Shkreli, CEO slammed over drug prices, $5M bond

Nathan Bomey, Kevin McCoy and Kim Hjelmgaard | USA TODAY

Show Caption Hide Caption Martin Shkreli charged with securities fraud Martin Shkreli, a pharmaceutical industry entrepreneur previously criticized for raising the price of life-saving drugs, was arrested early Thursday in New York City.

The reviled poster boy of drug price hikes perpetuated a Ponzi scheme on investors in hedge funds and a pharmaceutical company he founded and previously led, federal prosecutors and regulators alleged Thursday.

Martin Shkreli, a pharmaceutical industry entrepreneur previously criticized for raising the price of life-saving drugs such as those used to fight HIV and cancer, was arrested early Thursday in New York City and charged on criminal and civil charges of securities fraud.

Shkreli's arrest was not related to drug prices, but instead stems from allegations by federal prosecutors that he illegally took stock from Retrophin — a biotechnology company he started in 2011 and was ousted from in 2014 — to pay off unrelated business debts.

Evan Greebel, 42, a New York lawyer who served as Retrophin's outside counsel, was also arrested and charged with aiding the alleged scheme.

Prosecutors charged Shkreli with two counts of conspiracy to commit securities fraud, three counts of conspiracy to commit wire fraud and two counts of securities fraud. The U.S. Securities and Exchange Commission filed parallel civil charges. He potentially faces a maximum 20-year prison term if convicted on the top charge.

Investigators alleged that Shkreli, 32, siphoned millions of dollars from Retrophin to repay investors he'd defrauded in two defunct hedge funds that focused on health care investments: MSMB Capital and MSMB Healthcare. He was also accused of using company funds to settle personal disputes with investors, unjustly enriching himself with company funds and forming false ties to consultants.

For example, Shkreli told one investor on Dec. 2, 2010, that his hedge fund held $35 million assets, even though it had only had $700, the criminal indictment alleged.

At a Brooklyn news conference, U.S. Attorney Robert Capers charged that Shkreli, with Greebel's help, used Retrophin as his "personal piggy bank" to funnel millions of dollars in illegal repayments to investors he'd burned in the hedge funds.

"These charges in today's indictment highlight the brazenness and breadth of Shkreli's schemes and the outrageous web of lies and deceit weaved by both defendants," Capers said.

Capers said the investigation was continuing and could lead to additional charges.

Federal Magistrate Judge Robert Levy later freed Shkreli on $5 million bond secured by funds and other collateral posted by the entrepreneur and family members who appeared with him at a federal court arraignment.

The lightly-bearded defendant, dressed in a black vee-neck tee shirt and blue jeans, said nothing in court beyond identifying himself, indicating he understood the charges and entering a not guilty plea. Shkreli, his relatives and supporters declined to answer questions after the proceeding.

Greebel, who similarly declined to comment, was released on $1 million bond with similar conditions.

A spokesman for Shkreli fired back after his release, saying Shkreli expects to "fully vindicated" of all the charges. He said the MSMB-related transactions "involve complex accounting matters that the EDNY" — prosecutors of Eastern District of New York — "and SEC fail to understand."

"It is no coincidence that these charges, the result of investigations which have been languishing for considerable time, have been filed at the same time of Shkreli's high-profile, controversial and yet unrelated activities," spokesman Craig Stevens said.

Stevens also blasted prosecutors' characterization that Shkreli was involved in a Ponzi scheme: "Ponzi victims do not make money, yet Mr. Shkreli's investors enjoyed strong results," he said.

Shkreli "is particularly disappointed that his litigation with Retrophin, a company he founded, which should have been a private civil dispute, has become a government enforcement matter," Stevens said.

In an unrelated development, Shkreli, currently the CEO of Turing Pharmaceuticals, became the target of heavy criticism from health industry experts, presidential candidates and others in September after he raised the price of a medication called Daraprim by more than 5000% — from $13.50 a pill to $750.

The Food and Drug Administration-approved drug is used to treat toxoplasmosis, a parasitic disease that afflicts people with weakened immune systems, such as individuals suffering from AIDS and pregnant women.

Shkreli initially said he would roll back the Daraprim price hike. But he subsequently dropped that plan, and then publicly defended the increase.

Capers declined to speculate whether Shkreli might have raised the price of Turing-controlled drugs to raise funds for other potentially illegal transactions. A Turing Pharmaceuticals spokesman did not respond to requests seeking comment.

Shkreli, 32, has previously denied any wrongdoing related to his business dealings with Retrophin. But Retrophin's board of directors ousted him in September 2014.

In August, Retrophin filed a lawsuit against Shkreli, accusing him of defrauding investors and forming false business deals to enrich himself. The company seeks more than $65 million in damages.

A separate securities fraud case filed in December 2014 by Retrophin investors accused Shkreli, Retrophin and other company officials of making false or misleading statements about the firm's finances. The lawsuit seeks class-action status on behalf of defrauded shareholders.

According to the SEC civil complaint, Shkreli engaged in "widespread fraudulent conduct" from October 2009 through March 2014. The complaint said his actions included:

• Misappropriating more than $1 million of his hedge fund investors' funds.

• Lying about his hedge fund's investment returns.

• Fraudulently conspiring with Greebel to get Retrophin to issue stock and deliver cash compensation for phony consulting contracts to cover up disputes with MSMB investors over the hedge fund's performance.

The SEC is pursuing a disgorgement of ill-gotten profits, civil penalties and a ban on Shkreli serving as a corporate officer or director.

Noah Bookbinder, executive director of Citizens for Responsibility and Ethics in Washington, a nonprofit that called for federal investigations into Shkreli in 2012, said in a statement that the arrest "shows that the law applies to everyone. We commend the DOJ for sending a clear message that these types of action will not be tolerated."

Shkreli has gained a measure of public attention by cultivating a flamboyant persona on Twitter, where he aggressively defended Turing's price hikes. He also posted long YouTube videos that showed him sitting at his computer, with electric guitars and amplifiers in the background, as he mused about his businesses, his love of rap music and other matters.

Shkreli famously paid $2 million earlier this year for the one-of-a-kind double album featuring the Wu-Tang Clan, an iconic, Staten Island, N.Y. rap band he favored. The band later said the deal for the "Once Upon a Time in Shaolin" album was struck before news about the Turing drug price hikes approved by Shkreli.

Capers, the federal prosecutor, said he did not know where Shkreli got the funds to buy the album. Neither the album nor any other property was seized from Shkreli during his arrest, the FBI said.

Nathan Bomey on Twitter @NathanBomey.

Kevin McCoy on Twitter: @kmccoynyc.

Kim Hjelmgaard on Twitter: @khjelmgaard.