Martin Shkreli's arrest on Thursday was unlikely a surprise to anyone. This is not to say that everyone predicted the exact charges brought against him, but the meteoric rise of the young, brazen, entrepreneur seemed like something that could inevitably end in handcuffs.
Shkreli was arrested in his home early on Thursday morning and indicted on two charges of securities fraud, two charges of conspiracy to commit securities fraud, and three charges of conspiracy to commit wire fraud later that same day. Shkreli pleaded not guilty. The investigation into Shkreli's activities is ongoing and more charges could be brought against him, the FBI said in a press conference on Thursday.
Shkreli gained media attention and public scorn earlier this year after his company, Turing Pharmaceuticals, purchased the rights to Daraprim, a drug used to prevent malaria and treat toxoplasmosis. Overnight the price of the drug soared to $750 from $13.50. The move made Shkreli "the most hated man in America," according to some reports and the embodiment of greed in the pharmaceutical industry and Wall Street.
However, Thursday's charges pre-date his involvement with Daraprim. Instead, the charges focus on his activities between 2009 and 2014, during which time he founded two hedge funds, MSMB Capital Management and MSMB Healthcare, as well as Retrophin (RTRX), a publicly traded pharmaceutical company.
U.S. Attorney Robert Capers said in Thursday's press conference that Shkreli used Retrophin as a "personal piggy bank" to cover losses in his hedge funds and that the transactions Shkreli initiated had "Ponzi scheme similarities." If convicted, Shkreli could face up to 20 years in prison.
News of Shkreli's arrest was met with joy on several social media outlets and blogs. Shkreli himself is a very active social media user and tweeted from his verified account on Thursday night: "Glad to be home. Thanks for the support."
Many sources have said that it was not surprising that Shkreli was arrested. His rise to prominence, confirmed by his appearance in a Forbes "30 Under 30" profile in 2012, coupled with his brash behavior seemed to be building up for some sort of fall. In an eerily prophetic Twitter exchange the night before his arrest, he was warned to stay humble by Tren Griffin, an executive with Microsoft.
Indeed, Shkreli's origins appear humble. He grew up in the Sheepshead Bay section of Brooklyn. His parents were Albanian immigrants who worked janitorial jobs, according to a report from The New York Times. He was a bright child who attended Hunter College High School, an academically competitive public high school located on New York City's Upper East Side.
Through his involvement at the high school and a broader internship program for New York City students, Shkreli was placed into an internship at Cramer Berkowitz, a hedge fund, when he was 17 years old. Shkreli's placement at Cramer Berkowitz, as well as statements Shkreli has made, have led some media outlets to report that Shkreli was a protégé of Jim Cramer, the founder of TheStreet and a principal contributor to Real Money.
"The insistency of the "protégé" name is like saying I worked for the Phillies when I was a vendor selling ice cream at Veterans Stadium when I was a junior in high school," Cramer told Real Money. Also, the timing of Shkreli's internship is around when Cramer left the firm in 2000.
The details of Shkreli's academic and professional career become a little murky after that. He has said that he was asked to leave Hunter College High School due to performance. Even so, Shkreli made a $1 million gift to the high school earlier this year, which was one of the biggest individual gifts ever made to a New York City public school. Shkreli also says that he took classes at Baruch College while also working in the financial services industry. It is not clear if he graduated.
Shkreli started his first hedge fund, Elea Capital Management, in 2006. By his own admission, the fund wasn't a success. Shkreli and Elea were sued by Lehman Brothers in 2007 for failing to cover a put option. Lehman won the case and Shkreli was ordered to pay $2.3 million. In an interview with Bloomberg, Shkreli said that following Lehman's collapse, no one asked him for the funds but he "would make them whole now if they wanted."
Thursday's indictment states that when starting his next hedge fund, MSMB Capital, in 2009, Shkreli failed to disclose the failure of Elea and the $2.3 million default judgement against him when courting investors. Similarly, he made representations that the new firm had monthly liquidity and an independent auditor, neither of which was true. The omissions and misrepresentations "induced investments of approximately $700,000" from four investors, according to the indictment.
Similar behavior of making material misrepresentations and omissions about the performance and financial standing of his companies follows in the indictment. Between December 2010 and January 2011, Shkreli told an investor that the fund had $35 million in assets under management when the total in the firm's bank and brokerage accounts was only $700. The indictment alleges that the investor was induced by that assertion to wire $1 million to MSMB Capital's brokerage account.
Shkreli followed up by taking a large short position in Orexigen Therapeutics (OREX) in February 2011 and told his broker at Merrill Lynch that he had sufficient assets to cover the position. Merrill Lynch had to close the position and faced a loss of $7 million, according to the indictment. In September 2012, Shkreli and MSMB Capital entered into a settlement agreement with Merrill Lynch over the trading losses. Shkreli admitted in the settlement that MSMB had $0 in assets and agreed to pay Merrill Lynch $1.35 million by the end of 2012.
Days after reaching settlement with Merrill Lynch and admitting that the fund had no assets, Shkreli announced that he planned to close down the fund and liquidate its assets. According to the indictment, he made the following statements to the fund's investors:
"I have decided to wind down our hedge fund partnerships with a goal of completing the liquidation of the funds by November or December 1, 2012 ... Original MSMB investors (2009) have just about doubled their money net of fees ... investors will have their limited partnership interests redeemed by the fund for cash. Alternatively, investors may ask for a redemption of Retrophin shares, or a combination of Retrophin shares and cash."
At the time of that statement, shares of Retrophin were not publicly traded. Shares were available on over-the-counter markets in December 2012 and were traded on Nasdaq in January 2014.
Shkreli engaged in similar misrepresentations at his hedge fund MSMB Healthcare, which he ran concurrently with MSMB Capital, where he told a potential investor in April 2012 that the fund had $55 million in assets under management; however, at no time did the total investments in MSMB Healthcare exceed $6 million, the indictment states.
Furthermore, the indictment accuses Shkreli of misappropriating $900,000 in assets from MSMB Healthcare by reclassifying an equity investment in Retrophin to help settle MSMB Capital's settlement agreement with Merrill Lynch. Shkreli continued to use shares of Retrophin -- and made material and misrepresentations and omissions -- to satisfy "personal and unrelated professional debts and obligations."
In November 2012 Shkreli announced that he was closing his hedge funds but he continued as CEO of Retrophin.
The indictment states that Shkreli and co-conspirators induced Retrophin to pay more than $3.4 million in cash and stock to settle claims with seven investors in the hedge funds. When those transactions were questioned by external auditors, Shkreli and co-conspirators, devised "four sham consulting agreements" to "resolve claims and threats of claims" by investors in the defunct hedge funds.
Shkreli remained CEO of Retrophin until he was ousted in September 2014. The company's SEC filings soon after Shkreli was ousted just discuss the changes to management. However Bloomberg reported that Shkreli's "erratic conduct" and "stock-trading irregularities" contributed to his ouster.
In November 2014, The Street's Adam Feuerstein detailed a series of trades Shkreli made in Retrophin stock in the lead up to him leaving the company. During that time, Shkreli frequently tweeted that he was buying shares of Retrophin while not publicly disclosing that he was simultaneously selling the stock in prepaid forward contracts. He is said to have received $3 million from the transactions.
As the investigation into Shkreli's activities is ongoing, it is possible the more allegations of securities fraud and other misconduct may come to light. Even so, the rap sheet so far is quite large for the 32-year old entrepreneur.