Shkreli Behind Bars: Hedge Fund Genius Revealed To Be Con Artist

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On Thursday, the infamous biotech CEO Martin Shkreli was arrested in New York. Described by some as the most hated man in America,

Mr. Shkreli had built a mixed track record in the public view. Positive views were based on his purportedly excellent investing skills. That, however, was offset, by the controversial price hikes his biotech firms made for live-saving drugs treating conditions such as AIDS.

Shkreli had recently jumped into the national spotlight. First, it was for his firm Turing’s decision to hike the price of a critical but little-used drug, daraprim, by 5,000%. For this seemingly greedy maneuver, Shkreli took fire from many parties, including Hillary Clinton.

Shkreli also got into a political dispute with Bernie Sanders after that presidential candidate refused Shkreli’s campaign contribution. On Twitter, Shkreli claimed he would like to run against Sanders, as he has more experience and would win, were he old enough to be eligible to be president.

Most recently, Mr. Shkreli earned the grudging respect of some stock traders following a bold trading move that ignited a shocking 2,000% rally in shares of KaloBios from $2 to as high as $45. Shkreli and some affiliated investors bought the majority of that company and arranged to have Shkreli named the new CEO.

True to form, Shkreli, via Kalobios, purchased another drug, this one for a tropical Latin American disease, Chagas, caused by blood-sucking insects. Chagas is rare in the US, and Shkreli was hoping to force US patients, largely poor latinos, to pay up for his drug.

Those plans came unglued Thursday, which opened with him being arrested by the FBI. Kalobios shares nosedived roughly 50% in the pre-market trade before being halted. They have still not reopened as of the close of Thursday’s trading.

The SEC filed a length complaint against Mr. Shkreli alleging various misdeeds. The general structure of Shkreli’s activities would appear to resemble a Ponzi scheme.

Shkreli founded one fund that lost nearly all of its money, at one point ending up with just a few hundred dollars of remaining assets. Shkreli told investors all was well. He opened another hedge fund and allegedly used funds from that fund to pay off the original investors.

Later, Shkreli founded Retrophin, his first public company, and later misused funds from Retrophin to settle debts with his old hedge fund. The board of directors at Retrophin fired Mr. Shkreli claiming he had misused company assets. Following being ousted from that company which he had founded, he then proceeded to his more recent efforts with Turing and KaloBios.

Shkreli had built a reputation for being, if nothing else, an extremely savvy stock trader. However the SEC complaint shows something rather opposite of that to be the truth. Shkreli made large outsized bets against individual companies, causing him to take large amounts of concentrated risk.

At one of his funds, he went short a huge amount of stock. He claimed to have located the necessary shares to short sell the company and establish this large position. However this wasn’t the case in actuality, and later led to him having to buy back the inappropriately borrowed shares at a large loss, wiping out virtually the entire fund’s assets in one bad move.

Shkreli is out of jail for the time being after paying a large bond payment. Onlookers’ top remaining questions fall into two categories.

For investors, the question is what will happen to KaloBios. Remember, Shkreli bought that company when it was at the point of shutting down. It was in route to voluntarily wind down and return the remaining cash to investors.

Now, shares spiked and the company raised money based on Shkreli’s charismatic leadership. With him potentially in jail, will the company continue its new efforts related to Chagas? Or will the company simply resume shutting down? Either way, there’s no reason to even consider buying the stock at this point.

For non-investors, the bigger question is what happens to the Wu Tang album Shkreli bought. Shkreli won an auction for the latest Wu Tang group’s album, of which precisely one copy was made. Shkreli hasn’t allowed anyone else to listen to the album, although he offered the possibility that if Taylor Swift would go on a date with him, she could enjoy hearing the heretofore unreleased album.

The FBI stated that its arrest of Shkreli came without a warrant, and as such, they did not seize the singular copy of the Wu Tang album. Will rap fans finally get to hear the release now that Shkreli may be heading to jail? Time will tell.

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