Securities And Exchange Commission v. Shkreli et al
Filing
54
ORDER granting 48 Motion for Damages. As described in the Court's Memorandum and Order, the Court GRANTS the Securities and Exchange Commission's ("SEC") 48 Motion for an Officer and Director Bar and Civil Monetary Penalties a s to Defendant Martin Shkreli in its entirety. As reflected in the accompanying Final Judgment as to Defendant Martin Shkreli, the Court permanently bars Mr. Shkreli from serving as an officer or director of any public company, and further imposes c ivil monetary penalties of $1,392,000.00, against him. The Clerk of Court is respectfully ordered to enter the Judgment accordingly. The Court shall retain jurisdiction of this matter solely for the purposes of enforcing the terms of the Judgment. Ordered by Judge Kiyo A. Matsumoto on 2/23/2022. (Rodriguez Armenta, Elena)
Case 1:15-cv-07175-KAM-JRC Document 54 Filed 02/23/22 Page 1 of 39 PageID #: 388
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF NEW YORK
-----------------------------------------X
SECURITIES AND EXCHANGE COMMISSION,
Plaintiff,
MEMORANDUM & ORDER
- against -
15-CV-7175 (KAM) (JRC)
MARTIN SHKRELI;
EVAN GREEBEL;
MSMB CAPITAL MANAGEMENT LLC; and
MSMB HEALTHCARE MANAGEMENT LLC,
Defendants.
-----------------------------------------X
MATSUMOTO, United States District Judge:
In this civil action, commenced on December 17, 2015,
the
Securities
and
Exchange
Commission
(“SEC”)
alleges
that
defendants Martin Shkreli (“Mr. Shkreli”) and Evan Greebel (“Mr.
Greebel”) participated in multiple fraudulent schemes in violation
of this country’s securities laws.
(ECF No. 1, Compl.)
The
conduct at issue in the SEC’s complaint was also the basis for
criminal charges against Mr. Shkreli in the parallel proceeding
before this Court, United States v. Shkreli and Greebel, No. 15cr-637 (KAM) (E.D.N.Y.).
Presently before the Court is the SEC’s
motion to permanently bar Mr. Shkreli from serving as an officer
or director of any public company, and for the imposition of civil
monetary penalties against him.
For the reasons stated herein,
the SEC’s motion is GRANTED in its entirety.
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BACKGROUND
I.
Procedural Background
Following
the
Court’s
granting
of
the
Government’s
motion seeking intervention and stay (see ECF No. 33, Mar. 22,
2016 Mem. and Order), Mr. Shkreli consented to a bifurcated
resolution of the instant action.
As part of that bifurcated
resolution, on December 28, 2020, the Court entered a consent
judgment (“Consent Judgment”) which ordered injunctive relief, and
provided that the SEC’s claims for monetary penalties and an
officer and director bar would be decided on motion of the SEC.
(See ECF Nos. 45, 45-1, Consent J. as to Martin Shkreli, Dec. 28,
2020.)
On April 2, 2021, the SEC filed a Motion for an Officer
and Director Bar and Civil Monetary Penalties as to Mr. Shkreli.
(ECF No. 48, Letter Enclosing Motion, ECF No. 48-1, Notice of
Motion.)
The SEC moves the Court to (1) permanently bar Shkreli
from serving as an officer or director of any public company; and,
(2) impose civil monetary penalties in the amount of $1,392,000
against him.
(Id.)
In support of its Motion, the SEC filed a
memorandum of law, the declaration of Melissa Coppola, and a
proposed final judgment.
(ECF No. 48-2, SEC Memorandum of Law in
Support (“SEC Mem.”); ECF No. 48-3, Declaration of Melissa A.
Coppola (“Coppola Decl.”); ECF No. 48-4, Proposed Final Judgment.)
Also on April 2, 2021, Mr. Shkreli filed a memorandum in opposition
2
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to the SEC’s Motion (ECF No. 49, Def. Opp. Mem.), and the SEC filed
a reply in support of its Motion.
(ECF No. 50, SEC Reply.)
On
April 7, 2021, Mr. Shkreli filed a letter seeking leave to file a
sur-reply.
(ECF No. 52, Def. Letter.)
The Court granted Mr.
Shkreli leave to file a sur-reply on April 8, 2021.
Apr. 8, 2021.)
April 9, 2021.
(Dkt. Order,
Mr. Shkreli filed a sur-reply in opposition on
(ECF No. 53, Def. Sur-Reply.)
Pursuant
to
the
terms
of
the
Consent
Judgment,
in
connection with the instant motion, Mr. Shkreli is precluded from
arguing he did not violate the securities laws, and the allegations
in the complaint are to be accepted by the Court as true.
No. 45-1, pp. 2-3.)
(ECF
Additionally, the Consent Judgment provided
that the Court may decide the issues raised in the SEC’s motion on
the
basis
of
affidavits,
declarations,
excerpts
of
sworn
deposition or investigative testimony, and documentary evidence,
without regard to the standards for summary judgment contained in
Rule 56(c) of the Federal Rules of Civil Procedure.
II.
(Id.)
Factual Background
The
Court
assumes
familiarity
with
the
factual
background in this case, and incorporates by cross-reference in
its entirety the background as provided in the Court’s March 22,
2016, Memorandum and Order.
Order.)
(ECF No. 33, Mar. 22, 2016 Mem. and
As noted supra, pursuant to the terms of the Consent
Judgment, all allegations in the Complaint shall be deemed and
3
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accepted as true by the Court for the purposes of this Memorandum
and Order.
By way of brief factual background, Mr. Shkreli was the
founder and portfolio manager of two hedge funds, MSMB Capital
Management LP (“MSMB”) and MSMB Healthcare LP (“MSMB Healthcare”).
(See Compl. at ¶¶ 2, 13, 17-18.)
Mr. Shkreli was also the managing
member of the respective investment advisers to the two hedge
funds, defendants MSMB Capital Management LLC (“MSMB Adviser”) and
MSMB Healthcare Management LLC (“MSMB Healthcare Adviser”).
at ¶¶ 2, 13, 15-16.)
(Id.
In March 2011, Mr. Shkreli founded the
biopharmaceutical company Retrophin LLC, which became public in
December 2012 as Retrophin, Inc. (“Retrophin”). (Id. ¶¶ 2, 13,
22.)1
As will be discussed in greater detail infra, the Complaint
alleges that Mr. Shkreli: (1) made material misrepresentations and
omissions to investors and prospective investors in MSMB; (ii)
lied to an MSMB executing broker about MSMB’s ability to settle
short
sales
that
Mr.
Shkreli
made
in
MSMB’s
account;
(iii)
misappropriated funds from MSMB and MSMB Healthcare; and (iv)
fraudulently
induced
Retrophin
to
enter
into
sham
consulting
agreements with certain disgruntled investors in MSMB and MSMB
Healthcare to settle potential claims against himself. (Id. ¶¶ 23, 24-55.)
1
After he left Retrophin, Mr. Shkreli became CEO of Turing Pharmaceuticals
(now known as Vyera Pharmaceuticals), a privately held company founded by Mr.
Shkreli. (Id. ¶ 13.)
4
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LEGAL STANDARDS
I.
Officer Director Bar
A. Securities Act, Exchange Act, and Sarbanes-Oxley Act
For violations of the Securities Act Section 20(e),
Title 15 U.S.C. Section 77t(e), and Exchange Act Section 21(d)(2),
Title 15 U.S.C. Section 78u(d)(2), courts may bar a person from
serving as an officer or director of “any issuer that has a class
of securities registered” under Exchange Act Section 12, Title 15
U.S.C. Section 78l, or “that is required to file reports” under
Exchange Act Section 15(d), Title 15 U.S.C. Section 78o(d).
The
Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”), Pub. L. 107-204,
116 Stat. 745 enacted July 30, 2002, permits courts to impose an
officer and director bar on an individual if a person’s conduct
demonstrated “unfitness” to serve in such a capacity.
B. Unfitness
Although Sarbanes-Oxley amended Exchange Act Section
21(d)(2), 15 U.S.C. Section 78u(d)(2), and Securities Act Section
20(e), Title 15 U.S.C. Section 77t(e) to reduce the Commission’s
burden of proof from “substantial unfitness” to “unfitness,” the
Court
will
consider
the
six
non-exclusive
factors
previously
identified by the Second Circuit in SEC v. Patel, 61 F.3d 137 (2d
Cir. 1995), in evaluating Mr. Shkreli’s unfitness to serve as an
officer or director of a public company.
Circuit
highlighted
several
non-exclusive
5
In Patel, the Second
and
non-mandatory
Case 1:15-cv-07175-KAM-JRC Document 54 Filed 02/23/22 Page 6 of 39 PageID #: 393
factors that are relevant to determining whether a defendant was
“substantially unfit” to serve as an officer or director of a
public company:
(1) the “egregiousness” of the underlying securities law
violation; (2) the defendant’s “repeat offender” status;
(3) the defendant’s “role” or position when he engaged
in the fraud; (4) the defendant’s degree of scienter;
(5) the defendant’s economic stake in the violation; and
(6) the likelihood that misconduct will recur.
Patel, 61 F.3d at 141.
The Second Circuit in Patel was confronted
with the earlier version of Section 21(d)(2) of the Exchange Act
(“Section 21(d)(2)”), which permitted a ban only “‘if the person’s
conduct demonstrates substantial unfitness to serve as an officer
or director.’”
S.E.C. v. Bankosky, 716 F.3d 45, 48 (2d Cir. 2013).
In 2002, Congress replaced the phrase “substantial unfitness” in
Section 21(d)(2) with the term “unfitness.”
See Sarbanes–Oxley
Act of 2002 § 305(a), Pub. L. No. 107–204, 116 Stat. 745, 778–79
(2002)
(amending
15
U.S.C.
§
78u(d)(2))
(emphasis
added).
Congress’s intent in removing the term “substantial” from Section
21(d)(2) was to lower the threshold of misconduct to “unfitness”
for which courts may impose director and officer bans.
Bankosky,
716 F.3d at 48 (citing S.Rep. No. 107–205, at 27 (2002), available
at 2002 WL 1443523 (explaining that standard was changed to
“unfitness” because “‘substantial unfitness’ standard ... [was]
inordinately high, causing courts to refrain from imposing bars
even in cases of egregious misconduct”)).
6
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The Second Circuit in Bankosky clarified that though
Patel, decided in 1995, predated Congress’s amendment of Section
21(d)(2),
the
Patel
factors
are
still
just
as
relevant
to
determining “unfitness” as they were to determining “substantial
unfitness.”
Bankosky,
iShopNoMarkup.com,
Inc.,
716
F.3d
at
48–49
No.
04–cv–4057
(citing
(DRH)
SEC
v.
(ARL),
2012
WL
716928, at *3 n. 2 (E.D.N.Y. Mar. 3, 2012); SEC v. Miller, 744
F.Supp.2d 1325, 1347 (N.D.Ga.2010); SEC v. DiBella, No. 3:04–cv–
1342, 2008 WL 6965807, at *9 n. 12 (D. Conn. Mar. 13, 2008)).
The Patel factors, though helpful guidance, are not
mandatory.
Bankosky, 716 F.3d at 48.
A court applying the Patel
factors may impose an officer or director bar even if not all six
factors are present.
See Patel, 61 F.3d at 142 (“[I]t is not
essential for a lifetime ban that there be past violations”).
district
court
may
determine
that
some
Patel
inapplicable and apply other relevant factors.
at 48.
factors
A
are
Bankosky, 716 F.3d
The Court enjoys “substantial discretion” in deciding
whether to impose a bar and the duration of any bar, “so long as
any bar imposed is accompanied with some indication of the factual
support for each factor that is relied upon.”
Id. (citing Patel,
61 F.3d at 141).
II.
Civil Monetary Penalties
Pursuant
to
Securities
Act
Section
20(d),
Title
15
U.S.C. Section 77t(d), Exchange Act Section 21(d)(3), Title 15
7
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U.S.C. Section 78u(d)(3), and Section 209(e) of the Investment
Advisers Act of 1940, Title 15 U.S.C. Section 80b-9(e), Court may
order a civil monetary penalty and, if so, determine the amount of
the civil penalty.
Securities
Act
Section
20(d),
Exchange
Act
Section
21(d)(3), and Advisers Act Section 209(e) each provide three tiers
of monetary penalties for statutory violations. See 15 U.S.C. §
77t(d); 15 U.S.C. § 78u(d)(3); 15 U.S.C. § 80b-9(e).
“The amount
of the penalty shall be determined by the court in light of the
facts and circumstances.”
See, e.g., 15 U.S.C.A. § 77t(d).
A
first tier penalty may be imposed for any violation; a second tier
penalty may be imposed if the violation involves “fraud, deceit,
manipulation, or deliberate or reckless disregard of a regulatory
requirement”; and a third tier penalty may be imposed if the
violation involves “fraud, deceit, manipulation, or deliberate or
reckless disregard of a regulatory requirement,” and the violation
also resulted in “substantial losses or created a significant risk
of substantial losses to other persons.”
See 15 U.S.C. § 77t(d);
15 U.S.C. § 78u(d)(3); 15 U.S.C. § 80b-9(e).
The statutes provide
that, for all three tiers, the amount of the penalty that the Court
can impose, per violation, “shall not exceed the greater of” the
current statutory amount in effect at the time of the violation,
or the “gross amount of pecuniary gain to such defendant.” Id.
(emphasis added.)
Here, the third-tier statutory amount in effect
8
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during
the
years
of
Mr.
Shkreli’s
violations
involving
misappropriations from MSMB and misrepresentations to MSMB and
Executing Broker was $150,000.2
The third-tier statutory amount
in effect during the years of Mr. Shkreli’s violations involving
Retrophin was $160,000.3
The gross amount of pecuniary gain from
his misappropriations is $932,000.
(ECF No. 48-2, SEC Mem., p.
14.)
DISCUSSION
I.
Unfitness to Serve as an Officer or Director of a Public
Company Resulting in a Permanent Bar
The SEC argues that the imposition of a permanent bar
preventing Mr. Shkreli from ever again serving as an officer or
director of any public company is appropriate.
Mr. Shkreli argues
in opposition that a permanent bar would be “excessive,” and
proposes a ten-year bar or, in the alternative, a ten-year bar
along with conditions on any future service as an officer or
director of a public company.
pp. 1-2.)
(ECF No. 49, Def. Mem. in Opp., at
For the reasons described infra, after reviewing the
record and considering all factors the Court considers applicable
2
See Adjustments to Civil Monetary Penalty Amounts, Release Nos. 33-9009, 3459449, IA-2845, dated Feb. 25, 2009 (effective Mar. 3, 2009), previously
found at 17 CFR 201.1004 and Table IV to Subpart E of Part 201 (available at:
https://www.sec.gov/rules/final/2009/33-9009.pdf) and Release Nos. 33-9387,
34-68994, IA-3557, dated Feb. 27, 2013 (effective Mar. 5, 2013), previously
found at 17 CFR 201.1005 and Table V to Subpart E of Part 201 (available at:
https://www.sec.gov/rules/final/2013/33-9387.pdf).
3 Id.
9
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to Mr. Shkreli’s case, the Court finds that a permanent bar is
appropriate.
A. Egregiousness of Underlying Securities Law Violation
The
Court
considers
Mr.
Shkreli’s
violations
of
securities laws to be particularly egregious.4 Indeed, Mr. Shkreli
himself “appreciates this factor will not cut in his favor.”
No. 49, Def. Opp. Mem., p. 7.)
(ECF
Pursuant to the terms of the
Consent Judgment entered in this action, it is undisputed that
over several years, Mr. Shkreli engaged in multiple violations,
and aided and abetted violations, of multiple antifraud provisions
of the securities laws: Securities Act Section 17(a), Exchange Act
Section 10(b) and Rules 10b-5 and 10b-21, and Advisers Act Section
206 and Rule 206(4)-8.
2.)
Specifically,
misrepresentations
(Compl. ¶ 4; ECF No. 45-1, Consent J., p.
Mr.
and
Shkreli
omissions
(1)
to
repeatedly
multiple
made
material
investors
and
4
Though not part of the allegations in the Complaint in the instant action,
the Court takes judicial notice that in 2020, the FTC, the State of New York,
and other states, brought an action against Mr. Shkreli and others. The
complaint in that action alleged anticompetitive conduct and unfair methods
of competition regarding Mr. Shkreli and his co-defendants’ attempt to
monopolize the drug Daraprim, an essential drug in the treatment of deadly
parasitic infections, including in pregnant women, cancer patients and AIDS
patients. (See generally FTC v. Vyera Pharm., LLC, Dkt. No. 20-cv-706 (DLC)
(S.D.N.Y.), ECF No. 86, Apr. 14, 2020, Redacted Amended Complaint for
Injunctive and Other Equitable Relief.) Mr. Shkreli was the CEO of the
pharmaceutical company, now known as Vyera Pharmaceuticals, LCC, when the
company significantly increased the price of Daraprim, for which the company
had obtained exclusive rights, from $13.50 to $750 per pill. On January 14,
2022, U.S. District Judge Cote ordered Mr. Shkreli to return $64.6 million in
profits that he and his former company gained from raising the price of the
lifesaving drug, and barred Mr. Shkreli from participating in the
pharmaceutical industry for the rest of his life. (See Dkt. No. 20-cv-706
(DLC) (S.D.N.Y.), ECF No. 865, Opinion and Order, Jan. 14, 2022.)
10
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prospective investors in MSMB; (2) lied to one of MSMB’s executing
brokers about MSMB’s ability to settle short sales Shkreli had
made in MSMB’s account; (3) misappropriated funds from MSMB and
MSMB Healthcare; and, (4) fraudulently induced Retrophin to enter
into multiple sham consulting agreements with, and to issue stock
and make cash payments to, certain disgruntled investors in MSMB
and MSMB Healthcare in order to avoid liability.
(Compl. ¶¶ 2-3,
24-55.)
The
violative
conduct
alleged
in
the
Complaint
involved Mr. Shkreli taking a series of deliberate, calculated,
and affirmative steps.
As alleged in the Complaint, Mr. Shkreli
knowingly or recklessly made repeated, blatant misrepresentations
to current and prospective investors.
(Id. ¶¶ 29-36.)
For
example, on July 26, 2010, Mr. Shkreli lied to a prospective
investor (“Investor A”) in MSMB by stating in an email that MSMB
had generated gains of “+35.77% since inception on 11/1/2009,”
when MSMB had actually generated losses of about 18% during that
time.
(Id. ¶ 29.)
Mr. Shkreli lied further to Investor A on
December 2, 2010, when Mr. Shkreli wrote in an email that MSMB had
assets in the amount of $35 million; in reality, at that time,
MSMB had less than $1,000 across its bank and brokerage accounts.
(Id. ¶¶ 30-31.)
On December 2, 2010, Mr. Shkreli also falsely
stated in an email to Investor A that MSMB had an auditor and
11
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administrator when, in reality, MSMB had not retained either an
auditor or administrator.
Mr.
Shkreli
(Id.)
also
made
misrepresentations
to
an
executing broker (“Executing Broker”)5 regarding MSMB’s account.
(Id. ¶¶ 19, 32-36.)
On February 1, 2011, Mr. Shkreli sold short
more than 32 million shares of “Company A” in MSMB’s account at
Executing Broker, and represented to Executing Broker that MSMB
had identified a source to borrow the Company A shares that MSMB
(Id. at ¶¶ 32-33.)
was selling short.6
There was no such source,
as MSMB had not identified any source from which to borrow Company
A shares.
(Id. ¶ 34.)
Mr. Shkreli directly placed the orders for
the short sales, and each transaction included a misrepresentation
by Mr. Shkreli that MSMB was able to borrow sufficient Company A
shares from the prime broker to settle the short sales executed by
Executing Broker.
(Id. ¶ 33.)
Mr. Shkreli continued to mislead
Executing Broker regarding MSMB’s ability to settle the short sales
until February 2, 2011, and ultimately, MSMB failed to settle a
short position of over 11 million shares of Company A.
35-36.)
(Id. ¶¶
Executing Broker bought sufficient shares of Company A on
the market to settle MSMB’s short position, incurring a loss of
over $7 million.
(Id. ¶ 36.)
5
“Executing Broker” is identified as the registered broker-dealer Merrill
Lynch in the SEC’s Memorandum of Law. (ECF No. 48-2, p. 3.)
6 “Company A” is identified as the issuer OREX in the SEC’s Memorandum of Law.
(ECF No. 48-2, p. 3.)
12
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Mr.
Shkreli’s
repeated,
deliberate
falsehoods
to
investors with regard to MSMB and MSMB Healthcare resulted in
significant losses to hedge fund investors. The impacted investors
in MSMB and MSMB Healthcare suffered these losses as Mr. Shkreli
falsified the value and returns and dissipated the entire amounts
invested
in
both
funds
through
trading
losses
and
misappropriations. (Id. ¶¶ 25-28.) During the period from October
2009
to
January
2011,
$3,015,000 in MSMB.
nine
investors
(Id. ¶ 24.)
invested
approximately
During that time period, Mr.
Shkreli misappropriated approximately $120,000 of investor funds
from MSMB for his personal benefit—including rent, food, medical
expenses, and clothing—that were not properly charged as expenses
of MSMB. (Id. ¶¶ 2-3, 28; Coppola Decl. ¶ 6.)
By February 2011,
Mr. Shkreli had dissipated nearly the entirety of MSMB funds
through trading losses and misappropriations; the net asset value
of MSMB’s prime brokerage account and cash balance amounted to
approximately $58,500.
(Compl. ¶¶ 25-28, 44.)
In early February
2011, despite knowing that MSMB had already lost nearly all its
assets, Mr. Shkreli began emailing performance estimates to MSMB’s
investors, reporting profitable investments, reflecting outright
lies.
(Id. ¶ 42.)
Mr. Shkreli continued emailing MSMB investors
with deceptive performance estimates until September 2012. (Id.)
In one example, on February 8, 2011, when MSMB had only $1.126
million remaining of more than $3 million originally invested, Mr.
13
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Shkreli emailed at least five MSMB investors stating that MSMB had
returned “+35.95 since inception
on 11/1/2009.”
(Id. ¶ 43.)
In
another stark example, on March 2, 2011—again, by which point MSMB
had virtually no assets left—Mr. Shkreli emailed MSMB investors
falsely stating that MSMB had “returned +4.24% in February 2011”
and “returned +41.71% since inception on 11/1/2009.”
Mr.
Shkreli
continued
sending
performance
(Id. ¶ 44.)
estimates
to
MSMB
investors until September 2012, at which point he sent a final
performance estimate to the limited partners stating that through
June 2012 MSMB had returned “+79.49% net of fees since inception
on 11/1/2009.”
(Id. at ¶ 45.)
In contrast to Mr. Shkreli’s
fictional report to the investors, by the end of June 2012, MSMB
had no assets left in its prime brokerage account or bank account.
(Id.)
By September 2012, MSMB Healthcare’s assets had also
been dissipated, and consisted mainly of stock in the company
Retrophin.
(Id. ¶¶ 46-47.)
From January through March 2013, Mr.
Shkreli misappropriated approximately $900,000 of investor funds
from MSMB Healthcare to pay a settlement agreement resulting from
proceedings brought against Mr. Shkreli and MSMB by Executing
Broker.
(Id. ¶¶ 2-3, 37-41.)
As alleged in the Complaint, as a
result of Mr. Shkreli’s conduct, MSMB suffered approximately $3
million of lost assets, and MSMB Healthcare at least $900,000.
alleged
in
the
Complaint
and
14
as
supported
by
the
As
Coppola
Case 1:15-cv-07175-KAM-JRC Document 54 Filed 02/23/22 Page 15 of 39 PageID #: 402
Declaration, a total of $1,020,000 was misappropriated by Mr.
Shkreli from MSMB and MSMB Healthcare, of which Mr. Shkreli
directly misappropriated approximately $932,000 from December 18,
2010 to December 17, 2015.7
(Coppola Decl. ¶ 8.)
Mr. Shkreli then undertook further fraudulent conduct
in
order
to
absolve
himself
of
potential
disgruntled investors he left in his wake.
claims
from
the
In September 2012, Mr.
Shkreli notified investors in MSMB and MSMB Healthcare that he
would be liquidating the hedge funds, and that investors could
redeem their limited partnership for cash, Retrophin shares, or a
combination of those two options, with distributions of cash and
shares to be completed by October 31, 2012.
(Compl. ¶ 46.)
By
that point, MSMB and MSMB Healthcare had nominal amounts of cash,
and what few assets remained consisted primarily of Retrophin
shares.
(Id. ¶ 47.)
Many limited partners were dissatisfied with
the distribution they did receive, many others complained that
they received incomplete information regarding the funds’ asset
composition, and at least one investor threatened legal action.
(Id.)
During this time, Mr. Shkreli also issued a $250,000, note
to a disgruntled investor in Elea Capital (“Elea”), a different
7 In
sentencing Mr. Shkreli in the parallel criminal proceeding related to the
instant case, the Court determined that the two funds lost a combined total
of $6,400,450. (See Dkt. No. 15-cr-637, ECF No. 54, Memorandum and Order
dated Mar. 5, 2018.)
15
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hedge fund Mr. Shkreli had unsuccessfully operated during 2006 and
2007.
(Id. at ¶ 48.)
Faced
with
dissatisfied
investors
from
all
three
funds, Mr. Shkreli once again chose to commit another course of
fraudulent conduct.
In Mr. Shkreli’s role as president and CEO of
the public company Retrophin, Mr. Shkreli, together with Mr.
Greebel,
Retrophin’s
secretary,
induced
outside
Retrophin
counsel
to
and
enter
into
acting
sham
corporate
consulting
agreements with investors in the MSMB-related and Elea hedge funds.
(Id. ¶¶ 46-51.)
These sham agreements provided for the use of
Retrophin funds and assets to resolve potential claims by MSMB and
Elea investors against Mr. Shkreli.
(Id. ¶¶ 2-3, 23, 46-55.)
Mr.
Shkreli did not disclose to Retrophin’s Board of Directors that
the purpose of the agreements was to settle potential claims
brought against him or that consulting services were not actually
provided.
(Id.)
Ultimately, Mr. Shkreli caused Retrophin to
transfer approximately $7.5 million in cash and Retrophin stock
through the sham consulting agreements.
(Id. at ¶ 51.)
Accordingly, the Court finds that the violations by
Mr. Shkreli described in the Complaint rise to the level of
“egregious.”
See S.E.C. v. iShopNoMarkup.com, Inc., 2012 WL
716928, at *4 (citing Save the World Air, Inc., 2005 WL 3077514 at
*16 (finding violations egregious when defendant engaged in a
scheme defrauding through material misstatements and omission of
16
Case 1:15-cv-07175-KAM-JRC Document 54 Filed 02/23/22 Page 17 of 39 PageID #: 404
material fact made to the investing public and related to the “very
core” of the business); see also SEC v. Robinson, 2002 WL 1552049
at *5
(S.D.N.Y. July 16, 2002) (finding defendant made “flagrant”
and “outrageous” misrepresentations to investors that his company
had a product to market, ties to certain large telecommunications
companies, and reasonable expectations of reaping billions of
dollars in sales revenue).
intentional
falsehoods,
Mr. Shkreli told a series of flagrant,
including
regarding
the
assets
under
management (“AUM”), misrepresenting that his struggling hedge
funds were exceptionally successful, and hiding losses in order to
manipulate individual and public investors for his benefit.
Cf.
SEC v. Stanard, 2009 WL 196023, at *33 (S.D.N.Y. Jan. 27, 2009)
(finding no egregious violation when defendant’s false accounting
gave a “misleading impression” of the company’s profits but did
not “have the effect of creating false profits, hiding losses, or
giving a misleading picture of [the company’s] overall financial
strength”)).
The
Court
finds
that
Mr.
Shkreli’s
egregious
violations of the securities laws at issue in this case support
the imposition of an officer and director bar.
B. Defendant’s “Repeat Offender” Status
In the Second Circuit, the term “repeat offender” refers
to someone who has been found to have previously committed separate
violations of securities laws.
See S.E.C. v. SeeThruEquity, LLC,
No. 18-cv-10374 (LLS), 2022 WL 171196, at *4 (S.D.N.Y. Jan. 19,
17
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2022) (citing S.E.C. v. Bankosky, No. 12-cv-1012 (HB), 2012 WL
1849000, at *2 (S.D.N.Y. May 21, 2012), aff’d, 716 F.3d 45 (2d
Cir. 2013)) (“the term ‘repeat offender’ does not, in cases in
this Circuit, describe multiple violations as part of a unified
scheme,
but
the
recidivist
who
repeats
the
violation
after
prosecution for committing the earlier one.”); see also S.E.C. v.
Dibella, No. 04-cv-1342 (EBB), 2008 WL 6965807, at *11 (D. Conn.
Mar. 13, 2008), aff’d, 587 F.3d 553 (2d Cir. 2009) (finding
defendant was not a repeat offender because defendant was never
found to have committed securities violations in prior roles as a
director of two separate companies); SEC v. Shah, 1993 WL 288285,
at *7 (S.D.N.Y. July 28, 1993) (finding defendant could not be
considered a repeat securities law violator because he “was never
involved in any other violations of the securities laws”).
The SEC cites to authority from the Ninth and District
of Columbia Circuits in support of the proposition that defendants
are considered repeat offenders when they engage in “ongoing and
recurrent violations.” (ECF No. 48-2, SEC Mem. at p. 12 (citing
SEC v. First Pac. Bancorp, 142 F.3d 1186, 1193 (9th Cir. 1998);
SEC v. Falstaff Brewing Corp., 629 F.2d 62, 79 (D.C. Cir. 1980).)
Though the Court agrees with the SEC that Mr. Shkreli’s conduct
was not isolated and involved multiple courses of fraudulent
conduct over a period of more than four years, the Court cannot
find that Mr. Shkreli is a “repeat offender” as the term is applied
18
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in the Second Circuit.
It is undisputed that Mr. Shkreli, prior
to the events giving rise to the present litigation and related
criminal and civil actions,8 had not been previously found to have
violated any securities laws.
See Bankosky, 2012 WL 1849000, at
*2 (quoting iShopNoMarkup.com, Inc., 2012 WL 716928, at *5 (citing
Second
Circuit
cases)
(characterizing
a
repeat
offender
as
“someone who has committed separate violations of securities laws
in the past.”)).
Accordingly, the Court does not consider Mr.
Shkreli a “repeat offender” under Second Circuit precedent, and
this factor weighs against the imposition of an officer director
bar.
C. Defendant’s Role or Position During Fraud
It
is
undisputed
that,
during
the
securities
laws
violations alleged in the Complaint, Mr. Shkreli held high-level
roles as founder and manager of the hedge funds, and as founder
and CEO of Retrophin, the public company he defrauded or helped to
defraud.
Mr. Shkreli concedes that this factor does not weigh in
his favor.
was
the
(ECF No. 49, Def. Opp. Mem., pp. 7-8.)
founder,
managing
partner,
portfolio
Mr. Shkreli
manager,
and
investment adviser of both MSMB and MSMB Healthcare when he made
misrepresentations
to
investors,
potential
investors,
and
8
Mr. Shkreli was convicted after trial of criminal conduct relating to
certain matters alleged in the instant action. In United States v. Shkreli,
15-cr-637-KAM (E.D.N.Y.), Mr. Shkreli was convicted of violations of Title
15, U.S.C., Sections 78j(b); and Title 18, U.S.C., Section 371.
19
an
Case 1:15-cv-07175-KAM-JRC Document 54 Filed 02/23/22 Page 20 of 39 PageID #: 407
executing broker regarding the composition and performance of the
hedge funds. (Compl. ¶¶ 13, 17-18.)
Mr. Shkreli’s hedge fund,
Elea, was also operated by Mr. Shkreli in 2006 and 2007.
23.)
Mr.
investors.
Shkreli
owed
a
fiduciary
duty
to
his
(Id. ¶
hedge
fund
(Id. ¶ 74 (noting that at all relevant times, Mr.
Shkreli was an investment adviser within the meaning of Section
202(a)(11) of the Advisers Act, 15 U.S.C. § 80b-2(a)(11))); see
also SEC v Capital Gains Research Bureau, Inc., 375 U.S. 180, 19194 (1963) (noting fiduciary nature of an investment advisory
relationship under Advisers Act).
Mr. Shkreli was also president
and CEO of the public company, Retrophin, when he and Mr. Greebel
engaged in the scheme to defraud Retrophin through sham consulting
agreements.
(Compl. ¶¶ 13, 46-51.)
The Court finds that Mr.
Shkreli’s leadership positions and fiduciary roles during the
securities
violations
described
in
the
complaint
support
the
imposition of an officer director bar.
D. Defendant’s Degree of Scienter
The Court is satisfied that Mr. Shkreli’s high degree of
scienter
regarding
the
violations
in
the
complaint
has
been
established by his underlying criminal conviction and sentencing.
See S.E.C. v. Gupta, No. 11-cv-7566 (JSR), 2013 WL 3784138, at *4
(S.D.N.Y. July 17, 2013), aff’d sub nom. U.S. S.E.C. v. Gupta, 569
F. App’x 45 (2d Cir. 2014) (imposing a permanent injunction
20
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prohibiting the defendant from serving as an officer or director
of a public company, and noting as part of the court’s Patel
factors analysis that, in Mr. Gupta’s criminal proceedings, the
jury found that Mr. Gupta engaged in insider trading knowingly,
willfully, and with intent to defraud).
Mr. Shkreli concedes that
his criminal conviction9 has already established that he acted with
a
high
degree
of
scienter
as
to
certain
allegations
Complaint. (ECF No. 49, Def. Opp. Mem., pp. 7-8.)
in
the
Mr. Shkreli’s
criminal conviction establishes Mr. Shkreli acted with scienter
with
respect
to:
(1)
the
material
misrepresentations
and/or
omissions he made to investors of MSMB and MSMB Healthcare; and,
(2) the misappropriation of funds from MSMB Healthcare to settle
an arbitration against MSMB and Mr. Shkreli.
(Id. at n. 4 (citing
United States v. Shkreli, Dkt. No. 15-cr-637 (E.D.N.Y.).)
Though
Mr. Shkreli was acquitted, in relevant part to the instant action,
of the conduct that he engaged in with Mr. Greebel to fraudulently
induce Retrophin to enter into sham consulting agreements to steal
money and shares from Retrophin to repay defrauded MSMB investors,
9
(See Dkt. No. 15-cr-637, United States v. Shkreli, ECF No. 305, Verdict, at
1-3 (the jury returned its verdict on August 4, 2017, and Mr. Shkreli was
convicted of Count Three, Securities Fraud in relation to MSMB Capital; Count
Six, Securities Fraud in relation to MSMB Healthcare; and Count Eight,
Conspiracy to Commit Securities Fraud in relation to Retrophin. Mr. Shkreli
was acquitted on Count One, Conspiracy to Commit Securities Fraud with regard
to the MSMB Scheme; Count Two, Conspiracy to Commit Wire Fraud with regard to
the MSMB Scheme; Count Four, Conspiracy to Commit Securities Fraud with
regard to the MSMB Healthcare Scheme; Count Five, Conspiracy to Commit Wire
Fraud with regard to the MSMB Healthcare Scheme; and, Count Seven, Conspiracy
to Commit Wire Fraud with regard to the Retrophin Misappropriation Scheme.)
21
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the Court noted for the purposes of sentencing that the government
had proven this conduct by a preponderance of the evidence.
Dkt.
No.
15-cr-637,
United
States
v.
Shkreli,
ECF
(See
No.
89,
Memorandum and Order Denying Def. Motion for Judgment of Acquittal,
Feb. 26, 2018, at pp. 88-89.)
Even disregarding Mr. Shkreli’s criminal conviction, the
violations as described in the Complaint, which the Court accepts
as true, and as discussed in detail supra, demonstrate that Mr.
Shkreli was fully aware that he knowingly and intentionally was
engaging in fraudulent conduct.
“Scienter, as used in connection
with the securities fraud statutes, means intent to deceive,
manipulate, or defraud, or at least knowing misconduct.”
See
S.E.C. v. Bankosky, No. 12-cv-1012 (HB), 2012 WL 1849000, at *2
(S.D.N.Y. May 21, 2012), aff’d, 716 F.3d 45 (2d Cir. 2013) (quoting
S.E.C. v. Kelly, 765 F. Supp. 2d 301, 319 (S.D.N.Y.2011) (quoting
S.E.C. v. First Jersey Secs., Inc., 101 F.3d 1450, 1467 (2d
Cir.1996)).
Employing the Second Circuit’s definition, the Court
considers Mr. Shkreli to have acted with a high degree of scienter
in the commission of the violations alleged in the Complaint.
Mr. Shkreli knowingly and intentionally made numerous
false statements to investors and brokers on numerous occasions
concerning
investor
the
funds
two
which
MSMB-related
he
obtained
hedge
under
funds,
false
misappropriated
pretenses,
and
defrauded a public company into entering into sham consulting
22
Case 1:15-cv-07175-KAM-JRC Document 54 Filed 02/23/22 Page 23 of 39 PageID #: 410
agreements
to
protect
himself
from
investors from his two hedge funds.
claims
of
the
defrauded
Based on the record currently
before the Court, it is clear to the Court that it was Mr. Shkreli’s
intent to manipulate and deceive individual and public investors.
Though the Court considers that Mr. Shkreli acted with outright
intent in his violation of multiple securities laws, scienter can
also be “‘satisfied by a strong showing of reckless disregard for
the truth.’”
iShopNoMarkup.com, Inc., 2012 WL 716928, at *5
(citing SEC v. Tecumseh Holdings Corp., 765 F. Supp. 2d 340, 349
(S.D.N.Y. 2011) (quoting S. Cherry St., LLC v. Hennessee Grp. LLC,
573 F.3d 98, 109 (2d Cir.2009)).
“Conduct is reckless if it
represents an extreme departure from the standards of ordinary
care to the extent the danger was either known to the defendant or
so
obvious
that
the
defendant
must
have
been
aware
of
it.”
iShopNoMarkup.com, Inc., 2012 WL 716928, at *5 (citing SEC v.
Tecumseh Holdings Corp., 765 F. Supp. 2d at 349-50 (S.D.N.Y. 2011)
(internal quotation marks omitted).
Even if Mr. Shkreli did not
act with knowledge and intent—which, based on the evidence, the
Court finds to be established—the record supports a finding that
at a minimum Mr. Shkreli acted with an “extreme departure from the
standards of ordinary care.”
Id.
As described in the Complaint, Mr. Shkreli knowingly,
or at the very least recklessly, used one entity after another to
cover up the fraudulent conduct he committed at a different entity.
23
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Mr. Shkreli’s high degree of scienter weighs in favor of the
imposition of an officer director bar.
E. Defendant’s Economic Stake in the Violations
Mr. Shkreli’s economic interest and the direct benefit
he derived from committing the securities violations alleged in
the Complaint weigh in favor of the imposition of an officer
director bar.
Coppola
As alleged in the Complaint and as supported by the
Declaration,
Mr.
Shkreli
securities laws violations.
plainly
profited
from
his
From October 2009 through July 2011,
Mr. Shkreli misappropriated approximately $120,000 of investor
funds from MSMB for his personal benefit.
January
through
March
2013,
Mr.
(Compl. ¶¶ 3, 28.)
Shkreli
From
misappropriated
approximately $900,000 of investor funds from MSMB Healthcare to
fund
the
settlement
of
an
arbitration
proceeding
brought
by
Executing Broker in connection with MSMB’s failure to settle its
short sales of Company A stock—a failure orchestrated by Mr.
Shkreli.
(Compl. ¶¶ 3, 37-41; Coppola Decl. ¶¶ 5, 7.)
Mr. Shkreli does not dispute the SEC’s argument, which
is supported by the record, that Mr. Shkreli had an economic stake
in the violations he committed.
Logically, Mr.
Shkreli stood to
receive advisor fees from his hedge funds if he made it appear
that the funds were profitable, rather than conceding the truth:
that he had lost or spent all of the funds’ assets.
45.)
Mr. Shkreli benefited from the misappropriations from MSMB
24
(Compl. ¶ 24-
Case 1:15-cv-07175-KAM-JRC Document 54 Filed 02/23/22 Page 25 of 39 PageID #: 412
and MSMB Healthcare, which were used to fund the settlement with
Executing Broker and ultimately protect Mr. Shkreli from potential
claims arising from the $7 million loss Mr. Shkreli caused.
¶¶ 32-41.)
(Id.
Mr. Shkreli’s purpose in inducing Retrophin, of which
he was president and CEO, to enter into sham consulting agreements
was to evade liability from his fraudulent conduct involving his
hedge funds.
(Id. ¶¶ 23, 46-55.)
F. Likelihood of Recurrence
Though, as noted previously, the Court does not consider
Mr. Shkreli to be a repeat offender, the Court finds that there is
a likelihood of recurrence in Mr. Shkreli’s case.
Accordingly,
the Court must and will “articulate the factual basis for a finding
of the likelihood of recurrence[,]” in support of its conclusion.
S.E.C. v. Apuzzo, 184 F. Supp. 3d at 9 (D. Conn. 2016) (citing
Patel, 61 F.3d at 142).
In determining whether a “reasonable likelihood” of
future violations exists, courts may generally consider:
the egregiousness of the defendant’s actions; the
isolated, recurrent, or systematic nature of the
violations; the degree of scienter involved; the
[defendant’s] recognition of the wrongfulness of the
conduct; and the likelihood that the [defendant’s]
customary business activities will present opportunities
for future violations.
Commodity Futures Trading Comm’n v. McDonnell, 332 F. Supp. 3d
641, 725 (E.D.N.Y. 2018) (citing SEC v. Manor Nursing Ctrs., Inc.,
458 F.2d 1082, 1100-01 (2d Cir. 1972)).
25
As noted supra, the Court
Case 1:15-cv-07175-KAM-JRC Document 54 Filed 02/23/22 Page 26 of 39 PageID #: 413
has already found Mr. Shkreli’s violative conduct at issue to be
egregious, and to have been committed with a high degree of
scienter.
As to the other factors, Mr. Shkreli’s violations were
certainly not isolated.
Over a period of several years, from at
least October 2009 through March 2014, Mr. Shkreli repeatedly
committed
violations
entities.
(Compl. ¶ 1.)
frames
them,
involved
of
involved
interconnected
securities
laws
involving
multiple
Mr. Shkreli’s actions, as the SEC aptly
“different
acts
of
layers
of
wrongdoing
misconduct,”
against
and
different
entities, “e.g., stealing from MSMB Healthcare to help pay his and
MSMB’s debts; stealing from Retrophin to help pay his hedge fund
debts[.]”
(ECF No. 48-2, SEC Mem., at p. 13.)
Having reviewed the record, the Court also concludes
that Mr. Shkreli has demonstrated either an inability or an
unwillingness
to
truly
recognize
the
egregious violations of securities laws.
“wrongfulness”
case,
Mr.
argument
that
he
Shkreli
has
focuses
already
been
his
McDonnell, 332 F. Supp.
3d at 725 (citing Manor Nursing, 458 F.2d at 1100-01).
instant
of
almost
exclusively
sufficiently
In the
on
the
deterred
and
punished, and only once across his opposition and sur-reply to the
SEC’s Motion does he express that he has accepted responsibility
for his actions.
(ECF No. 49, Def. Opp. Mem., at p. 1.)
Mr.
Shkreli’s opposition to the SEC’s Motion states that he has
26
Case 1:15-cv-07175-KAM-JRC Document 54 Filed 02/23/22 Page 27 of 39 PageID #: 414
“accepted responsibility for his conduct in this action,” by having
“consented to entry of Judgment permanently enjoining him from
future violations of the federal securities laws, waived his right
to appeal that judgment, and submitted himself to this Court’s
determination as to...additional remedies[.]”
(Id.)
Contrary to
Mr. Shkreli’s interpretation that the permanent injunction weighs
in his favor, the Court “has already determined in enjoining [Mr.
Shkreli] from future violations of the securities laws that there
is a likelihood that [Mr. Shkreli’s] misconduct would recur absent
appropriate
constraints.”
Gupta,
2013
WL
3784138,
at
*4.
Relatedly, as Mr. Shkreli notes, “following his conviction on
charges arising from much of the same conduct set forth in the
Complaint,” this Court sentenced Mr. Shkreli on March 9, 2018, in
his parallel criminal proceeding to eighty-four months in prison
and three years of supervised release, along with forfeiture and
restitution.
(ECF No. 49, Def. Opp. Mem., p. 4.)
During the
sentencing over which this Court presided, the Court noted that
Mr.
Shkreli’s
pre-sentencing
letter
reflected
that
he
was
“generally remorseful for the betrayal of trust,” that his acts
demonstrated.
13.)
(Dkt. No. 15-cr-637, ECF No. 621, Hr. Tr. 112:8-
The Court also noted that it must view Mr. Shkreli’s
statements
“in
light
of
his
other
conduct
and
statements,”
including that Mr. Shkreli had “clearly and repeatedly minimized
his actions.”
(Id. at 112:18-22.)
27
In his same pre-sentencing
Case 1:15-cv-07175-KAM-JRC Document 54 Filed 02/23/22 Page 28 of 39 PageID #: 415
letter to the Court, Mr. Shkreli did not admit to “his multitude
of lies, but only that he dodged answering questions...exaggerated
if he felt he had any basis...and provided answers that were only
correct if put in a certain assumed context.”
113:1.)
(Id. at 112:22-
The Court also reflected on the bevy of other conduct
that “call[ed] into question the sincerity of his remorse in his
letter to the Court” (id. at 114:7-8.), including Mr. Shkreli
asserting that he would be sentenced to time served or serve only
a few months in prison, and writing “fuck the Feds,” in an email
where he claimed the Government would not be able to take all his
money.
(Id. at 113:13-19.)
As
business
to
the
activities
likelihood
will
that
present
Mr.
Shkreli’s
opportunities
“customary
for
future
violations[,]” McDonnell, 332 F. Supp. 3d at 725 (citing Manor
Nursing, 458 F.2d at 1100-01), the Court concludes that Mr.
Shkreli’s return to the world of investment and capital markets
would
be
highly
violations.10
likely
to
present
opportunities
for
future
A “district court may properly infer a likelihood
of future violations from the defendant’s past unlawful conduct.”
McDonnell, 332 F. Supp. 3d at 725 (citing CFTC v. Am. Bd. of Trade,
10
The Court takes judicial notice that as part of the aforementioned
proceedings in FTC v. Vyera Pharm., LLC, Dkt. No. 20-cv-706 (DLC) (S.D.N.Y.),
Mr. Shkreli has been found to have used a contraband phone (“Prison Phone”)
while incarcerated pursuant to this Court’s sentence in order to continue to
remain involved in Vyera’s business development from prison. FTC v. Vyera
Pharms., LLC, No. 20-cv-706 (DLC), 2021 WL 2201382, at *3 (S.D.N.Y. June 1,
2021). Incarceration has apparently not deterred Mr. Shkreli from continuing
to participate in his prior business ventures.
28
Case 1:15-cv-07175-KAM-JRC Document 54 Filed 02/23/22 Page 29 of 39 PageID #: 416
Inc., 803 F.2d 1242, 1251 (2d Cir. 1986).
Mr. Shkreli’s past
unlawful conduct, which has shown a manifest disregard for the
investing
public,
regulatory
mechanisms,
and
this
country’s
securities laws, reasonably leads this Court to infer there is a
likelihood of future violations.
***
The Court concludes, based on a review of the record and
an analysis of the Patel factors, that Mr. Shkreli is unfit to
serve as an officer or director of any public company.
The Court
next considers whether Mr. Shkreli should be permanently barred
from serving as an officer or director of any publicly traded
company, or whether a less onerous, alternative bar or conditions
will suffice.
II.
Permanent Bar11
11
The Court notes that Mr. Shkreli argues, in opposition to the imposition of
a permanent bar, that other courts have imposed officer director bars limited
in duration against more culpable or comparable defendants. (See ECF No. 49,
Def. Opp. Mem., pp. 8-15 (citing to ECF No. 9, Final Judgment, SEC v. Holmes,
No. 18-cv-1602 (N.D. Cal. Mar. 27, 2018); ECF No. 87, Final Judgment, S.E.C.
v. DiMaria, 15-cv-7035 (S.D.N.Y. Aug. 16, 2017); ECF No. 43, Final Judgment,
S.E.C. v. Earls, No. 02-cv-02495 (D.D.C. Jun. 13, 2011); S.E.C. v. Chan, 465
F. Supp. 3d 18 (D. Mass. 2020)).) Though the SEC overstates the irrelevance
of these four cases, the Court notes the difference in procedural posture.
The courts in each of the first four cases entered final judgments at the
SEC’s request and with the consent of the defendants as part of settlements
between the parties. Therefore, the Court does not find persuasive Mr.
Shkreli’s reliance on these cases with regard to the Court’s determination of
the appropriateness of a permanent officer or director bar for Mr. Shkreli
using the Patel factors. As to Chan, 465 F. Supp. 3d 18, which also did not
apply the Patel factors and in which a five-year bar was imposed, the Court
notes that Mr. Chan was not an officer of the involved company—in sharp
contrast to Mr. Shkreli—and had only a modest economic stake in the fraud at
issue. Chan, 465 F. Supp. 3d at 38.
29
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Prior to “imposing a permanent bar, the court should
consider whether a conditional bar (e.g., a bar limited to a
particular industry) and/or a bar limited in time (e.g., a bar of
five years) might be sufficient, especially where there is no prior
history of unfitness.”
Patel, 61 F.3d at 142.
Mr. Shkreli argues
that a permanent bar is excessive because it would be exceedingly
punitive, given his young age, the fact that he is a first-time
offender, and “all the other punitive and deterrent sanctions”
imposed against him.
(ECF No. 49, Def. Opp. Mem., at p. 1.)
In determining whether a conditional bar or a bar of
limited duration is sufficient, the Second Circuit instructs that
it would not be “improper for the district court to take into
account any prior punishment that may have been imposed in a
criminal proceeding.”
therefore,
taken
Patel, 61 F.3d at 142.
into
account
Mr.
Shkreli’s
The Court has,
prior
criminal
conviction in his parallel criminal proceedings—the only criminal
conviction Mr. Shkreli faced prior to the filing of the instant
action.
Notably, however, the jury convicted Mr. Shkreli on three
counts of the eight-count indictment, and the Court found for
sentencing
purposes
that
as
to
the
other
five
counts,
the
government had successfully proven Mr. Shkreli’s conduct by a
preponderance of the evidence.
(See Dkt. No. 15-cr-637, United
States v. Shkreli, ECF No. 305, Verdict, at 1-3.)
30
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Even
given
Mr.
Shkreli’s
status
as
a
first-time
offender, the Court has found that every other Patel factor weighs
in favor of the imposition of a permanent officer director bar.
Based on a review of the record, Mr. Shkreli’s prior criminal
conviction, and the weight of the majority of the factors in the
Court’s Patel analysis, the Court concludes that Mr. Shkreli is
permanently unfit to serve as the officer or director of any public
company.
and
As reflected in the Complaint, Mr. Shkreli consistently
brazenly
deceived
his
investors,
acting
as
a
chaotic,
dishonest, and untrustworthy corporate leader in his role as a
fiduciary and as the president and CEO of a public company.
Mr.
Shkreli’s relatively young age is also concerning to the Court,
because a limited bar of five or ten years, for example, would not
sufficiently protect the public from Mr. Shkreli’s likelihood of
future
violations.
Mr.
Shkreli’s
conduct
demonstrates
a
persistent, prevailing inclination to place his own “self-interest
ahead of” the interests of his investors, hedge funds, and the
public companies under his control, “and further demonstrates
unfitness to serve as a corporate fiduciary.”
Gupta, 2013 WL
3784138, at *4 (citing Bankosky, 2013 WL 1955809, at *4).
The
imposition of a lifetime bar in Mr. Shkreli’s case is in the
interest of the investing public.
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III. Civil Monetary Penalties12
The SEC argues that, in addition to the imposition of
a permanent bar from serving as an officer or director, the
imposition of monetary penalties in the amount of $1,392,000 is
appropriate.
(ECF No. 48-2, SEC Mem., p. 14.)
Mr. Shkreli
argues in opposition that a civil penalty in not appropriate
given the sanctions already imposed on Mr. Shkreli, and in the
event that one is imposed, only second tier penalties should
apply.
(ECF No. 49, Def. Opp. Mem., p. 17.)
The Court agrees
with the SEC that third tier penalties are appropriate.
A. Statutory Requirements
First, the SEC’s requested civil monetary penalties
comply with the relevant statutory requirements and relevant
statutory maximums.
Pursuant to the relevant statutes, third
tier penalties may be imposed if the violation involves “fraud,
deceit, manipulation, or deliberate or reckless disregard of a
regulatory requirement,” and if the violation also resulted in
“substantial losses or created a significant risk of substantial
losses to other persons.”
See 15 U.S.C. § 77t(d); 15 U.S.C. §
78u(d)(3); 15 U.S.C. § 80b-9(e).
The Court, based on its
detailed consideration of the relevant facts supra, finds that
all of Mr. Shkreli’s violations included fraud, deceit,
12
The SEC has not moved for disgorgement.
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manipulation, or a deliberate or reckless disregard of a
regulatory requirement, and also resulted in substantial losses
or created significant risks of substantial losses to other
persons.
Id.; (see also generally Compl. ¶¶ 1-55.)
The statutes provide that, for all three tiers, the
amount of the penalty that the Court can impose, per violation,
“shall not exceed the greater of” the current statutory amount
in effect at the time of the violation, or the “gross amount of
pecuniary gain to such defendant.”
Id. (emphasis added.)
The
SEC’s request for an imposition of $1,392,000 in civil monetary
penalties is comprised of: (1) $932,000, the amount of Mr.
Shkreli’s gross pecuniary gain from his misappropriations from
MSMB and MSMB Healthcare; and, (2) $460,000, representing onetime, third tier penalties for each of his three additional,
separate securities violations, i.e., misrepresentations to MSMB
investors ($150,000 penalty), misrepresentations to Executing
Broker ($150,000 penalty), and defrauding Retrophin ($160,000
penalty).
(ECF No. 48-2, SEC Mem., p. 14.)13
All components of
13
These amounts accurately reflect the inflation-adjusted statutory maximum
penalty amounts for violations occurring from March 4, 2009 through March 5,
2013, adjusted again for violations occurring March 6, 2013 through November
2, 2015. See Adjustments to Civil Monetary Penalty Amounts, Release
Nos. 33-9009, 34-59449, IA-2845, dated Feb. 25, 2009 (effective Mar. 3,
2009), previously found at 17 CFR 201.1004 and Table IV to Subpart E of Part
201 (available at: https://www.sec.gov/rules/final/2009/33-9009.pdf) and
Release Nos. 33-9387, 34-68994, IA-3557, dated Feb. 27, 2013 (effective Mar.
5, 2013), previously found at 17 CFR 201.1005 and Table V to Subpart E of
Part 201 (available at: https://www.sec.gov/rules/final/2013/33-9387.pdf).
During the period (see Compl. ¶¶ 24-41, describing appropriate time period as
approximately from October 2009 to March 2013), Mr. Shkreli engaged in
33
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the SEC’s requested total civil monetary penalties comply with
the statutory maximums.
Having determined that the requested third tier civil
monetary penalties comply with the relevant statutory
requirements and statutory maximums, the Court next turns to
determine whether these civil penalties should be imposed.
See
S.E.C. v. Razmilovic, 738 F.3d 14, 38 (2d Cir. 2013), as amended
(Nov. 26, 2013) (“Beyond setting maximum penalties, the statutes
leave the actual amount of the penalty ... up to the discretion
of the district court.”) (quotation omitted); see also 15 U.S.C.
§§ 77t(d)(2)(A) (“The amount of the penalty shall be determined
by the court in light of the facts and circumstances.”);
78u(d)(3)(B)(i) (same); 80b–9(e)(2)(A) (same).
B. Imposition of Civil Monetary Penalties
In considering whether civil penalties should be
imposed and the amount of any such penalties, courts in the
Second Circuit look to a number of factors, including:
(1) the egregiousness of the defendant’s conduct; (2)
the degree of the defendant’s scienter; (3) whether
the defendant’s conduct created substantial losses or
the risk of substantial losses to other persons; (4)
whether the defendant’s conduct was isolated or
recurrent; and (5) whether the penalty should be
violations involving misappropriations from MSMB and misrepresentations to
MSMB and Executing Broker, the statutory amounts for penalties for natural
persons were $7,500 for first tier, $75,000 for second tier, and $150,000 for
third tier. See id. During the period Mr. Shkreli engaged in violations
involving Retrophin (see Compl. ¶ 3(e), describing appropriate time period as
approximately from September 2013 to March 2014), the statutory amounts for
penalties for natural persons were $7,500 for first tier, $80,000 for second
tier, and $160,000 for third tier. See id.
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reduced due to the defendant’s demonstrated current
and future financial condition.
S.E.C. v. Fowler, 6 F.4th 255, 266 (2d Cir. 2021), cert. denied,
142 S. Ct. 590 (2021). SEC v. Rajaratnam, 918 F.3d 36, 44 (2d
Cir. 2019).
The Court, in its detailed Patel factors analysis
supra, has already made findings as to relevant factors one
through four for determining an appropriate civil monetary
penalty.
Specifically, the Court has determined that (1) Mr.
Shkreli’s conduct was egregious; (2) Mr. Shkreli acted with a
high degree of scienter in the commission of his violations; (3)
Mr. Shkreli’s conduct created substantial losses and the risk of
substantial losses to others; and, (4) Mr. Shkreli’s conduct was
recurrent. See Fowler, 6 F.4th at 266.
The Court next considers
whether the third tier penalty should be reduced by one level
due to Mr. Shkreli’s demonstrated current and future financial
condition.
The record, however, does not reflect that Mr. Shkreli
faces present or future financial circumstances that would
warrant a reduction from third to second tier penalties.
Mr.
Shkreli has not submitted any evidence demonstrating an
inability to pay a civil monetary penalty imposed by the Court.
Mr. Shkreli appears to argue in this regard that the economic
ramifications (the forfeiture, restitution, and fine) of his
criminal conviction and sentencing have sufficiently cost and
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punished him, which should preclude the imposition of any
further civil penalties.
(ECF No. 49, Def. Opp. Mem. pp. 19-20;
ECF No. 53, Def. Sur-Reply, pp. 1-2.)
As part of his criminal
sentencing, Mr. Shkreli has been Ordered to forfeit $7,360,450
(reflecting the moneys invested by MSMB and MSMB Healthcare
investors), pay a fine of $75,000, and pay mandatory restitution
in the amount of $388,336.49 to one investor in MSMB Healthcare.
(Dkt. No. 15-cr-637, United States v. Shkreli, ECF No. 565,
Sentencing Order; Dkt. No. 15-cr-637, United States v. Shkreli,
Dkt. Order Apr. 9, 2018, Restitution Order.)
The Court cannot
find, based on Mr. Shkreli’s unsubstantiated arguments, that his
financial circumstances, due to his criminal financial penalties
and his income lost while incarcerated, warrant a reduction of a
third tier civil monetary penalty.
Cf. U.S. S.E.C. v.
Syndicated Food Serv. Int’l, Inc., No. 04-cv-1303 (NGG) (VMS),
2014 WL 2884578, at *20 (E.D.N.Y. Feb. 14, 2014), report and
recommendation adopted, No. 04-cv-1303 (NGG) (VLS), 2014 WL
1311442 (E.D.N.Y. Mar. 28, 2014) (bringing defendant down one
tier, taking into account defendant’s present and likely severe
health, family and financial circumstances.).
This Court has broad discretion to impose the civil
monetary penalties it deems appropriate in the instant case.
See S.E.C. v. de Maison, No. 18-2564, 2021 WL 5936385, at *1 (2d
Cir. Dec. 16, 2021) (quoting SEC v. Fowler, 6 F.4th 255, 265 (2d
36
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Cir. 2021)) (quoting SEC v. Sourlis, 851 F.3d 139, 146 (2d Cir.
2016)) (“[O]nce the district court has found federal securities
law violations, it has broad equitable power to fashion
appropriate remedies.”).
As Mr. Shkreli correctly points out,
“[c]ivil monetary penalties are authorized by the Securities Act
and the Exchange Act for both deterrent and punitive purposes.”
See S.E.C. v. Sourlis, 851 F.3d 139, 146 (2d Cir. 2016) (citing
Razmilovic, 738 F.3d 14, 38–39 (2d Cir. 2013)).
Given (1) the
egregiousness of Mr. Shkreli’s conduct in misappropriating
investors’ funds from MSMB and MSMB Healthcare, making flagrant
misrepresentations to MSMB investors and Executing Broker, and
defrauding Retrophin; (2) the high degree of scienter with which
Mr. Shkreli acted in committing those egregious violations; (3)
the substantial losses and risk of substantial losses to other
persons created by Mr. Shkreli’s misappropriations and
misrepresentations; (4) the
recurrent nature of Mr. Shkreli’s
misconduct; and, (5) the lack of evidence demonstrating that the
monetary penalties should be reduced due to Mr. Shkreli’s
current and future financial condition, the Court concludes that
third tier penalties are appropriate in the instant case, both
as punishment for Mr. Shkreli and for their deterrent effect.
The Court will impose third tier civil monetary penalties as to
Mr. Shkreli, in the total amount of $1,392,000.00, for the
following: (1) $932,000, the amount of Mr. Shkreli’s gross
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pecuniary gain from his misappropriations from MSMB and MSMB
Healthcare; and, (2) $460,000, representing one-time, third tier
penalties for each of his three additional, separate securities
violations, i.e., misrepresentations to MSMB investors ($150,000
penalty), misrepresentations to Executing Broker ($150,000
penalty), and defrauding Retrophin ($160,000 penalty).
(ECF No.
48-2, SEC Mem., p. 14.)
CONCLUSION
Accordingly, and for all the foregoing reasons, the
Court GRANTS the SEC’s Motion for a permanent Officer and Director
Bar and Civil Monetary Penalties in its entirety.
1.)
(ECF No. 48-
As reflected in the accompanying Final Judgment (“Judgment”)
as to Defendant Martin Shkreli, the Court permanently bars Mr.
Shkreli from serving as an officer or director of any public
company,
and
further
imposes
$1,392,000.00, against him.
has
withdrawn
its
claims
civil
monetary
penalties
of
As reflected in the Judgment, the SEC
for
disgorgement
and
prejudgment
interest. The Clerk of Court is respectfully ordered to enter the
Judgment pursuant to Rule 54(b) of the Federal Rules of Civil
Procedure.
The Court shall retain jurisdiction of this matter
38
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solely for the purposes of enforcing the terms of the Judgment.
SO ORDERED.
Dated:
February 23, 2022
Brooklyn, New York
_____________/s/_____________
Kiyo A. Matsumoto
United States District Judge
39
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