The “Pharma Bro” Trial—Who Really Won?

After a five-week trial, a jury of five men and seven women convicted notorious pharmaceutical executive Martin Shkreli of securities fraud on August 4, 2017. Shkreli had been charged with two counts of securities fraud, three counts of conspiracy to commit securities fraud, and three counts of conspiracy to commit wire fraud for operating a sophisticated Ponzi scheme in which he looted the assets of his pharmaceutical company to pay off defrauded investors in his hedge funds. The jury convicted Shkreli of two counts of securities fraud and one count of conspiracy to commit securities fraud but acquitted him of five other counts, including the wire fraud charges.

Shkreli gained notoriety in 2015, when he was head of Turing Pharmaceuticals, for increasing the price of a life-saving drug from $13.50 to $750 per pill. However, Shkreli’s conviction stems from his time before Turing, when he managed two hedge funds, MSMB Capital Management and MSMB Healthcare Management. The government alleged that between 2009 and 2012, Shkreli induced investments of around $3 million from eight investors in MSMB Capital and $5 million from thirteen investors in MSMB Healthcare by misrepresenting key facts, including the funds’ performance and assets under management, and omitting key facts, such as significant trading losses at another fund Shkreli had previously managed. Shkreli allegedly also withdrew money from the funds for personal use and produced false performance reports touting profits as high as forty percent. MSMB Capital ceased trading after a series of trading losses in early 2011, and MSMB ceased operating in late 2012. In September 2012, Shkreli notified both funds’ investors that he was winding down the funds, that he had doubled their investments net of fees, and that investors could have their interests redeemed for cash, even though the funds had no money. At trial, Shkreli’s attorney argued that the hedge funds’ investors had not only received all of their money back but made significant profits.

In addition to the securities fraud claims related to the hedge funds, the government alleged that Shkreli misappropriated over $11 million from Retrophin—a publically traded pharmaceutical company he founded in 2011 and led until 2014—to pay off his personal liabilities as well as claims or threatened claims by defrauded investors in MSMB Capital and MSMB Healthcare. Shkreli, with the help of Retrophin’s outside attorney who was separately charged, allegedly caused Retrophin to enter into settlement agreements with these investors without getting approval from Retrophin’s Board. When Retrophin’s outside auditor raised concerns regarding the settlement agreements, Shkreli allegedly caused MSMB Capital and MSMB Healthcare to execute indemnification agreements and promissory notes for Retrophin’s benefit, even though the funds had no assets. After that, to avoid questions from the auditor, Shkreli settled claims with investors through sham consulting agreements for services “on strategic and corporate governance matters to the management of the company” or “on cluster headache drug development and other matters to the Company.” According to the government, Retrophin did not actually receive any consulting services but paid investors millions in cash and stock.

No one emerged as a clear winner from this trial. While the jury convicted Shkreli of securities fraud for defrauding investors in MSMB Capital and MSMB Healthcare and of conspiracy to commit securities fraud related to the Retrophin scheme, it acquitted him of conspiracy to commit wire fraud in connection with both the hedge fund and the Retrophin schemes, and of conspiracy to commit securities fraud related to the hedge fund schemes. Although the confidentiality of juror deliberations means that the reasoning behind this split verdict is uncertain, some reports have suggested that Shkreli’s defense that he had not intended to harm investors may have played a role in avoiding conviction on all counts. Nonetheless, both sides have declared victory: Shkreli has touted that he is “delighted” with the verdict, and the acting U.S. Attorney for the Eastern District of New York similarly stated after trial that he was “gratified” and that “justice has been served.”

Sentencing has not been scheduled yet but Shkreli could face up to 20 years in prison for the securities fraud convictions. Shkreli also still faces a separate enforcement action by the SEC charging Shkreli with securities fraud as well as aiding and abetting his two entities that served as the hedge funds’ investment advisers in violating antifraud provisions of the Investment Advisers Act.