The Ongoing Legal Saga of Martin Shkreli

When we last checked in on former pharmaceutical executive Martin Shkreli, he had just been indicted for securities fraud and related charges. Shkreli – a/k/a the “pharma bro” and “most hated man in America” – is best known for purchasing the rights to an anti-cancer drug called Daraprim and promptly raising the price by 5,000%. His defiant attitude in the face of the resulting outcry, along with his insult-laden Twitter feed, only heightened his notoriety.

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Pharma Bro Martin Shkreli

But Shkreli’s indictment last December had nothing to do with extortionate drug prices. The charges are based on Shkreli’s earlier conduct at two different hedge funds and at a company he founded called Retrophin. Shkreli allegedly defrauded his hedge fund investors by lying to them about their investments, and then defrauded Retrophin by wrongfully using company assets to settle claims from those hedge fund investors. An attorney who worked as Retrophin’s outside counsel, Evan Greebel, was charged with Shkreli in one count of conspiracy. (You can read a more detailed analysis of the indictment in my earlier post here.)

The criminal proceeding against Shkreli and Greebel is still in the early stages, but there have been a couple of interesting related developments in the past couple of weeks.

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Congressional Testimony – or Lack Thereof

Shkreli was subpoenaed to testify last Thursday, February 4, before the House Committee on Oversight and Government Reform. The committee was holding a hearing about skyrocketing drug prices, and the incident where Shkreli raised the price of Daraprim by 5,000% was Exhibit One.

Shkreli’s attorney made it clear in advance of the hearing that Shkreli would invoke his Fifth Amendment right against self-incrimination. That was no surprise. Even though the hearing was not specifically about Shkreli’s criminal case, there would be too much risk that something he said might end up facilitating his own prosecution. Almost any lawyer would likely give him the same advice.

Shkreli’s lawyer asked that his client be excused from attending the hearing, since he was not going to be able to answer questions. But Congress insisted that he appear, threatening him with additional criminal sanctions if he ignored the subpoena. And so, in a familiar Washington theater production, Shkreli sat before the committee, with his attorney in the “I am not a potted plant” seat directly behind him, and repeatedly invoked his right to remain silent in response to every question.

This type of scene unfortunately plays out quite regularly on Capitol Hill. In most legal proceedings, if a witness is going to take the Fifth it is relatively rare for him to be called to the stand. There may be a hearing before a judge to determine whether the assertion of privilege is valid, but if it is, the witness generally will not be forced to appear simply to assert the privilege over and over. For one thing, it’s a waste of everyone’s time if the witness is not going to answer. But more important, it is grossly unfair: repeatedly forcing a witness to assert his right to remain silent can’t help but lead to the impression he is hiding something and must have done something wrong. What should be a constitutional shield is turned into a bludgeon wielded to suggest the witness must be guilty of something – if not, why not answer the questions?

But Congress routinely compels witnesses to appear even when it is perfectly clear they are going to take the Fifth. Then they pepper the witness with speeches masquerading as questions, forcing the witness repeatedly to invoke his or her right to remain silent.

This is a tawdry business. Perhaps the reason it continues is that some Members of Congress are less concerned about actually getting answers and more concerned with trying to create a good video clip that will get replayed on cable news or social media. And indeed Shkreli’s brief appearance was a made-for-TV event, carried live on CNBC and elsewhere.

Shkreli didn’t do his image any good at the hearing. He smirked, rolled his eyes, and generally seemed annoyed that he had to be there. After he was finally excused, he sent out a Tweet calling the Members of Congress “imbeciles.”

But if Shkreli didn’t exactly cover himself in glory, neither did the Members of the committee. I’m no apologist for the pharma bro, but this practice of publicly pillorying a witness who is simply asserting his basic constitutional rights is pretty disgraceful.

Congress may be one of the few things in this country currently held in lower esteem than Shkreli. The spectacle before the House committee last week will do nothing to boost the approval ratings of either.

Attorney-Client Privilege – or Lack Thereof

In another development, we learned a couple of weeks ago that back in December U.S. District Judge Jack Weinstein ruled the grand jury investigating Shkreli could have access to emails that Shkreli and his former company had claimed were protected by attorney-client privilege.

One aspect of the fraud charged in Shkreli’s indictment relates to Retrophin, the pharmaceutical company he founded in 2011 and took public in 2012. The indictment charges that Shkreli defrauded Retrophin by using its assets to pay off debts that Shkreli incurred while running his hedge funds.

While acting as CEO of Retrophin and engaging in the alleged fraud, Shkreli had email exchanges with his outside counsel (and now co-defendant) Evan Greebel. Greebel, who is now a partner with Kaye Scholer LLP, was employed at the law firm of Katten Muchin Rosenman LLP at the time.

The grand jury subpoenaed documents from Retrophin, including copies of emails between Shkreli and Greebel. Retrophin produced the emails but redacted many of them, based on a claim by Shkreli’s attorney that the documents were protected by the attorney-client privilege.

Normally, of course, communications between attorney and client would be privileged and would not need to be produced. But the privilege is subject to something called the crime-fraud exception: if the client communicates with the attorney in furtherance of a crime or fraud, the law will not protect those communications.

The exception applies only if the communications are used to further an ongoing or future crime or fraud. If a client communicates with a lawyer about past criminal conduct, that of course is fully protected. Indeed, such communications are at the very heart of the privilege in the criminal context.

But a client will not be allowed to use an attorney’s services to help him commit a crime and then turn around and try to protect the very communications with counsel that made the crime possible. In other words, clients are not allowed to convert the shield of the attorney-client privilege into a sword that affirmatively helps them engage in criminal activity.

The crime-fraud exception can apply even when the attorney doesn’t know about the criminal conduct. I recall one case where I was arguing as a prosecutor that the crime-fraud exception applied to certain communications between a major corporation and its lawyers. Some of those communications were with a very distinguished former DOJ official who was now a partner at the firm. The firm brought him into the courtroom during the hearing to sit in the front row and glower at the judge, while the corporation’s lawyers expressed outrage at the suggestion that this gray-haired pillar of the bar might have been involved in any criminal activity.

It was all for show, of course — more theater —  because the attorney does not need to be involved. The client may be lying to his own counsel, just as he is to the victims of his fraud. If the attorney was deceived by the client and was assisting in the crime or fraud unwittingly, the privilege may still be overridden. The focus is on what the client intended, not on the intent or knowledge of the attorney.

In this case, of course, the government has done more than simply allege the attorney was involved – it has indicted the attorney, Greebel, as a co-defendant. Although it’s not legally required, that the attorney has been charged as a co-conspirator in committing the alleged fraud certainly bolsters the government’s argument for the crime-fraud exception.

The burden is on the government to establish that the exception applies. In support of its claim, the government submitted a 47-page affidavit from an FBI agent involved in the investigation. The affidavit alleges that the emails in question directly relate to fraudulent activities carried out by the co-defendants, including the backdating of documents to deceive the SEC and the creation of other phony documents used to defraud Retrophin.

In a December 3 order that was just recently unsealed, Judge Weinstein agreed with the government that the emails were not privileged. He noted first that to the extent the communications between Shkreli and Greebel related to Retrophin’s business, the privilege belonged to the company, not to Shkreli, and the company had already waived any privilege claims. But even if there were a personal attorney-client relationship, the judge ruled, “exchanges in redacted emails between the attorney [Greebel] and employee [Shkreli] were part of a scheme, conspiracy or fraudulent attempt to commit a securities fraud. The attorney-client relationship and privilege, if any, is voided by the criminal conduct.”

Accordingly, the unredacted emails were produced to the grand jury, were referenced in the indictment, and will undoubtedly play a major role at trial. There’s a reason prosecutors often say that “email” is short for “evidence mail” – it is frequently a rich source of incriminating information.

The fact that Shkreli was unable to shield his communications with his alleged co-conspirator attorney is not particularly surprising, but it nevertheless has to be considered a blow to the defense.

And in other news, Shkreli recently replaced his legal team with a celebrity lawyer who previously defended rappers Jay Z and Sean “Diddy” Combs. It appears this is only going to get weirder. Stay tuned.

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Analyzing the Indictment of Martin Shkreli

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

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.

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Charles Ponzi: The Classics Never Get Old

The Alleged Schemes

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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