214. Fraudster, or the Immigrant's Dream Come True?

     At 6 a.m. on Thursday, December 18 --  an hour when, at this time of year, the city is still shrouded in darkness -- F.B.I. agents arrested Martin Shkreli, a flamboyant and controversial pharmaceutical company CEO and former hedge fund manager, at his Murray Hill apartment in midtown Manhattan and bundled him off to be arraigned in the Federal District Court in Brooklyn on securities fraud and wire fraud charges.  One might assume that this suspect was a seasoned Wall Street executive, plump in the tummy and wallet, but photos of the arrest show a dark-haired young man in a gray hoodie being herded along by husky, grim-faced agents.  Mr. Shkreli, though a veteran of many financial adventures and misadventures, is all of 32 and very much, if not a paragon, at least an exemplar of the millennial generation.

His famous smile (before the arrest).

     Martin Shkreli was no stranger to the news.  As CEO of Turing Pharmaceuticals he had acquired Daraprim, a decades-old drug used to treat an infection highly toxic for babies, and overnight hiked the price up from $13.50 a pill – a price that already would raise my hackles – to an astronomical $750.  This ungenerous gesture immediately provoked rabid criticism – he was labeled a “morally bankrupt sociopath,” and worse – criticism that he rejected with a jeering response both in news media interviews and on Twitter (oh yes, he tweets), apparently reveling in his newfound notoriety as a symbol of pharmaceutical greed.  Inevitably, in this year of pre-election brouhaha, his and other drug companies have reaped vibrant denunciations from consumers, lawmakers, and our valiant crop of presidential wannabes.  All of which the target in questions seems – or until now seemed – to shrug off with aplomb.  Mr. Shkreli is nothing if not self-confident and immune to virulent attack.  Which makes him interesting, and all the more so, given his young years. 

     And what are the charges against him?  They hark back to his hedge fund days – he has gone through an amazing series of metamorphoses in his short career in business – when he informed investors that his fund, MSMB Capital Management,

·      had an auditor

·      had posted a 36 percent return since its inception

·      had $35 million in assets under management

Alas, according to federal authorities, none of this was true.  What, then, was the truth?  The fund had losses of some 18 percent, and by 2011 had less than $1,000 in its bank account, with no auditor in sight.  Which would seem to make Mr. Shkreli, for all his big talk and defiance, a rather small-time fraudster.  Perhaps, but I find him fascinating by virtue of his astonishing derring-do, his breathtaking appetite for risk. 

     Arraigned on Thursday afternoon in a packed courtroom, Mr. Shkreli pleaded not guilty and was released on $5 million bail secured by a bank account and guaranteed by his father and brother.  Wearing dark sunglasses, he left the court in a pouring rain and refused to speak to journalists.  But two days later, defying the usual advice of attorneys to clients under arrest, he did just that, telling the Wall Street Journal that the authorities were out to get him because of his drug price hikes – not an indictable offense – and his attention-getting public persona.  And of course he's innocent until proven guilty.  Be that as it may, let’s take a quick glance at his career, as presented by the authorities.

     From 2006 to 2007 he managed a small hedge fund, Elea Capital Management, and in so doing lost tons of money in a disastrous  speculation.

     But Mr. Shkreli, if not his enterprises, had a way of rising Phoenix-like from the ashes of a previous venture, for in 2009 he and a colleague founded MSMB Capital Management, another hedge fund, of which he became manager, and as such lied shamelessly to its investors, hence the charges against him.  He lost $7 million on a bad bet on a small drug company, owed his broker, Merrill Lynch, that amount, and got off with paying Merrill a mere $1.35 million. 

     And where did he get that $1.35 million?  From Retrophin, a biopharmaceutical company that he started in 2011, assuring his hedge fund investors that they would be compensated with cash or a combination of cash and Retrophin shares.  With him as CEO, Retrophin quickly became notorious for acquiring old, neglected drugs for rare diseases and hiking their prices astronomically.  A rising star in finance, in December 2012 Mr. Shkreli was hailed by Forbes magazine, which added his name to its list of “30 under 30 in Finance,” lionizing him as an activist “battling billionaires and entrenched drug industry executives” through his spiels on social media.  With such backing, no wonder he was able to launch a third hedge fund, MSMB Healthcare, attracting investors with blatant misrepresentations of his previous financial undertakings.

     In 2014 the Retrophin board ousted Mr. Shkreli for using the company as a personal piggy bank to pay off his hedge fund investors by hiring some of them for fake consulting jobs, and by using company funds to pay off others who were threatening to sue.  He was, in effect, running a kind of Ponzi scheme, milking each new enterprise to reimburse creditors from the previous one.  

     His inelegant exit from Retrophin might have discouraged some, or seasoned them with a minimum of caution, but not Martin Shkreli, who in August 2015 raised $90 million – from whom? one wonders – in a first round of financing for Turing Pharmaceuticals, following which he bought the American rights for Daraprim, a 62-year-old drug, and raised the price by 5,000 percent.  In the outcry that followed, he evinced not a trace of regret, and in November acquired yet another drug company, KaloBios, and announced plans to elevate the price of one of its drugs as well.  Meanwhile he was heaping scorn on his foes on Twitter, enjoying the adulation of young fans, and buying a rare album of music for $2 million.  Only his arrest  interrupted these ongoing grandiose adventures. 

     So who is Martin Shkleri?  When activists picketed the offices of Turing Pharmaceuticals last October, they brandished signs proclaiming THE FACE OF GREED with an image of him smiling smugly.  When not multi-tasking in his office, he tweets endlessly on Twitter, defending his transactions vigorously, and in an interview insisted that the media brouhaha over his drug pricing was "the best possible way to get girls."  In an hours-long live stream on YouTube he appears as a good-looking, boyish young man lolling about in a T-shirt who proclaims himself “the world’s most eligible bachelor ” and announces plans to dominate the rap industry.  Seeking an intelligent and handsome girlfriend online, he has described himself as “endlessly entertaining, providing comedic relief and artistic thought in one convenient package.  What a catch!”  But when a young woman asked online for a date, he informed her that she’d have to “get in a long, long line.”  After his arrest he resumed live streaming, showing himself, unshaven, playing online chess and guitar, and continues live streaming to this day.  As for the bachelor assertion, there’s no doubt that he’s a handsome specimen, the kind who, with a day’s growth of beard, looks even sexier.

     Oddly enough, his career has been, until now, the immigrant's dream of making it big in America.  He grew up in a crowded apartment on Ocean Avenue in Brooklyn, the son of Albanian and Croatian immigrants who did janitorial and other jobs to support him and his three siblings.  Admitted to Hunter College High School, an elite public school in Manhattan for gifted students, he was remarkably uncommitted to intellectual success.  Former classmates remember him as shy, often found in the school’s hallways playing chess or guitar, or studying stock prices in a newspaper.  Finally he stopped attending classes altogether and was booted out before his senior year.  After that he attended City-As-School High School, an alternative public school where students did internships for credit.  Becoming an intern at age 17 at a Wall Street hedge fund, he came into his own, and in 2004 got a bachelor’s degree in business administration from Baruch College.  Business administration and maladministration were his preoccupation from then on, with a predilection for selling biotech stocks short and launching one risky enterprise after another, as chronicled above.

     Following his arrest, Mr. Shkreli resigned as CEO of Turing, and newly acquired KaloBios fired him as CEO and promptly filed for bankruptcy.  Meanwhile another problem arose.  In March 2015 he had donated $1 million to Hunter College High School – the largest gift in its history – even though he had been kicked out for poor grades and poor attendance.  Former classmates remember him as willing to pay for nights out during their college years, as if to show that the onetime academic flop had become an astounding success – motivation that surely explains the million-dollar donation as well.  And three days before his arrest, he chatted online with a female Hunter student  during a live stream on You Tube – a performance that many Hunter students, alerted by messages on social media, forsook their homework to watch.  The result: a lively debate among Hunter students and administrators as to whether they should return the donation and have no more to do with the donor, a debate that is still under way.

     What is one to make of this guy?  Is he a minor-league Carl Icahn, the shark of Wall Street, or a Donald Trump writ small?  He shares Trump’s flamboyance, his self-promotion, his disregard for the truth, his blithe ability to bounce back from multiple failures in business, his love (until recently, at least) of even bad publicity, though unlike Trump, he rose up from humble beginnings and clawed his way to the top.  But to the top of what?  Wealth?  He pretends to $200 million, but any figures emanating from such a source are suspect.  (He later secured his bond with a brokerage account valued at $45 million, which isn’t exactly peanuts.)  To the top as regards celebrity?  Yes, of a kind, since he’s all over the media and social media, almost inescapable.  Success?  Hardly, with prosecution looming.  Narcissism?  Yes, certainly; just look at his endless live streams, his self-indulgent videos. 

     Martin Shkleri merits attention by virtue of his chutzpah, his intelligence, his energy, his insatiable infatuation with risk.  He reminds me of the remark of a Wall Street speculator of long ago:  “Aim for the stars, you get chorus girls.  Aim for chorus girls, you get nothing.”  Shkleri has aimed for the stars, but what he’ll finally get is in doubt.  His is a dark energy; it seems to have led him astray.

     Finally, let’s take note that this presumed whiz kid of Wall Street isn’t the only hedge fund manager in trouble, though he may be the only one threatened with prison.  The year 2015 has not been kind to hedge fund biggies, those alleged financial wizards whose talents are available only to the moneyed few.  The moneyed few are in fact up in arms at their wizards’ deplorable results.  Consider:

·      William A. Ackman’s Pershing Square Management, up 40% in 2014, is down 19.5% as of December 22, a performance he will have to explain to disgruntled investors when they meet in the hallowed halls of the New York Public Library this  January.

·      Likewise in January, David Einhorn, the founder of Greenlight Capital, will host his investors at the American Museum of History over cocktails and dinner under a 94-foot blue whale in the Milstein Hall, but even this lavish setting may not make up for the fund’s 20% loss in 2015.

·      Larry Robbins of Glenview Capital Management, down 17% this year, will similarly have an awkward time consoling investors when next they gather.

·      Claren Road Asset Management suffered $3 billion in redemptions this year as disabused investors jumped ship, probably reducing the firm’s assets to just over a paltry $1 billion, compared with the $8 billion it once managed.

     Not all hedge funds have had a bad year, but those that did have exploded the myth of hedge fund success, the fantasy of unending profits and glory.  To be sure, in 2015 the number of out-and-out closures, when lousy performance forces the fund to shut down completely, is still below 2014’s grievous total of 731.  But some pension funds are beginning to question what value hedge funds add to their portfolio, given the funds’ substantial fee of 2% of assets under management, and a hefty 20% of performance.  Obviously, even if investors weep bitter tears, the managers are scooping up millions in profits.  But to judge by the opening days of 2016, this year is going to be a mite rougher than last.  So it goes in the Wall Street la-la land.  As for Mr. Shkreli, that sexy millennial in a black T-shirt, jeans, and a hoodie, we shall watch his unfolding saga with the greatest interest.

     Prediction fulfilled:  One of my predictions for 2016 in the previous post has proven, alas, disastrously right: the stock market is in free fall.  As for the other predictions, it will be months before we learn if I'm right.

     ©  2016  Clifford Browder