDASE

Martin Shkreli Indictment Portrays Small-Time Fraud

By STEPHANIE CLIFFORD and MATTHEW GOLDSTEIN NY TIMES

Another psychopath gets slapped by the Feds! DF

Martin Shkreli told investors that his hedge fund had an auditor, that it had posted a 36 percent return since its inception and that it had $35 million in assets under management.

None of it was true, federal authorities say.

Mr. Shkreli has gained nationwide notoriety for his bravado in spiking prices on pharmaceuticals, one of the biggest industries in the country. But his predawn arrest in Manhattan on Thursday was on charges of a small-time hedge fund fraud.

An indictment unsealed by federal prosecutors in Brooklyn and a related civil lawsuit filed by the Securities and Exchange Commission assert that Mr. Shkreli was nothing like the stock market genius and savvy entrepreneur that he had portrayed.

His former hedge fund, MSMB Capital Management, had recorded losses of at least 18 percent and was essentially broke by 2011, having less than $1,000 in its bank account, according to the indictment. The hedge fund had no auditor.

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The authorities described Mr. Shkreli, 32, as a failed trader with a habit of spreading falsehoods and running his businesses on fumes and misappropriated money. His Ponzi-like scheme, they said, involved looting Retrophin, a biopharmaceutical company he used to run, to pay back his disgruntled investors.

“At a certain point, when you lie, it catches up with you,” said Robert L. Capers, the United States attorney for the Eastern District of New York, at a news conference discussing the charges.

The investigation of Mr. Shkreli was underway long before he became a target of criticism for raising the price of a drug sold by a company he acquired, Turing Pharmaceuticals, to $750 a pill from $13.50.

It is not clear whether federal authorities had quickened the pace of their investigations in light of the defiant posture Mr. Shkreli struck in news media interviews and on Twitter since the drug-price gouging controversy first emerged. Recently, it became known that he was the buyer of the sole copy of a rare Wu-Tang Clan album at an auction for $2 million.

The F.B.I.‘s New York office tweeted on Thursday that it had not seized the record, saying: “no seizure warrant at the arrest of Martin Shkreli today, which means we didn’t seize the Wu-Tang Clan album.”

The schemes outlined by both prosecutors and securities regulators were not especially sophisticated.

The indictment charges Mr. Shkreli with two counts of securities fraud, saying that he deceived the fewer than two dozen investors in his former hedge fund about the firm’s viability and performance in persuading them to give him more capital. He also faces five conspiracy counts.

Mr. Shkreli, the authorities said, quickly lost money at a small hedge fund he managed called Elea Capital Management from 2006 to 2007.

At his next fund, MSMB, he did not disclose information about his prior losses and poor performance when raising money from investors.

He also lied about MSMB’s assets. He told an investor in December 2010 that the firm had $35 million in assets under management. In fact, it had $700.

He then lost even more money — some $7 million — at MSMB when he bet wrong in 2011 that the shares of a small pharmaceutical company would fall in price. He owed Merrill Lynch, his brokerage firm, that amount, and settled with Merrill for $1.35 million. He used money from a new fund, MSMB Healthcare, to pay off the Merrill settlement.

Again, he did not tell investors.

Finally, at Retrophin, he once again used company money to cover up his failed investments.

Mr. Shkreli received help, authorities said, from a corporate lawyer, Evan Greebel, 42, who at time was working for the law firm Katten Muchin Rosenman.

Mr. Greebel, who lives in Scarsdale, N.Y., recently joined the Kaye Scholer firm as a partner. Prosecutors charged him with helping Mr. Shkreli engineer a series of fraudulent transactions that effectively took money from Retrophin so it could be given to some of Mr. Shkreli’s former hedge fund investors.

The indictment mirrors some of the accusations contained in a civil lawsuit filed in August by Retrophin, which ousted Mr. Shkreli as chief executive in 2014. The company had accused him of using Retrophin as his personal piggy bank to help pay off upset investors in the hedge fund by hiring some of them for sham consulting jobs.

The authorities contend that fraudulent transactions were devised to make it appear as if Mr. Shkreli’s former hedge fund had invested in the pharmaceutical company when in fact it had not.

In a scheme involving two other unnamed people, Mr. Shkreli and Mr. Greebel created a paper trail using backdated stock transfer agreements in response to an inquiry the S.E.C. had begun in early 2012.

Mr. Shkreli and Mr. Greebel also used $3.4 million in Retrophin funds and stocks to settle claims with several MSMB investors who were threatening to sue in 2013. The money was transferred to the hedge fund investors, even though Retrophin had no responsibility for those claims.

The indictment contends the lawyer was an active participant in the scheme.

In some instances, Mr. Greebel removed the outside auditors from Retrophin from emails to hide what he and Mr. Shkreli were doing, the authorities said. The indictment includes portions of an email exchange between Mr. Shkreli and Mr. Greebel in which they discussed questions from Retrophin’s auditors in August 2013 about the appropriateness of the settlement agreements.

In one email, Mr. Shkreli writes, “There were serious faults with the agreements including lack of board approval.”

Mr. Greebel responds, “That will open up some very big issues. The current thinking is let RTRX pay,” referring to Retrophin’s trading symbol. “It would be easier than the road you are referring to,” he continued, adding that the auditor “would get very spooked with what you are talking about.”

“That works for me,” Mr. Shkreli replied.

It is not clear from the court filings what Mr. Greebel’s motivation might have been in helping Mr. Shkreli with the purported fraud. Mr. Greebel is charged with one count of conspiracy.

Regulatory filings with the S.E.C. show that Retrophin was not Mr. Greebel’s only corporate client. In recent years, Mr. Greebel had built an expertise working with Bitcoin, the digital currency. He is listed on filings with the S.E.C. as one of the outside lawyers working on the Winklevoss Bitcoin Trust, the publicly traded Bitcoin investment vehicle that Cameron and Tyler Winklevoss plan to introduce.

On Mr. Greebel’s profile at Kaye Scholer, which he joined during the summer, it mentions that The Financial Times recognized him as an “innovative lawyer” in the United States.

A spokeswoman for Kaye Scholer said in a statement: “We are deeply concerned that these charges have been made against Mr. Greebel. He has been with us for a relatively short period of time, and all the alleged activities occurred before he joined the firm. We are conducting our own internal investigation, and based on our findings we will take appropriate action.”

Jacquelyn L. Heard, a spokeswoman for Katten Muchin Rosenman, said, “It would be inappropriate for us to comment on an investigation into a former colleague.”

In a statement, a spokesman for Mr. Shkreli said, “It is no coincidence that these charges, the result of investigations which have been languishing for considerable time, have been filed at the same time of Shkreli’s high-profile, controversial and yet unrelated activities.”

Both Mr. Shkreli and Mr. Greebel entered not guilty pleas at their arraignment in the Federal District Court in Brooklyn on Thursday afternoon. The case is being prosecuted by assistant the United States attorneys Winston Paes and Alixandra Smith.

Mr. Shkreli, dressed in a short-sleeve, black T-shirt and dark jeans, was released on $5 million in bail, secured by a bank account and guaranteed by his father and his brother.

Mr. Greebel was released on $1 million in bail, secured by his house, and guaranteed by his wife and his mother.

Mr. Shkreli, who had shown a great deal of self-confidence in recent television appearances before his arrest, looked a little shaken during the arraignment, occasionally twisting his head to look at the packed courtroom.

At one point, he questioned Magistrate Judge Robert M. Levy after the judge mentioned a date, asking, “Did you say 2016, your honor?”

He wore sunglasses as he exited the court in the pouring evening rain, declining to speak to journalists.