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The Details of Shkreli’s Fraud

If you want to know all the details of why Martin Shkreli was indicted, and how he has become associated with securities fraud (instead of just being associated with totally unrepentant drug price hikes), then this is the article to read. Here’s a bit:

The other way to sustain the lie — and the only possible permanent solution — is to gamble on redemption. If you’ve lost half of your investors’ money, but you’ve told them that you’ve doubled it, then you need to quadruple the money you have left. So you take riskier and riskier bets, hoping that one will eventually pay off and make up for all of the earlier losses. This basically never works! But it could work. And if it does, your investors will be happy, you will be rich, and no one will ever be the wiser.

This sounds exactly right – and actually, Shkreli seems to have (mostly) gotten away with it. But he seems also to have messed things up by being so fantastically obnoxious – if he’d kept his head down more, this indictment might not have happened at all. But if he could keep his head down more, he wouldn’t be Martin Shkreli. Like a character in an old Cordwainer Smith story, he’s actually being sentenced to a life of being his own difficult and complicated self.

For science-fiction fans and trivia buffs, the story referred to is “Drunkboat”, set in Smith’s strange and detailed future history, “The Instrumentality of Mankind”. That particular one involves extradimensional travel and is laced with references to the poetry of Rimbaud, and I believe that’s the one that gives you a clue that it’s actually taking place in Miami, thousands of years from now. Deciphering what Smith was up to definitely requires a liberal arts background – he works in puns in Russian and German, Chinese history, and more. My own contribution is that I’m pretty sure that one of his characters is named after a high school in Tennessee, but I certainly couldn’t tell you why. I’ve never seen that referenced anywhere, so I’m putting it out there for Smith’s remaining fans. The definitive Cordwainer Smith collection is The Rediscovery of Man.

Update: no, not on Martin Shkreli. He’s been tossed out of T*uring, but the heck with that, and him. More importantly, I’ve heard from another Cordwainer Smith reader, who tells me that Smith’s second wife was, in fact, from Kingsport, Tennessee, and graduated from the high school mentioned above (as did my late mother, many years ago). It was quite puzzling for me to read Smith back in the 1970s and see a character with the same name as was on her old yearbooks!

37 comments on “The Details of Shkreli’s Fraud”

  1. Anon says:

    Basically no different from Bernie Madoff. Lock him up!

  2. bmartinmd says:

    After reading the indictment and re-reading the Retrophin 8-K, it almost appears that the founding of Retrophin by Shkreli was some kind of colossal scheme to generate funds/revenue for Shkreli so that he could pay back his disgruntled MSMB clients. In that case, Retrophin’s ridiculous price hikes on old drugs (Thiola, Chenodal), to generate revenue, would have been a part of that fraud. Perhaps the same is true for the founding of Turing and jacking up the price of Daraprim. After being kicked out of Retrophin, did Shkreli expect that he’d have to, at some point, pay back the money he bilked from Retrophin (which was used to assuage his MSMB clients)? Seems like he was jumping from one venture to the next, all in an effort to keep ahead of his failed market deals and investments–eg, a YOOGE (channel Trump) naked short of Orexigen. This may be his ultimate con: That, whatever you think of his morals, he is/was a super-smart short seller in biotech. It appears that the opposite is true.

  3. Hap says:

    If he was going to raise prices to fund the cover of his hedge fund losses, perhaps he could have gotten some money from PACs to help out, too – this seems like manna from heaven for some people, and I am cynical enough to think that at least a few might have paid for the privilege.

  4. enl says:

    The expression is kiting checks. On the scale involved here, and moreso with Madoff, we tend to use fancier terms, but it is still kiting checks.

  5. Rule (of 5) Breaker says:

    Yes, the first thing I thought of was this guy was undone by his ego. By publicly gloating in his status as America’s biggest jackass, he made himself a political target. I believe that if he had stayed out of the media with his interviews and comments he might have gotten away with it. Hurray for hubris!

  6. Kiting checks or a Ponzi scheme. Either way, we’re better off with him out of the industry. Tolerating bunko artists like him only makes us all look like frauds.

    MG

  7. Anon says:

    Egotism, self-grandiosity, lies, fraud, deceit, manipulation, risk-taking, impulsiveness, lack of empathy, refusal to take blame or responsibility, learn from mistakes, etc…

    All very classic signs of a psychopath.

    1. David Edwards says:

      Isn’t your above description of a psychopath, basically synonymous with most of the world’s corporate C-suites? It’s not unique to the pharmaceutical industry either – banking, hedge fund management, energy utilities and privatised water companies tend to attract white-collar Ted Bundys like a fresh turd attracts flies.

      1. Anon says:

        Yes. In fact I read in a book specific to the subject that 4% of top executives are psychopaths vs only 1% of the general population. So somehow companies are specifically recruiting and promoting them!

  8. Wu Tang says:

    The AP says that Shkreli just resigned as T*ring CEO

  9. MiTown says:

    He has apparently stepped down as CEO today. I’m sure we haven’t seen the last of him though, especially if he beats the rap.

    1. Wu Tang says:

      that homey will be rappin’ all the way to jail – better not be gettin’ funky sellin’ my album.

  10. Anonymous Researcher snaw says:

    Another fan of the unjustly-forgotten writer Cordwainer Smith! Cool.

    For those not familiar with him, here’s your Christmas reading assignment…

  11. Justin Peukon says:

    Each day the world is becoming more and more ponziest. Is not this scary for our civilization?

    1. Anon says:

      The entire economy is one big Ponzi scheme, as debt fuels growth but growth slows by the law of diminishing returns until it can’t repay the debt.

      1. enl says:

        Not the best forum to debate economic theory, but this is not quite true. In a nutshell (and many economists have made their names proposing ways around this, including some that have guided governmental policy, such as Authur Laffer), things are OK as long as new value is created at a rate that matches growth, give or take. When growth is push beyond the creation on real value, problems come up. Real value is things like durable resources (useful minerals) and tools or techniques that increase the value or decrease the cost of other goods and services. For example, a steel handsaw, which increases the value of a carpenter over his value when using previous tools for cutting wood. An apple, as tasty as it is, doesn’t count, as it is not durable– eat it and it is gone.

        Credit is seen as a necessary part of growth, as it provides the means to create new value. The problem comes when the cost of the credit is greater then the value created, and that is what we see in many of these cases. High cost, for little, or in this case, no value created.

        The Ponzi scheme, kiting checks, etc, is when the credit is taken by fraud. I tend to view most of the finance industry as pretty much on the wrong side of the line, as there is little concern for the creating value part of the process. They seem to see money and value as equivalent, and every time this comes around, we reach a point that is unsustainable and things go south.

        As a corollary, the value of techniques and tools that increase efficiency is one of the things that drives economic inequality, but not always (I might say rarely, even) in favor of those that create the value.

        1. anon says:

          In a nutshell, I don’t care what the theory says. For example, my income has had no increase to match with the increase in my rent. Simply, I lost money and I became poorer.

        2. Anon says:

          Bottom line is that our economy depends on indefinite growth, but growth must always come to an end, at which point the debt bubble bursts.

  12. PorkPieHat says:

    Thanks Derek. Interesting reading. You know, the thing is, it took a man as desperate as Shkreli was to go down that rabbit hole of ridiculous unjustified price hikes that no one would go in. But not because the hole wasn’t there….it was just waiting for someone to do it…the industry was skipping along in that direction anyway. So, as far as I can tell, he simply accelerated to, a logical extreme, where we are going: unsustainable drug prices. Don’t know the way out of that.

    And as far as Marty is concerned, right about now, he may be facing Bubba in the cell…that, you know…is looking at him with desire in his eyes. And Marty may not know the way out of that either.

  13. Chrispy says:

    How will the pricing issue fall out — will it be ignored now that the rotten apple is gone?

    Most of us in drug discovery depend upon the ability to charge crazy prices, particularly in the US. Should the public lump our industry in with Shkreli, serious price regulation could follow.

    I happen to be among those that think that this would be a good idea, but it is easy to see how this might upset the applecart.

    It would not take much for R&D to become a bad investment — with development costs in the billions per drug we are almost there.

    1. The pundits think the pricing issue will be around for a while. See “For Drug Companies, the Martin Shkreli Nightmare Isn’t Over Yet” .

      1. Kelvin says:

        US drug price rises can’t last much longer as branded drugs continue to lose Rx volume to generics, which already take 90% share of prescriptions. At this rate, drug prices will need to keep rising faster and faster (up to 20% p.a.) just to maintain current sales. Meanwhile the incremental benefits of new drugs gets smaller and smaller. So whatever the political appetite, the numbers simply don’t add up, and the system will collapse. Basically, US drug prices are just another Ponzi scheme.

        1. M12 says:

          This is basically an argument that drug prices won’t keep rising. It doesn’t have anything to do with the industry or their pricing being a Ponzi scheme (which is a specific type of fraud, not a synonym for “unsustainable.”)

          1. Kelvin says:

            Except that higher drug prices require higher insurance premiums, so money from the newly insured is effectively being used to pay for the sick that have previously been paying lower premiums. What’s the difference between that and a Ponzi scheme?

          2. M12 says:

            A Ponzi scheme doesn’t actually produce anything; the “profits” are the same as the investment and are just moving money around. Money is coming solely from people being fleeced.

            Investing drug sales money into drug research produces new drugs. The profits come from people who benefit from the drugs–not investors–so you don’t have this closed loop of zero net income that is at the heart of a Ponzi scheme.

            Accepting, for the discussion, that drug sales money will dry up (and there won’t be other funding sources), the response will be fewer new drugs. It’d fundamentally be the same as not making laser discs anymore because no one buys them. The fact that product life cycle is way longer in pharma than most other industry, so there’s a time lag, makes investments risker but doesn’t convert them to a scam.

  14. Qroger says:

    Shkreli is the argument against R. Reagan’s miracle of free enterprise; Sort of like the rewrite of the savings and loan rules that got government out of the way, and DID take money from widows and orphans. Sometimes a cumbersome, disinterested, honest, professional bureaucracy is helpful in looking out for the interests of the unwashed.

    1. Weezl says:

      Where can you find “a disinterested, honest, professional bureaucracy?” If you find one, get back to me, I’ll take three.

    2. Justa Retiree says:

      You know! You remember!
      I worked in the SL industry and watched them all bleed to death due to the deregulation of their costs, while the income side remained under regulatory control.
      My former college finance prof told me the rewrite came about courtesy of a Senator on the Senate Banking and Finance Committee, who was obligated to pay back for a ride on the shuttle. This special privilege was granted due to pressure on NASA by the American Bankers Association, the opposite type of service as Savings and Loans.
      Savings and Loans were owned by the depositors, and made enough profit to stay in business and provide loans to home buyers. Most of the failed S&Ls were bought from the government regulators at a deep discount by banks.

  15. Cytirps says:

    Don’t mess with the congress especially if you are not mother Teresa clean.

  16. Lou says:

    Terror wins again. Isis pharmaceuticals changes name so as not to be hit by a drone strike.

    see http://www.isispharm.com

  17. Anon says:

    Fired from Turing, and now fired from KaloBios. Meanwhile, Twitter account hacked, “charitable donations” rejected, awaiting trial for securities fraud with possible 20 year prison sentence. And still the most hated man in America.

    Happy Christmas, Mr Wu Tang! 🙂

  18. Kevin McLaughlin says:

    Like Capone, whom they could never convict on a criminal offense, he’s tripped up on a white-collar charge.

  19. MTK says:

    Did you all get to the punchline at the bottom of the article?

    The guy actually made every one of his investors money. No one got ripped off at the end. Oh sure, he told some whoppers along the way and made some highly questionable financial transactions, but at the end of the day, he delivered on everything he said he would.

    Don’t get me wrong here, I think the guy is a jerk, a scoundrel, and ethically challenged to say the least,

    What I am saying is this isn’t going to be an easy charge to stick in my opinion. If you’re on a jury and there’s a fraud charge, but no “victims” of this fraud, it’s pretty hard to convict. What are the feds going to do? Put a person on the stand who goes on about how they were duped and then on cross have to admit that being duped meant his $1M investment turned into 2 million? Good luck.

    His defense is going to come out and say “Sure, he may have stretched the truth to buy some time or get more investment money, but he made everyone money. In order to commit fraud, some entity has to be defrauded. Who is that entity? The prosecution hasn’t identified a single person, bank, or investment firm who was defrauded. If the bank account grows, you must let go.”

    1. loupgarous says:

      You may not understand the nature of the term “securities fraud.” It’s an act that doesn’t necessarily need a victim.

      Title 17, Code of Federal Regulations, Section 240.lOb-5,
      “Employment of manipulative and deceptive devices.” says
      “It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,
      (a) To employ any device, scheme, or artifice to defraud,
      (b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
      (c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person,
      in connection with the purchase or sale of any security.”

      I don’t see a requirement there that anyone actually incur a financial loss as a consequence of the acts covered in this law, merely that the acts have been committed.

      I’m not an attorney, and it’s possible that there may be wiggle room along the lines you mention for Shkreli to walk away from these charges, but I sort of doubt it.

      If the Feds can make these charges stick, I’d say Martin Shkreli is toast, legally.

  20. Anon says:

    Worse is that Retrophin will have to pay for his defense as an officer of the company at the time, and since their investors didn’t actually lose any money, my guess is he’s very likely to walk, and then claim huge damages for wrongful arrest and damage to reputation. How ironic! America is sick.

  21. loupgarous says:

    There’s another Cordwainer Smith character whose sentence (for trying to have Rod McBan kidnapped at the spaceport, in The Planet Buyer, which is also the first part of Norstrilia) seems to be “sentenced to a life of being his own difficult and complicated self” – “Commissioner Teadrinker”

    1. Derek Lowe says:

      Finding someone who knows Cordwainer Smith that well is a rare event these days!

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