In December 2010, Martin Shkreli was working to convince potential investors to give money to MSMB Capital, a hedge fund he founded in his twenties that focused on the health care industry.
Shkreli was allegedly courting a particular investor for months and was close to reeling him in. The investor emailed Shkreli to ask about the fund’s assets. According to an indictment unsealed in Brooklyn federal court on Thursday, Shkreli assured the investor that MSMB Capital had $35 million in assets.
A few days later, the investor, apparently satisfied with the answer, sent $1 million by wire transfer to MSMB Capital’s brokerage account. A month later, the same investor sent an additional $250,000.
Prosecutors, though, said Shkreli’s assurance was nothing more than deception. MSMB Capital’s bank and brokerage accounts at the time actually contained about $700.
In the five years that passed since his exchange with that investor, Shkreli — raised in Brooklyn’s blue-collar Sheepshead Bay to Albanian and Croatian parents who were janitors — became known as the “bad boy” of pharmaceuticals for defiantly raising the price of life-saving drug Daraprim from $13.50 to $750. He defended the increase as “a good business decision.”
He took extreme pressure for the decision — including from presidential candidates Hillary Clinton, Bernie Sanders, and Donald Trump, who called Shkreli a “spoiled brat.” He later said he would keep the $750 price tag but would offer volume discounts.
Then, earlier this month, Shkreli — who was also known for broadcasting hours-long streams of himself sleeping, playing chess, and chatting with people — said he paid about $2 million for the only known copy of the Wu-Tang Clan’s new album, Once Upon a Time in Shaolin. When the group distanced itself from him, Shkreli tweeted, “If I hand you $2 million … show me some respect. At least have the decency to say nothing or ‘no comment.’”
Shkreli also seemingly discussed his business on social media — which also drew backlash from people. Here's one recent example:
@MartinShkreli cc @SEC_Enforcement this is fucking illegal - arrest him
Federal agents on Thursday arrested Shkreli in his Manhattan apartment. He was hauled, disheveled and wearing a hoodie, into a courthouse, and was later released on $5 million bail. People reveled in the images on social media. The charges against him weren’t for any of his recent antics — prosecutors charged him with securities fraud for essentially running a Ponzi scheme on investors.
(All statements in this article about Shkreli and attorney Evan Greebel, who was also charged Thursday, are from the criminal indictment unsealed Thursday in U.S. District Court for the Eastern District of New York. A spokesperson at Turing Pharmaceuticals, which Shkreli founded, declined to comment. Both men pleaded not guilty, and Shkreli’s lawyer declined to comment to CNBC. As for the Wu-Tang Clan album, the FBI said they didn’t seize it.)
For years, Shkreli allegedly used assets of new companies to pay off debts from bad trades made while he ran MSMB Capital. Prosecutors claim that with regulators and auditors breathing down their necks, Shkreli and Greebel used cash and stock from Retrophin — a publicly traded pharmaceutical company he founded in 2011 — to settle debts of his failed hedge fund. Throughout it all, Shkreli is accused of doctoring false financial reports to dupe investors and officials.
Shkreli, U.S. Attorney Robert Capers said on Thursday, “engaged in multiple schemes to ensnare investors through a web of lies and deceit.”
Shkreli allegedly started mishandling funds as early as 2006, when he was a managing member and portfolio manager of Elea Capital Management, a hedge fund. He allegedly lost all the money he managed at Elea — and Lehman Brothers won a $2.3 million default judgment against him for his trading activity.
Shkreli started MSMB Capital in September 2009. In a little more than a year, the fund raised $700,000 from four investors. He promised his investors transparency, saying that an independent auditor would review the hedge fund — though prosecutors said no such auditor existed.
But Shkreli allegedly poorly invested the funds and made bad trades — and by the end of November 2010, the $700,000 had been whittled down to about $700.
In the following months, Shkreli allegedly secured $3 million from eight investors, including the one who believed he had $35 million in assets. But MSMB Capital ended January 2011 with $1.12 million in its bank and brokerage accounts — and by the end of February had lost almost all of that money, too.
In February 2011, MSMB Capital was effectively bankrupted when Shkreli allegedly made a costly trade with Merrill Lynch that went south. That mistake — which involved a losing bet on the price of shares of Orexigen Therapeutics — put him $7 million in the hole to Merrill Lynch. With less than $60,000 in its accounts, it was money that the fund didn’t have to lose.
Even though Shkreli ceased trading after the Merrill Lynch incident, he allegedly continued to send his investors fabricated performance updates, boasting of profits as high as 40%.
He settled with Merrill Lynch in September 2012, agreeing to pay $1,350,000 by mid-December 2012 — even though MSMB Capital had $0 in assets at that point.
Also in September 2012, Shkreli allegedly sent an email to investors saying that he was winding down the fund and that “original MSMB investors have just about doubled their money net of fees.” He allegedly offered the investors the chance to cash out, to invest in Retrophin, or to take a combination of cash and shares.
While MSMB Capital was functioning, Shkreli is accused of withdrawing approximately $200,000 – a figure that exceeded the 1% management fee and the 20% net profit incentive provided in his partnership agreement.
According to federal officials with the Securities and Exchange Commission, those funds were used for personal effects like food, clothing, and medical expenses.
After the disastrous Merrill Lynch trade, Shkreli stopped trading under MSMB Capital and began searching for investments for a new fund, MSMB Healthcare. He allegedly didn’t tell his new investors about the money he owed to Merrill Lynch.
From February 2011 to November 2012, he got 13 people to invest roughly $5 million in his new venture.
Shkreli allegedly deceived potential investors about MSMB Healthcare’s balance. Even though prosecutors said it never exceeded $6 million in investments, in April 2012 he had one of his employees tell an investor that the fund had $55 million in assets.
Additionally, Shkreli used MSMB Healthcare assets for payments that were not the company’s responsibility — including $900,000 to settle claims brought by Merrill Lynch related to the failed trades.
Then, in November 2012, with personal and professional debts hanging over him, the U.S. Securities and Exchange Commission contacted Shkreli regarding his management of both MSMB funds.
Shkreli told the SEC that MSMB Capital was still active — with $2.6 million in assets — but was in the process of being liquidated. That’s when Shkreli and Greebel allegedly turned to Retrophin to bail them out of the MSMB Capital debts.
He informed the SEC that Retrophin was the “most successful and largest effort” of the MSMB funds — even though prosecutors said MSMB Capital had never invested in the biopharmaceutical company.
Federal prosecutors claim that in December 2012 — more than a year after MSMB Capital stopped trading — Shkreli and Greebel created phony backdated transactions in Retrophin’s records to make it look as if MSMB Capital had money to invest in it prior to the SEC’s inquiries.
And to settle debts with defrauded investors from his hedge funds, Shkreli allegedly entered into sham consulting agreements with them.
Between September 2013 and March 2014, Retrophin did not receive any legitimate consulting services, but paid more than $7.6 million in cash and stock to Shkreli’s hedge funds. More than $3.4 million in cash and stock went to settle claims with seven investors from his previous two hedge funds.
Shkreli was ousted from Retrophin by its board of directors in 2014. He was later sued for $65 million by the board for misuse of company funds. He has denied the allegations made against him.
The night before Shkreli was arrested, he posted a live stream of himself clicking around dating sites and playing chess online. Live-streaming his mundane activities and taking questions from social media followers appears to be one of his hobbies.
He gets a call from someone at about 1:22 in one video he posted that night.
“Hello?” he says. “Hello?”
“Yes, hello, this is Special Agent W…” the caller says before Shkreli hangs up.
The FBI’s New York office told BuzzFeed News it does not have any information on whether the call was an agent.
Shkreli continued singing to himself and blowing into a water bottle, seemingly unperturbed.
Additional reporting by Leticia Miranda.