Martin Shkreli was arraigned on charges of securities fraud in federal court in Brooklyn on Thursday. He was released on a $5 million bond.
The bad boy of the pharmaceutical industry was arrested Thursday morning. This came in the wake of an investigation into his previous former hedge fund and drug company. The allegations brought against him include using stock from Retrophin Inc., the biotechnology firm, to settle his debts related to his hedge fund and with investors.
Charged with seven counts of fraud, United States Attorney Robert L. Capers of the Eastern District of New York said Shkreli – who was highly criticized for escalating the price of the drug used to treat AIDS from $13.50 to $750 – was running a Ponzi scheme. “As alleged in the indictment, Shkreli essentially ran his companies like a Ponzi scheme, where he used each subsequent company to pay off the defrauded investors in the prior company,” Capers said, as reported by CNBC News.
Shkreli pleaded not guilty to the charges brought against him. If convicted, he could face a maximum of 20 years of jail time. His next appearance in court is scheduled for January 20.
Evan Greebel, Shkreli’s lawyer according to SEC, has also been charged with a count of wire fraud conspiracy. Arrested on Thursday, he was released on a $1 million bail.
The SEC alleged in a complaint that Shkreli committed “widespread fraudulent conduct” from October 2009 to March 2014. He made “made material misrepresentations and omissions to investors and prospective investors” during this time, the complaint said.
The allegations against Shkreli said that he was at least 26 years old – he is currently 32 – when he engaged in financial fraud. In 2009, he set up hedge fund MSMB Capital but did not tell his investors that he had lost all the money from his previous hedge fund, Elea Capital, as reported by Daily Mail. He also failed to mention to his investors that Lehman Brothers had a $2.3 million default judgement against Elea.
Once MSMB Capital started functioning, Shkreli allegedly lost $700,000 of his investors’ money. He also owed Merill Lynch $7 million following an unfortunate trade. By December of the following year, while he had only $700 in the fund he told prospective investors that he had $35 million in assets, promising them – as Capers described – “handsome returns.”
Shkreli used $5 million given by 13 investors to set up MSMB Healthcare, another hedge fund. He allegedly used this money to settle his debts from MSMB Capital and paid high management fees to himself. While he had bought Retrophin in 2012, his investors by this time wanted their money back. He is alleged to have made secret payoffs from Retrophin to settle his debts. Capers said that Shkreli used the company as his “personal piggy bank,” ignoring warnings from internal auditors.