‘Pharma Boy’ Arrested for Fraud

PillBoxIt has been a busy week for Martin Shkreli, the flamboyant businessman at the center of the drug industry’s price-gouging scandals. He said he would sharply increase the cost of a drug used to treat a potentially deadly parasitic infection. He called himself “the world’s most eligible bachelor” on Twitter and railed against critics in a live-streaming YouTube video. After reportedly paying $2 million for a rare Wu-Tang Clan album, he goaded a member of the hip-hop group to “show me some respect.”

Then, F.B.I. agents arrested Mr. Shkreli, 32, at his Murray Hill apartment. He was arraigned in Federal District Court in Brooklyn on securities fraud and wire fraud charges. In a statement, a spokesman for Mr. Shkreli said he was confident that he would be cleared of all charges.

Mr. Shkreli has emerged as a symbol of pharmaceutical greed for acquiring a decades-old drug used to treat an infection that can be devastating for babies and people with AIDS and, overnight, raising the price to $750 a pill from $13.50. His only mistake, he later conceded, was not raising the price more. Those price increases combined with Mr. Shkreli’s jeering response to his critics has made him a lightning rod for public outrage and fodder for the presidential campaign. His company, Turing Pharmaceuticals, and others, like Valeant Pharmaceuticals, have come under fire from lawmakers and consumers for profiting from steep price increases for old drugs. But the criminal charges brought against him actually relate to something else entirely — his time as a hedge fund manager and when he ran his first biopharmaceutical company, Retrophin. Federal officials described his crimes as a quasi-Ponzi scheme in which he used money from his company to pay off money-losing investors in his hedge funds. An F.B.I. official called his business schemes a “securities fraud trifecta of lies, deceit and greed.”

Still, for many of his critics, Mr. Shkreli’s arrest was a comeuppance for the brash executive who has seemed to enjoy — relish, even — his public notoriety. On Thursday, a satirical New Yorker column by the humorist Andy Borowitz said Mr. Shkreli’s lawyers had informed their client their hourly legal fees had increased by 5,000 percent. “Personally, I think Martin Shkreli has become wealthy at the expense of the public good. I don’t believe for a second that his manipulation of drug prices fuels valuable research as he has claimed,” said Katie Uva, a 2006 alumna of Hunter College High School in Manhattan where Mr. Shkreli attended, in an email response to questions. This fall, Ms. Uva started an online fund-raising campaign to match a $1 million donation from Mr. Shkreli to Hunter in the hope of persuading the school to return the donation. So far, the campaign has raised about $800 from 16 donors.

Mr. Shkreli (pronounced SHKRELL-ee) could have been a quintessential archetype for the immigrant’s dream of American success. He grew up in a crowded apartment on Ocean Avenue in Brooklyn, the son of Albanian immigrants who worked janitorial and other side jobs to support him and his three siblings. Mr. Shkreli was admitted into Hunter, an elite Manhattan public school for the intellectually gifted. On Thursday, two former classmates remembered Mr. Shkreli as a somewhat shy person who could often be found lingering in the school’s hallways, playing chess, his guitar or looking at stocks in the newspaper.

But he stopped attending classes and was asked to leave before his senior year. He received the credits needed for his high school diploma through a program that introduced him to Wall Street, placing him at an internship at the Wall Street hedge fund Cramer, Berkowitz & Company. Eventually, Mr. Shkreli opened his own hedge fund — Elea Capital. It didn’t last long, collapsing in 2007 on a big bet he made that went against him. Undeterred, in 2009, he started his second hedge fund, MSMB Capital, the initials of Mr. Shkreli and his partner, Marek Biestek, whom he met while attending Baruch College.

Like Elea, MSMB’s performance wasn’t nearly as hot as Mr. Shkreli let on. From 2009 through 2012, Mr. Shkreli lost millions of dollars trading in the market, according to the accusations contained in the indictment. But he hid those losses, telling investors instead that the funds had strong double-digit returns. In 2011, Mr. Shkreli started Retrophin, which quickly adopted a controversial business strategy, acquiring old, neglected drugs used for rare diseases and quickly raising their prices.

Soon, however, Mr. Shkreli was making a plan to use Retrophin assets to pay off MSMB investors. When seven MSMB investors threatened to sue in 2013, Mr. Shkreli and Evan Greebel, the lead outside counsel for Retrophin, used $3.4 million in Retrophin funds and stock to settle the investors’ claims, even though Retrophin had no responsibility, the indictment says. Mr. Greebel was also arrested on Thursday and charged with one count of conspiracy to commit wire fraud.

Later, when Retrophin’s auditor raised questions about the settlements, Mr. Shkreli and Mr. Greebel created fraudulent consulting agreements for the investors, thinking they could pay the money back without upsetting the auditor, the indictment states. From September 2013 to March 2014, they created fake consulting agreements for four investors, paying $7.6 million in cash and stock. Retrophin’s board did not approve of the consulting agreements, the indictment says.

In 2014, Retrophin ousted Mr. Shkreli as its chief executive. A lawsuit filed this summer by the company mirrors many of the same accusations contained in the federal charges. Once again, Mr. Shkreli didn’t let failure slow him down. In August of this year, he raised $90 million in a first round of financing for Turing, his new biopharmaceutical company.

One of his first moves was to pay $55 million for the American marketing rights for Daraprim, a 62-year-old drug for toxoplasmosis and immediately increase the price by 5,000 percent. The jump brought the cost of a course of treatment for some patients to hundreds of thousands of dollars. Congressional committees and politicians denounced his move, but Republicans and Democrats have been split on how far to pursue further regulation of the drug industry or its practices.

News of his arrest prompted Representative Elijah Cummings, a leading Democrat on the House Oversight panel, to release this statement: “Mr. Shkreli has lined his own pockets at the expense of patients who desperately need their medications, and he should be ashamed of himself.” Despite the public outcry, Mr. Shkreli neither reversed his decision nor showed any regret in the numerous interviews he has conducted with the media in recent weeks. Instead, he threw gasoline on the fire. After leading an investor group to take control of KaloBios Pharmaceuticals, a failing California biotechnology company, Mr. Shkreli agreed to license the worldwide rights and said he would immediately elevate the price of a drug used to treat Chagas’ disease, a potentially deadly parasitic infection.

Even as he defends his strategy on his never-ending Twitter feed, arguing that no one is denied the drugs or pays more than $10 out of pocket, a fair trade-off for more research, he asserts, he still makes time to heckle his critics. Last week, he tweeted: “Should one of my companies change its name to Wu-Tang Pharmaceuticals? (Lawsuits be damned.)” And then there are the bizarre, hours long live streams, including a conversation he had on Monday with a girl who identified herself as a student at Hunter. Mr. Shkreli told her that he was planning to dominate the rap industry, have Hunter renamed for himself and bail a rapper out of jail. When the girl asked if he would attend a school dance with her, he demurred, adding, “I am blushing though.” Mr. Shkreli’s antics have not gone unnoticed by federal law enforcement officials. When asked on Thursday if agents had seized the rare Wu-Tang Clan album that Mr. Shkreli reportedly bought, Robert L. Capers, the United States attorney, was coy. “I wondered how long it was going to take to get to that,” he said. “We’re not aware of where he got the funds that he raised to buy the Wu-Tang Clan album.”