The Securities and Exchange Commission Thursday charged Turing Pharmaceuticals CEO Martin Shkreli — the former CEO of pharmaceutical company Retrophin — with committing fraud during a five-year period when he also was working as a hedge fund manager for MSMB Capital Management LP and MSMB Healthcare LP.
In its 22-page complaint, the SEC alleges that Shkreli misappropriated money from the 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.
The U.S. Attorney’s Office for the Eastern District of New York also announced criminal charges against Shkreli and Greebel. Shkreli was arrested at his Manhattan apartment.
The 32-year-old Shkreli — who made headlines when he jacked up the price of the toxoplasmosis drug Daraprim from $13.50 to $750 — 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, MSMB Healthcare LP.
“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 Ceresney, director of the SEC’s Division of Enforcement.
“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,” added Andrew Calamari, director of the SEC’s New York Regional Office.
According to the SEC’s complaint filed in federal district court in Brooklyn, Shkreli misappropriated about $120,000 from MSMB Capital Management from October 2009 to July 2011 to unlawfully pay for food, clothing, medical expenses, office rent and cash withdrawals.
He also 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,” the SEC states. In fact, the fund lost about 18%.
In December 2010, the SEC says, Shkreli falsely stated that the fund had $35 million in assets under management when the fund had less than $1,000 in assets in its bank and brokerage accounts.
He also lied to one of MSMB Capital Management’s executing brokers in February 2011 about the fund’s ability to settle a sizable short sale in a pharmaceutical stock in MSMB Capital Management’s account, according to the regulator. “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,” the SEC said.
The complaint states that 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,” the complaint adds.
Shkreli and Greebel also 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.”
— Check out SEC Allows Third Avenue to Temporarily Halt Redemptions on ThinkAdvisor.