Why Shkreli’s on Trial When Investors Didn’t Lose: QuickTake Q&A

Martin Shkreli Faces Day of Reckoning in Court

Martin Shkreli became notorious for raising the price of a potentially life-saving HIV drug by 5,000 percent overnight and getting banned from Twitter for harassing a female journalist. His criminal fraud trial, which is taking place in Brooklyn, New York, has nothing to do with any of that. It’s about whether laws were broken when the fund manager got in a hole and lied about it but managed to make up the losses before getting caught.

1. So why’s he on trial?

He’s accused of lying to investors about two, now-defunct, hedge funds that he managed, MSMB Capital and MSMB Healthcare. Prosecutors say he ran a Ponzi-like scheme, using investors’ money to start a drug company, Retrophin Inc., and later looting $11 million of Retrophin assets to pay them off.

2. What did he supposedly lie about?

Documents presented in court show that Shkreli lied about everything from the value of the funds he managed -- he claimed it was $100 million, when at one point, the net asset value of a fund fell to minus 33 cents -- to the performance of the funds, claiming they were outperforming the S&P 500 Index. He accepted investments until the last minute, before shutting the funds down. And he promised investors a full refund or shares in his startup pharmaceutical company.

3. How much did investors lose?

Nothing. Shkreli partly repaid them with Retrophin stock and several witnesses told the jury they ended up with multimillion-dollar profits. One invested $1.25 million in Shkreli’s hedge fund, got $1.6 million back and 150,000 Retrophin shares, currently worth about $2.9 million. Another said she ended up with a $2.7 million profit from a $300,000 initial investment. But they struggled, sometimes for years, to get the money back.

4. So if no one lost money, what’s the problem?

Think of it this way: In “Ferris Bueller’s Day Off”, Matthew Broderick’s character leaves his Ferrari with two parking valets. They take the car for a joyride and return it undamaged. No one was hurt. But they broke the law -- the valets stole the car.

5. How can prosecutors convince the jury there was a crime?

By showing he lied to investors. It’s illegal to make material misstatements of fact to investors. According to the controlling laws enacted to protect investors, a "material fact" is anything that would be important in the decision-making process of a reasonable investor. Shkreli might have committed securities fraud by using investors’ money in ways they didn’t agree to, such as putting it in Retrophin when he told them he’d invest it otherwise.

6. What’s the defense?

A "no harm, no foul" argument may tap into the jury’s sense of right and wrong. Shkreli’s lawyers are focusing on the fact that investors made money. Defense lawyer Benjamin Brafman wants the jury to know that investors turned to Shkreli and relied on his brilliance for their profits. During cross examination of investors, the defense argued that they didn’t question Shkreli’s peculiar behavior because he was a biotech genius. The fact that Shkreli may have hid the truth from his investors but didn’t lose their money is something the defense wants the jury to take into consideration when they make their determination.

7. What’s at stake?

A conviction could land the 34-year-old in prison for as long as 20 years.

The Reference Shelf

  • The case is U.S. v. Shkreli, 15-cr-0637, U.S. District Court, Eastern District of New York (Brooklyn).
  • Shkreli said his hostile identity on social media was "an extremely weird form of sarcasm," in a 2016 Vanity Fair interview.
  • A 1984 New York Magazine profile of Shkreli’s attorney, Benjamin Brafman, noted that he "knows how to charm juries."
  • Bloomberg Businessweek examined Shkreli’s infamous price hike on the parasite treatment Daraprim.
  • This Bloomberg QuickTake on drug prices tracks how costs -- and outrage -- have been rising in the U.S.
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