The Washington PostDemocracy Dies in Darkness

The fascinating legal argument at the heart of the Martin Shkreli ‘Pharma Bro’ trial

Ex-pharmaceutical executive Martin Shkreli leaves after his appearance at the U.S. District Court in Brooklyn on the first day of his securities fraud trial June 26, 2017. (Kevin Hagen/Getty Images)

Not much Martin Shkreli has done the past two weeks has helped him in a trial that could put him behind bars for 20 years for eight counts of securities and wire fraud.

He was personally rebuked by the judge for speaking to reporters about his case inside the Brooklyn courthouse and on the streets outside where jurors could potentially hear him. He has mocked prosecutors on a live stream on his Facebook page and called them a "junior varsity" team to news outlets. One day, he strolled into a room filled with reporters and made light of a witness who had just testified against him.

And yet, despite the antics and his attorneys' acknowledging that Shkreli is an "odd duck," legal experts say the flamboyant former hedge fund manager is putting on a novel defense that may resonate with jurors.

Former drug executive Martin Shkreli entered a Brooklyn federal courthouse Monday for the first day of his trial on charges he ran a Ponzi scheme that defrauded investors. (Video: Reuters)

At the heart of his team's legal argument is this question: Is his alleged wrongdoing worth a criminal conviction if his investors did not lose money?

Shkreli — who is often called "Pharma Bro" on social media — became infamous for increasing the price of a vital drug used by AIDS patients by 5,000 percent and then publicly lamenting that he didn't raise it more. But federal authorities say they arrested him because he also lied to his investors about how he was using their cash. None of those investors, however, lost money. Some even made a big profit, largely because Shkreli's bet on a biopharmaceutical start-up paid off.

If he gets off, it would be an embarrassing loss for federal prosecutors struggling to prove that they can put away prominent Wall Street figures.

"If Shkreli is acquitted, jaws will drop. Given the time, taxpayer money and resources devoted to this case, a defense win would be a huge embarrassment for prosecutors," said James Goodnow, an attorney with Fennemore Craig, a corporate defense firm.

He added that a defeat could make "prosecutors gun-shy about pursing other high-profile cases," at least in the short term.

To the wealthy elite he courted, Shkreli was a savvy if eccentric Wall Street insider. Even after greeting one investor while wearing fluffy slippers and a stethoscope, Shkreli collected millions from those willing to bet on the market instincts of a self-made hedge fund manager from a working-class family in Brooklyn.

His investors would reportedly crow about Shkreli's smarts, including an encyclopedic knowledge of drugs and the ability to memorize medical journals. Some pointed to an internship he had at age 17 at a hedge fund started by CNBC personality Jim Cramer.

Susan Hassan, the daughter of pharmaceutical industry giant Fred Hassan, former chairman of Bausch & Lomb, heard from a friend that Shkreli was a "rising star" in the hedge fund industry and forked over $300,000. She was new to the opaque hedge fund world and considered Shkreli a potential "mentor," she told jurors. In the end, she walked away with $400,000 in cash and more than 50,000 shares in Retrophin, a biopharmaceutical company Shkreli launched. She eventually sold those shares for $900,000, making three times her initial investment.

"At the end of the day, you made a hefty profit?" Benjamin Brafman, Shkreli's bulldog defense attorney, asked her recently. "Yes," Hassan said, "even more than I asked for."

During a surprise visit to reporters after Hassan testified, Shkreli made light of her remarks. "We should all only be this victimized in life," he said.

Darren Blanton, who is known as the "cowboy venture capitalist" and who served as an adviser to President Trump's transition team, met Shkreli for dinner and decided to entrust him with $1.25 million. Several years later, Blanton walked away with $200,000 in cash and Retrophin shares that he sold for $2.4 million. He has another $3 million worth in stock that he has yet to sell.

"You're $5 million ahead," Brafman asked the Texas investor. "Yes," Blanton responded.

These investors were "high rollers" with "tens of millions of dollars" who understood the risks of investing in a hedge fund and ultimately made money, Brafman argued.

"This is a very unusual fraud case in that there aren't a line of people who lost money, can't pay rent, and the like," said Jeff Cramer, managing director of investigations firm Berkeley Research Group and a former federal prosecutor. It is "an enticing argument to a jury."

But prosecutors say these handsome payoffs were only possible because of an elaborate shell game in which Shkreli used Retrophin cash and assets to pay off discontented investors in his hedge fund, MSMB Capital. MSMB Capital sustained significant losses in 2011 after an investment by Shkreli went sour. After the faulty trade, one employee testified that Shkreli seemed depressed and sat at his desk with his hoodie up, not speaking.

"That day things became deathly quiet. . . . I definitely sensed something was wrong, but there was no talk," testified Caroline Stewart, who conducted research for the hedge fund. "It was like somebody had died. In essence that somebody was the fund."

Rather than tell his investors of the massive loss, Shkreli raised more money for another hedge fund and then started Retrophin, according to prosecutors. Then as pressure built from unhappy investors, Shkreli gave them Retrophin cash and stock.

He looted the company of more than $10 million, according to prosecutors. "Telling lies on top of lies — this is what that man, Martin Shkreli, did for years," G. Karthik Srinivasan, an assistant U.S. attorney in the Eastern District Court in Brooklyn, told jurors.

The investors testified they spent months, and sometimes years, asking Shkreli for their money. Blanton even filed a complaint with the Securities and Exchange Commission. "I was worried Martin might be lying to me," Blanton testified.

Indeed, Brafman, Shkreli's attorney, acknowledged during opening statements: "Not everything he [Shkreli] said was 100 percent accurate, but he was truthful to the mission" of making Retrophin successful.

But simply showing that his investors didn't lose money may not be enough to save Shkreli from a conviction, according to some legal analysts following the trial.

"The 'no harm, no foul' standard may have intuitive appeal, but that's not the way the law works," said Goodnow, the Fennemore Craig attorney.

"It's like if a burglar broke into a house while its owners were out of town, threw a rager, and then left a note saying, 'No worries — yeah, I broke in, but I cleaned up and left you flowers'," he said. "The positive outcome of a clean house and flowers doesn't negate the underlying crime."

Still, the prosecutors will have to show that Shkreli lied to investors, legal experts say. Based on testimony from investors, the prosecution has already provided evidence that Shkreli mischaracterized the size of his hedge fund, lied about having an independent auditor and exaggerated his connections to high-ranking pharmaceutical executives. Instead of dismissing Shkreli's investors as faux victims, the conduct may evoke "images of notorious Wall Street villains like Bernie Madoff" for the jury, Goodnow said.

Regardless, the trial is giving renewed attention to Shkreli, who rarely shies away from the spotlight. In the surprise visit to reporters last week, Shkreli appeared confident and calm. He asked reporters how they thought the trial was going and then criticized their coverage while proclaiming his innocence. "I think the world blames me for almost everything," he told them.

Later on a Facebook live stream, Shkreli expressed confidence that he would "be back watching the markets regularly in a few weeks, during the day."

"We've got the prosecutors pretty freaked out," he said. "The case is falling apart before their eyes, and they don't know how it's happening. Sad."