Martin Shkreli became a leading contender for most hated man in America after he raised prices on life-saving cancer and AIDS medication from $13.50 to $750 a pill. But karma seems to have caught up with Shkreli. Shkreli has been arrested and charged with two counts of securities fraud, three counts of conspiracy to commit securities fraud, and two counts of wire fraud.
The official charges, or indictment, against Shkreli allege that he was involved in three fraudulent schemes.
The first allegation is that Shkreli repeatedly lost money for investors in his hedge funds, MSMB Capital and MSMB Healthcare, and lied about the losses. Shkreli allegedly told an investor that his $1.25 million investment in MSMB Capital was worth over $1.3 million, even though the fund had no assets and had stopped trading a year before he made the statement.
The second allegation is that Shkreli induced investments through misrepresentations about the performance of MSMB Healthcare. Allegedly, Shkreli concealed the collapse of MSMB Capital from potential investors to induce investments in MSMB Healthcare.
The last allegation is that Shkreli misappropriated assets in Retrophin, Inc, a biopharmaceutical company founded by Shkreli, by using its assets to “satisfy his personal and unrelated professional debts.” Shkreli allegedly transferred Retrophin shares to MSMB Capital, even though MSMB Capital never invested in Retrophin. Due to the fraudulent transactions, Retrophin and its investors lost in excess of $11 million.
Shkreli’s Criminal Charges
- Securities Fraud
Shkreli has been charged with a violation of Rule 10b-5, the rule governing securities fraud. Securities fraud is any fraud perpetrated in connection with the sale of a security. In other words, any scheme, untrue statement, or misrepresentation intended to deceive an investor of stocks or other investments qualifying as securities.
Under 10b-5, the prosecutor must establish that the defendant engaged in a fraudulent scheme, made a material misstatement or omitted material information in connection with the purchase or sale of a security and the defendant acted willfully. If Shkreli is convicted of securities fraud, he could face a 20 year prison sentence, fines, and restitution, requiring him to refund the victim investors.
Defendants charged with security fraud often assert good faith defenses. A defendant may present evidence to a jury that he or she in good faith believed that the alleged fraudulent statements or omissions were true or that they relied on faulty professional advice (i.e. advice of an accountant or attorney).
In prior civil suits, Shkreli has stated that some of the alleged transactions occurred with his attorney’s “blessing,” and thus, he may present a good faith reliance defense in the criminal case.
- Conspiracy
Shkreli has also been charged with conspiracy to commit securities fraud and wire fraud. To establish a conspiracy, the prosecutor must show that there was an agreement between two or more people to commit an offense and that the defendant or a co-conspirator took steps to actually commit the offense.
Generally, the prosecutor must establish that the defendant had the intent to commit the underlying offense. In this case, the prosecutor must establish that Shkreli intended to commit wire fraud or securities fraud. If convicted of conspiracy Shkreli could be fined, subject to a five year imprisonment, or both.
- Wire Fraud
To establish conspiracy to commit wire fraud, the prosecutor must establish that Shkreli had the intent to commit wire fraud. Wire fraud is established when the defendant uses interstate wire communications to facilitate or carry out a scheme to defraud with the intent to deprive another of money or other property. For instance, telephoning a co-conspirator in another state to plan to scam investors. Wire fraud convictions can lead to 20 year prison sentences and fines.
Like securities fraud, defendants may assert a good faith defense in addition to the puffery defense. The puffery defense generally applies to when a salesperson exaggerates to sell a product with statements indicating that a product is “the best ever made.” Courts have generally found that a reasonable consumer is unlikely to rely on such statements, and thus, puffery is a defense to wire fraud in the salesperson context.
It is unlikely that Shkreli would be able to use puffery as a defense if the allegations against him are true. Assuming the prosecutors can establish that Shkreli knew his statements to investors were untrue, Shkreli could face convictions on several criminal charges. This wouldn't help the consumers who need access to affordable medication, but at least his investors have some sense of closure.
Authored by Robin Sheehan, LegalMatch Legal Writer
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