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Martin Shkreli was one terrible investor, SEC document shows

Martin Shkreli was one terrible investor, SEC document shows
Not so brash anymore: Pharmaceutical pariahMartin Shkreli (in gray hoodie), escorted by federal agents after his arrest for fraud Thursday. (Andrew Burton / Getty Images)

From this time forward, the dictionary entry for "schadenfreude" -- taking pleasure from another person's misfortune -- will come with a photograph of Martin Shkreli, 32, in federal custody.

Shkreli is the pharmaceutical company wunderkind who won worldwide obloquy by acquiring the rights to an orphan drug used by cancer and HIV patients and jacking up the price 5,000%, an exploit we reported here.

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At the time, we also reported that Shkreli was being sued for self-dealing and other misdeeds by Retrophin, a biotech firm he had founded. That case has now morphed into a federal indictment and Securities and Exchange Commission civil complaint, both unsealed Thursday just after Shkreli was arrested by federal agents at his Manhattan home.

Shkreli was the paradigm faithless servant...[who] used his control over Retrophin to enrich himself.


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The SEC complaint and federal indictment closely track the Retrophin complaint. They tell of an alleged scheme by Shkreli and a cohort based on a series of hedge funds Shkreli founded with millions of dollars from wealthy investors, involving faked documents, sham transactions, and lies about his investment record and prowess.

"Shkreli was the paradigm faithless servant...[who] used his control over Retrophin to enrich himself," the company said in its lawsuit.

The documents raise plenty of questions about why investors with millions of dollars to spare would be taken in by a thirtysomething investment guru, and why some allegedly agreed to sign transparently bogus "consulting agreements" with Retrophin to conceal repayments of their hedge-fund losses. If the allegations in the complaints are true, more indictments and civil suits should follow.

But what interests us more is what the cases say about Shkreli's investment skills. In a word, they were terrible.

Start with Shkreli's record as head of MSMB Capital Management, the hedge fund he launched in 2009. According to the SEC, he took in $660,000 from investors starting in November 2009; by November 2010, $331 was left. Some of the money allegedly went to fund Shkreli's lifestyle, but most was lost in trading. This was in a period when the benchmark Standard & Poor's 500 index gained roughly 13%.

He took in another $2.35 million in investments in December 2010 and January 2011, the SEC says, including $1.25 million from a single investor. By the end of January, half the money was gone, and by the end of February it was all gone and MSMB was in the red. This was during a period in which the S&P 500 index gained nearly 9%.

But Shkreli's biggest blunder was an enormous short position in Orexigen Therapeutics, a La Jolla biopharma firm with an obesity drug. Shkreli shorted 32 million shares of Orexigen on Feb. 1, 2011, when it was trading about $2.50 per share.

This was a massive bet that it would fall from there. But what was curious about this trade was that Orexigen shares had just taken a huge hit, falling from $9.09 the day before, when the Food and Drug Administration had issued a report questioning the obesity drug's cardiovascular safety. Shkreli, in other words, shorted at the low. Orexigen bounced back, gaining more than 50% from its lows over the next few days and ending the month up more than 30% from where Shkreli had shorted. Because short-trades lose money when the stock rises, Shkreli's trade was blown to smithereens.

Portrait of a really bad short-sale: After Martin Shkreli shorted Orexigen Therapeutics on Feb. 1, 2011, the shares went up.
Portrait of a really bad short-sale: After Martin Shkreli shorted Orexigen Therapeutics on Feb. 1, 2011, the shares went up. (Ycharts)

Worse, according to the SEC, Shkreli had misrepresented to Merrill Lynch that he had "located" the shares to short. (Technically, short-sellers are supposed to borrow shares that they're selling; in practice, they need not have these share in hand, only to know where they can borrow them if they have to. Shkreli said he'd done the "locate," but Merrill Lynch found that he hadn't, the SEC says.) In the event, Merrill Lynch had to cover Shkreli's short itself, allegedly at a $7-million loss, which it was trying to get back from Shkreli.

As outlined in the indictment and lawsuits, Shkreli's career as a hedge fund manager displayed the same qualities that have made him such a detestable symbol of  industry greed: brashness, an almost pathological self-confidence, and a buzz of business acumen that is deeply misleading. He portrayed his policy of jacking up the price of Daraprim, the toxoplasmosis drug he acquired for his firm Turing Pharmaceuticals, from $13.50 to $750 as a logical response to the the market forces governing drug prices. But Turing hasn't made a profit from the drug, and the price hike has lured at least one competitor into the market to sell the drug for $1.

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Shkreli may go down in history as the face of pharmaceutical greed. But the cases brought against him paint him as something else: an investment hotshot who couldn't get anything right.

Keep up to date with Michael Hiltzik. Follow @hiltzikm on Twitter, see our Facebook page, or email michael.hiltzik@latimes.com.

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