Mr. Shkreli’s actions were frenetic. Starting on Monday, jurors in Federal District Court in Brooklyn will be deciding whether they were criminal.
Major losses were not new to Mr. Shkreli in 2012. He shut down his first hedge fund in 2007 after a single bad trade. At his next fund, MSMB Capital, he lost everything after a short sale, or a bet against a stock, in February 2011. Days later, he created MSMB Healthcare, another hedge fund, and Retrophin, a pharmaceutical company.
Investors might have seen warning signals with MSMB: Different memos listed different auditors, neither of whom worked for MSMB. Mr. Shkreli kept listing Fred Hassan, a prominent pharmaceutical executive, as an investor even after Mr. Hassan’s daughter, the actual investor, repeatedly asked him to stop. Statements were sent late, in emails from Mr. Shkreli rather than from a fund administrator.
Suddenly, in September 2012, Mr. Shkreli emailed investors that he was shutting down MSMB Capital and MSMB Healthcare to focus on Retrophin and that they could cash out.
But there was nothing in the MSMB Capital accounts. The MSMB Healthcare account held $515. Retrophin was nearly broke, too.
As for Mr. Shkreli, in September 2012, he listed more than $2.6 million in liabilities and $1,415 in assets. And in October, the Securities and Exchange Commission said it was investigating MSMB Capital.
Retrophin, and Mr. Shkreli, desperately needed cash. His idea: Pursue a reverse merger into a shell company so Retrophin could go public.
An employee who had run a consumer fund for MSMB, Tim Pierotti, left the company in November, signing a termination and severance agreement. Mr. Pierotti testified that Mr. Shkreli called him into the office on Dec. 11.
With the reverse merger, Retrophin would get 2.5 million shares that could be traded on the open market — as long as recipients were not Retrophin affiliates, per securities law rules. Now, Mr. Shkreli wanted to divide the shares among seven friends and co-workers, Mr. Pierotti testified. For $400, he was to receive 400,000 shares.
Prosecutors say Mr. Shkreli tried to make it appear as though the share recipients were not aligned with MSMB or Retrophin. Evan Greebel, a lawyer who worked for Mr. Shkreli, emailed him about the shares: “I’m listing everyone’s addresses as c/o msmb…does that work for you?” Mr. Shkreli replied: “no!!”
Mr. Greebel asked recipients to confirm they were not officers or…