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From Securities Regulation Daily, December 17, 2015

Shkreli indicted for fraud, SEC tees up civil case

By Mark S. Nelson, J.D.

The Department of Justice and the SEC have charged Martin Shkreli and lawyer Evan Greebel with breaking federal criminal and civil securities and wire fraud laws for their roles in three linked investment schemes. SEC enforcement officials said the agency’s civil case grew out of frauds related to Shkreli’s “poor trading decisions” and Greebel’s ethical lapses. Shkreli is currently the CEO of Turing Pharmaceuticals, where his biography touts his prior hedge fund activities, which are the focus of the DOJ’s and SEC’s charges (U.S. v. Shkreli, December 14, 2015; SEC v. Shkreli, December 17, 2015).

Trio of schemes. Shkreli is accused of orchestrating a cascade of misrepresentations and omissions that inaccurately portrayed to investors the performance of several hedge funds at which he was a managing member and portfolio manager during a span of about six years. Shkreli also was the founder and CEO of the publicly-traded biopharmaceutical firm Retrophin, Inc.

In one alleged scheme, Shkreli convinced four investors to contribute $700,000 on promises that the fund was transparent, offered monthly liquidity, and had an independent auditor. The government alleged these statements were false and that Shkreli instead misappropriated funds and did not tell investors that his prior hedge fund trades performed poorly resulting in a $2.3 million default judgment against him.

A second alleged scheme followed a similar pattern, including the concealment of a botched short sale made at the prior hedge fund that resulted in Shkreli owing a brokerage firm $7 million. Shkreli and an unnamed co-conspirator admitted that the prior hedge fund had no assets as part of a settled FINRA arbitration proceeding focused on the failure to deliver a security as part of the short sale. As for the hedge fund Shkreli was then operating, he told an unnamed “Corrupt Employee” to tell an inquiring potential investor that the fund had $55 million in assets under management when it never had more than $6 million during its lifetime.

Yet another alleged scheme involved Shkreli’s and Greebel’s efforts to use Retrophin shares to mollify investors in one of Shkreli’s hedge funds. That meant giving Retrophin a $20 million valuation, despite the firm’s lack of products or assets, and the backdating of documents to show an investment in Retrophin by the hedge fund, even though the hedge fund had never made the investment. The backdating occurred at a time when the SEC was investigating Shkreli’s hedge funds. Shkreli also tried to settle various liabilities owed to hedge fund investors directly and indirectly via alternative consulting deals.

Many criminal and civil counts. A federal grand jury indicted Shkreli on multiple counts of conspiracy to commit securities fraud, securities fraud, and conspiracy to commit wire fraud, including one wire fraud conspiracy count against both Shkreli and Greebel. The government also seeks the forfeiture of any assets traceable to these counts.

The SEC’s complaint alleges that Shkreli violated Securities Act Section 17, Investment Advisers Act Section 206, and Exchange Act Rule 10b-5. Greebel allegedly aided and abetted the Rule 10b-5 violations. The agency further alleged that Shkreli violated Exchange Act Rule 10b-21, which treats the deception of a broker-dealer about one’s intention or ability to deliver an equity security as a manipulative or deceptive device or contrivance. But a preliminary note to the provision clarifies that Rule 10b-21 does not limit the SEC’s general antifraud authorities under Rule 10b-5.

According to the SEC, Shkreli should be permanently stopped from committing securities law violations and pay disgorgement and civil monetary penalties. The agency also seeks officer and director bars against Shkreli and Greebel.

The criminal case is No. 15-cr-637.

Attorneys: Robert Capers for the U.S. Sanjay Wadhwa for the SEC.

Companies: Elea Capital Management; MSMB Capital Management LP; MSMB Healthcare LP; Retrophin, Inc.; MSMB Investors LLC; MSMB Capital Management LLC; MSMB Healthcare Investors LLC; MSMB Healthcare Management LLC

MainStory: TopStory AlternativeInvestmentFunds BrokerDealers DirectorsOfficers Enforcement FraudManipulation HedgeFundsNews InvestmentAdvisers NewYorkNews

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