Analyzing the Indictment of Martin Shkreli

You might think if your nickname already was “the most hated man in America,” things couldn’t get a whole lot worse for you. The Martin Shkreli criminal demonstrates you’d be wrong.

The Martin Shkreli criminal case charges him with fraud

Martin Shkreli, a/k/a the “Pharma Bro”

Pharmaceutical executive and former hedge fund manager Martin Shkreli recently earned the “most hated” moniker when his company, Turing Pharmaceuticals, bought the rights to a drug called Daraprim and promptly raised the price of a single tablet by more than 5,000%, from about $13.50 to $750. Daraprim is primarily used to treat or prevent toxoplasmosis, a serious parasitic infection often suffered by HIV and cancer patients and others with compromised immune systems.

The public and political outcry over the dramatic price hike threatened to break the Internet. Shkreli was defiant and unrepentant, saying his job was to make money for his shareholders. He remarked at one point that his only regret was he didn’t raise the price even higher. But although the incident may have qualified him for a starring role in American Greed, it didn’t appear to be illegal.

Then yesterday, in an unrelated case, the 32-year-old man who social media loves to hate was arrested.  Shkreli stands charged with securities fraud and conspiracy in a seven count federal indictment in Brooklyn. A lawyer who worked as his outside counsel, Evan Greebel, is charged as a co-defendant in one of the conspiracy counts.

The charges against Shkreli have nothing to do with Daraprim or jacking up drug prices; they are based on his earlier activities as a hedge fund manager and CEO of a different company. But the near-universal reaction to his arrest seems to be, “Couldn’t happen to a nicer guy.” A new hashtag quickly popped up on Twitter to describe the satisfaction that people felt upon seeing Shkreli being “perp walked” in handcuffs: #Shkrelifreude.

Ponzi

Charles Ponzi: The Classics Never Get Old

Unpacking the Martin Shkreli Criminal Case

The indictment lays out three different fraudulent schemes allegedly carried out by Shkreli. As U.S. Attorney Robert Capers noted during the press conference announcing the indictment, the frauds were basically a Ponzi scheme, but with a twist. (You can find the press release and a link to the indictment here.)

In a typical investment Ponzi scheme (a la Bernie Madoff), the defendant lies to investors about the spectacular returns they are allegedly earning, when in fact the defendant is simply stealing their money. As word of the supposedly stellar results spreads, more money and investors pour in. If anyone wants to take their money out, the defendant uses money from new investors to pay for the withdrawal, further adding to the illusion that the supposed returns are real. Typically the scheme collapses at some point when the defendant is no longer able to meet the demands of investors who are seeking to cash out.

In classic Ponzi fashion, Shkreli allegedly lied to his hedge fund investors about the money he was earning for them and other issues related to their investment. The twist is that Shkreli created kind of a Ponzi stepladder; he had a series of hedge funds and companies, and when one went belly up he fraudulently used money from the subsequent ones to pay off his earlier obligations. And although he was allegedly misappropriating some of the money, he was actually making investments as well — albeit spectacularly bad ones. The picture that emerges is of someone who was very good at fraud but really, really bad at investing.

MSMB Capital Management Scheme – the first alleged scheme involved MSMB Capital Management, a hedge fund focused on health care companies that Shkreli created and ran from September 2009 to December 2012. Shkreli allegedly lied to investors and potential investors about the returns he was earning, whether the fund had an independent auditor, and how much money the fund was managing. For example, the indictment alleges he told one potential investor MSMB Capital had $35 million under management; in fact, at that point investors had given him only $700,000, and he had already lost it all in a series of disastrous trades.

Shkreli allegedly received a total of about $3 million from eight different investors in MSMB Capital and lost it all – all the while telling those investors they were earning returns of up to 40%. When he ultimately sent an e-mail to the investors telling them he was going to wind down the fund, Shkreli told them he had “just about doubled their money net of fees,” when in truth all the money had been lost.

The indictment also alleges that Shkreli and the co-founder of the fund, identified only as “Co-Conspirator 1,” misappropriated funds from MSMB Capital by taking out money well in excess of the fees to which the fund managers were entitled.

MSMB Healthcare Scheme – MSMB Healthcare LP was another hedge fund created by Shkreli after MSMB Capital. Once again, he allegedly solicited funds from investors by lying to them about things such as his past performance as a portfolio manager, the returns he was earning, and the amount of money he had under management. The indictment alleges that thirteen investors ultimately invested a total of about $5 million in MSMB Healthcare.

Shkreli allegedly misappropriated funds from MSMB Healthcare by taking out money for personal use well in excess of the disclosed fees. In addition, in the first rung of the Ponzi ladder, Shkreli allegedly defrauded his investors by using funds from MSMB Healthcare to pay off some of the debts he had incurred through bad trades and fraud at MSMB Capital, even though MSMB Healthcare was not responsible for those debts.

Retrophin Misappropriation Scheme – Retrophin Inc. is a publicly-traded pharmaceutical company where Shkreli served as CEO from February 2012 to September 2014. In the next rung of the Ponzi ladder, the indictment alleges that Shkreli and his co-defendant, Retrophin’s outside counsel Evan Greebel, defrauded Retrophin by using millions in company assets to pay off Shkreili’s debts and obligations related to MSMB Capital and MSMB Healthcare.

The indictment charges that Shkreli, with Greebel’s help, fraudulently transferred Retrophin shares to MSMB Capital, fraudulently used Retrophin shares to settle liabilities owed to investors in MSMB Capital and MSMB Healthcare, and entered into sham “consulting agreements” between Retrophin and defrauded MSMB Capital and MSMB Healthcare investors as a way to pay off the debts owed to those investors.

The Structure of the Indictment

The indictment contains seven counts; Shkreli is charged in all seven, while Greebel is charged only in the seventh and final count.

Counts One, Two, and Three are based on the MSMB Capital scheme, and charge Shkreli with conspiracy to commit securities fraud, conspiracy to commit wire fraud, and securities fraud. These are just different legal theories for charging essentially the same acts: the alleged defrauding of the MSMB Capital investors, as described above.

Counts Four, Five, and Six are based on the MSMB Healthcare scheme, and again charge Shkreli with conspiracy to commit securities fraud, conspiracy to commit wire fraud, and securities fraud, based on his alleged defrauding of the investors in that fund.

Count Seven charges both Shkreli and Greebel with conspiracy to commit wire fraud, based on their alleged actions that defrauded Retrophin by using its assets to help Shkreli pay off his investors and try to resolve his other legal and financial problems related to his hedge funds.

Conspiracy to commit securities fraud has a maximum penalty of five years in prison; all the other charges carry a maximum penalty of twenty years each. Shkreli also faces millions of dollars in potential criminal fines and asset forfeiture.

What to Watch Going Forward

The indictment looks pretty grim for Shkreli; there certainly is nothing that leaps out in terms of potential defenses. They are only allegations, of course, but if true they paint a devastating picture.

There are likely additional revelations to come concerning others involved in the misconduct. Most of the charges are conspiracy, and a conspiracy requires the criminal participation of two or more people. For example, in connection with the MSMB Capital scheme, the indictment alleges that the co-founder of MSMB Capital, identified only as “Co-Conspirator 1, a individual whose identity is known to the Grand Jury,” conspired with Shkreli and engaged in some of the same criminal conduct.

MSMB Capital’s co-founder was reportedly another New York hedge fund manager name Marek Biestek (“MSMB” comes from the initials of the two men). That suggests Biestek may be Co-Conspirator 1. But whoever he is, Co-Conspirator 1 would seem to be facing criminal problems of his own. The fact that Co-Conspirator 1 wasn’t charged suggests he may be cooperating and may have already pleaded guilty under seal, or he may have been granted immunity. It’s also possible that charges against him are still to come.

The indictment also refers to additional individuals involved in the schemes, using pseudonyms such as “Corrupt Employee 1” and “Corrupt Employee 2,” as well as unidentified “others” involved in the various conspiracies. Again, look for their identities to be revealed as the case progresses; some may already be cooperating in the investigation.

The sham consulting agreements with Retrophin also raise some interesting questions. The indictment alleges the defendants used these agreements as a way to pay off defrauded investors in MSMB Capital and MSMB Healthcare. The phony agreements said those investors would provide consulting services to Retrophin, which allowed the defendants to use Retrophin funds to pay off the defrauded investors. In short, these were really settlement agreements for Shkreli’s personal obligations, disguised as consulting agreements in order to make it possible to have Retrophin foot the bill.

It will be interesting to see what additional information comes out about these sham consulting agreements and the investors involved. For example: if the agreements were signed by the defrauded investors who were being paid off, presumably they knew they were not in fact providing consulting services to Retrophin. If they knowingly executed the sham agreements, aren’t they also implicated in the fraud against the company?

Shkreli’s legal woes are not limited to the criminal case (although of course that’s the only proceeding that can land him in jail). The SEC also filed civil securities charges against him, and Retrophin is suing him for civil fraud. He was released on $5 million bail and ordered not to leave New York.

And in response to his plight, a leading joke on social media is the suggestion that Shkreli’s lawyers should increase their fees by 5,000%.   Shkrelifreude, indeed.

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DOJ Doubles Down on the FIFA Indictment

This past May the U.S. Department of Justice stunned the international sports world by unveiling a 161 page, 47 count federal indictment charging widespread corruption within the Federation Internationale de Football Association (FIFA), the global soccer organization. Last week, DOJ made it clear that the May indictment was merely the tip of the FIFA corruption iceberg.

The original indictment charged fourteen defendants: nine current and former FIFA officials, four sports marketing executives, and one intermediary. (I wrote about that indictment in a post you can find here.) Now a superseding indictment, unsealed last week, has added sixteen additional FIFA defendants and has nearly doubled the number of charges: the new indictment runs 236 pages and contains 92 felony counts. (The DOJ press release and a link to the superseding indictment can be found here.)

A superseding indictment, as the name implies, replaces the original indictment in a case that is already pending. It generally means the grand jury has continued to investigate and has voted to add additional charges, additional defendants, or — as in this case — both.

The fundamental nature of the case remains the same: senior FIFA officials and officials within FIFA’s constituent organizations are alleged to have accepted more than $200 million in bribes and kickbacks in exchange for being influenced in awarding lucrative sports marketing contracts, rigging FIFA elections, agreeing to participate in certain competitions, and awarding the right to host soccer’s premier event, the World Cup.

When the superseding indictment was unsealed, DOJ also announced that eight additional defendants have pleaded guilty since the first indictment, bringing the total number of known guilty pleas to fourteen. Three of the eight – Jeffrey Webb, a former senior FIFA official; Alejandro Burzaco, former manager of an Argentinian sports marketing company; and José Marguilies, who acted as an intermediary for bribe payments – were among the fourteen defendants charged in the original indictment. Due to their pleas, they are not charged in the superseding indictment. The remaining five new guilty pleas came from FIFA officials and sports executives who waived indictment and pleaded guilty under seal.

The sixteen new defendants thus join the eleven remaining original defendants in the superseding indictment. Although the basic nature of the allegations is unchanged, the superseding indictment against the (now) twenty-seven defendants dramatically expands the universe of charges, including not only charges against the new defendants but also additional charges against the original defendants.

The FIFA superseding indictment greatly expands the conspiracy case

The Structure of the FIFA Superseding Indictment

Despite its length, the superseding indictment, like the original, consists almost entirely of three types of charges:

  • The Racketeer Influenced and Corrupt Organizations Act (RICO)
  • Money laundering and money laundering conspiracy
  • Wire fraud and wire fraud conspiracy

A massive RICO conspiracy lasting for more than twenty years continues to be the heart of the indictment. RICO is the statutory glue that allows the many different corruption schemes and far-flung defendants to be joined together in a single prosecution.

RICO requires that the defendants conducted of the affairs of an “enterprise” through a pattern of racketeering activity. As in the original indictment, the government charges that FIFA, its six continental confederate organizations, and other soccer organizations and sports marketing companies together constitute a single RICO enterprise, bound together by the common purpose and goal of promoting soccer worldwide. Because FIFA soccer organizations are present in more than 200 countries and territories around the world, this RICO enterprise is undoubtedly one of the most sweeping ever charged.

The alleged enterprise includes all six of FIFA’s continental confederate organizations, including those governing soccer in Asia, Africa and Europe. Almost all of the alleged corruption, however, relates to officials and events in only two of those organizations: CONCACAF, the confederation covering North and Central America and the Caribbean; and CONMEBOL, the confederation covering South America. (The United States Soccer Federation is a member of CONCACAF.)

To establish the required “pattern of racketeering activity,” the indictment alleges a series of different corruption schemes involving various soccer tournaments, different sports marketing and media agreements, and events such as the selection of the host city for the World Cup. The original indictment charged twelve such schemes. The superseding indictment has expanded one of those schemes and added three new ones, for a total of fifteen.

The individual criminal schemes are charged using two principal statutes: wire fraud and money laundering. The essence of each scheme is a series of bribes and/or kickbacks involving FIFA officials or officials from FIFA member organizations, along with financial transactions designed to facilitate or disguise the payments. Most of the alleged bribes were paid by individuals (a number of whom have been indicted or have pleaded guilty) seeking lucrative contracts for soccer media and marketing rights or to have certain countries participate in tournaments they were promoting.

To charge bribery and kickbacks the indictment uses honest services wire fraud, charging that various officials violated the duty of honest services they owed to FIFA and its member organizations. (For a more detailed analysis of the use of honest services fraud to charge bribery, see my posts here and here.)

The money laundering charges stem from financial transactions, many of them international wire transfers, used to facilitate the bribe payments and/or to conceal those payments. The defendants are accused of using various intermediaries, secret bank accounts, shell companies, and other methods to disguise the nature, source and ownership of the funds involved in various bribery transactions. They are also charged with transmitting funds across the U.S. border in order to promote their criminal activity, a form of international money laundering.

Following the overarching RICO conspiracy charge that encompasses all defendants, the great bulk of the indictment consists of a series of wire fraud and money laundering charges related to each of the fifteen different schemes in turn. Each of these schemes involves a different set of corruption allegations and a different combination of defendants. There are also a handful of additional charges, including tax fraud and obstruction of justice, that apply to only a couple of the defendants.

soccer balls

What’s New in the Superseding Indictment

The most significant change in the superseding indictment is, of course, the addition of the sixteen new defendants. All of the new defendants are current or former FIFA or FIFA-affiliated officials, seven from CONCACAF and nine from CONMEBOL.

The superseding indictment answers a lot of questions that were raised by the original charges in May. That first indictment included many allegations that described the criminal acts of anonymous individuals identified only by number, as in “co-conspirator #1” and “co-conspirator #2.” The superseding indictment includes many of those same allegations, but with formerly anonymous co-conspirators now identified as among the new defendants. As a result, a fuller picture of many of the corruption allegations has started to emerge.

The other significant change is the addition of three entirely new corruption schemes and the expansion of a fourth. One new scheme, titled “CONMEBOL Copa Libertadores Scheme #2,” charges a number of CONMEBOL officials with accepting millions of dollars in bribes over more than a decade in connection with selling the broadcast rights to a popular South American soccer tournament. A second, titled the “UNCAF Region Friendlies Scheme,” alleges that FIFA officials in El Salvador, Guatemala, Costa Rica and elsewhere accepted bribes in exchange for agreeing to participate in various “friendlies” soccer matches organized by private promoters. (UNCAF is a regional federation within CONCACAF that includes the soccer organizations of countries in Central America.)

The third new scheme, the “CONCACAF Media and Marketing Rights Scheme,” charges that several CONCACAF officials accepted hundreds of thousands of dollars in bribes in connection with an unsuccessful attempt to influence the sale of the media marketing rights to CONCACAF tournaments. It also alleges that various conspirators — including current FIFA vice president and CONCACAF president Alfredo Hawit — obstructed justice in July 2015, following the first indictment, by creating phony contracts and other documents to attempt to conceal their participation in this scheme.

Finally, the superseding indictment greatly expands the allegations in a scheme contained the original indictment titled the “UNCAF Region World Cup Qualifiers Scheme.” The scheme alleges that soccer officials from nearly every country in Central America solicited and accepted hundreds of thousands of dollars in bribes in connection with the sale of the media rights to their country’s World Cup qualifying matches.

The Nature of the Case and What to Watch Going Forward

The superseding indictment seems to take great pains to describe the effect of the FIFA corruption scheme on the United States. As did the original indictment, it stresses that a number of financial transactions related to the bribe payments were routed through U.S. banks. A number of the new charges also emphasize how some soccer matches in tournaments that were the subject of various bribe schemes were played in the U.S., or how the U.S. media market made up a significant portion of some media rights that were the subject of bribes, or how some bribes were actually paid within the U.S. These details may help address questions that have been raised over whether the United States was really the appropriate place to prosecute a massive corruption scheme in which the overwhelming majority of criminal acts took place in other countries.

The heart of the case remains bribery, on a massive and worldwide scale. The “victims” in a bribery case often do not suffer any identifiable economic damages. For example, if a Congressman takes a bribe in exchange for awarding a defense contract, the money for the bribe comes not from the Congressman’s constituents but from the bribe payer. The constituents are harmed not by losing money but in a more intangible way: by losing their right to the fair, honest, and unbiased services of the person elected to represent them. The harm is more diffuse; the damage is the corruption of the system, not a direct monetary loss as in a fraud case.

Similarly, in the FIFA case, the principal harm is the deprivation of the right of various FIFA member organizations and individuals to the honest and impartial services of the FIFA defendants who were supposed to represent their interests, and the resultant corruption of the entire FIFA decision-making process. The indictment does suggest other types of harm as well; for example, the wire fraud allegations claim that the defendants deprived their victims not only of the intangible right to honest services (the bribery allegation) but also of tangible money or property. But how this deprivation of money or property allegedly took place is never spelled out, and it appears that honest services fraud is definitely the primary theory.

There is one very interesting paragraph in the superseding indictment that did not appear in the original. It appears in the description of the racketeering conspiracy and is titled “Embezzlement and Misappropriation.” It alleges that “The conspirators’ corruption of the enterprise extended beyond the payment and receipt of bribes and kickbacks,” and notes that FIFA maintained hundreds of millions of dollars in various programs intended to benefit its member organizations, including youth leagues. It further alleges that certain defendants, including former CONCACAF executives Jack Warner and Jeffrey Webb, embezzled or otherwise misappropriated some of these funds, “including funds intended for natural disaster relief.”  News reports suggest this last clause refers to alleged embezzlement of funds intended to aid the victims of the 2010 earthquake in Haiti.

But after unveiling this tantalizing new allegation, the indictment provides no further detail and no specific charges related to this embezzlement. The DOJ press release concerning the superseding indictment does not mention embezzlement at all. We will have to await further developments to learn more details about any such misappropriation of FIFA funds, whether related to natural disaster relief or otherwise. Webb has already pleaded guilty and may well be a key source of this information for the prosecution.

The defendants who have pleaded guilty have agreed to forfeit more than $40 million, and DOJ is seeking tens of millions more in forfeiture. Typically, forfeited proceeds would go to the U.S. treasury, but this case is a bit unusual because the U.S. and its citizens are not the primary victims of most of the alleged misconduct. The DOJ press release notes that all forfeited money is being held in reserve so it can be used to satisfy any future orders of restitution entered at sentencing, “for the benefit of any individuals or entities that qualify as victims of the defendants’ crimes under federal law.” This could mean that some of the forfeited money ends up being distributed to the soccer organizations outside the U.S. whose officials were involved in the corruption.

The eight additional guilty pleas that DOJ announced last week are significant. Most, if not all, of these defendants are likely cooperating in the ongoing investigation, providing DOJ with information and testimony that will allow it to pursue the corruption allegations even further.

But in terms of the future of the investigation, the most significant thing to note about the superseding indictment is that it contains references to another 24 still unnamed and unidentified co-conspirators. That means there are at least two dozen more potential defendants out there – some of whom likely have already pleaded guilty under seal and are cooperating as the grand jury investigation continues.

And that means when it comes to FIFA corruption, the Department of Justice is just getting warmed up.

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