“Pharma Bro” Martin Shkreli was recently convicted of three counts of securities fraud after some of his own coworkers blew the whistle on his illegal investment activities. Shkreli earned his infamous nickname for purchasing the lifesaving AIDS drug Daraprim in 2015 and increasing the price five thousand percent. The recent conviction had nothing to do with his checkered past and only came about because employees who uncovered his financial misdeeds decided to turn him in.
The fraud allegations related to Shkreli’s work running two hedge funds, MSMB Capital and MSMB Healthcare. Shkreli also conspired to defraud Retrophin, a pharmaceutical company he took public before using its funding to issue cash payments and stock to MSMB investors. The jury found Shkreli guilty of committing fraud in relation to the hedge funds, and conspiring to commit fraud in relation to Retrophin.
Much of the prosecution’s case rested on eyewitness testimony and statements from people who worked under Shkreli. One blew the whistle to internal authorities and the U.S. Securities and Exchange Commission, and another told MSMB’s chief executive officer directly. Both ultimately stood witness at Shkreli’s trial, helping bring down the investor.
Two Whistleblowers Blew the Whistle on Martin Shkreli
A key witness in the trial, Jackson Su served as the chief operating officer of MSMB until late 2012. Su testified that he notified the hedge fund internally about Shkreli’s behavior, according to an article from the National Law Review. When the hedge fund ignored his pleas to investigate and correct Shkreli’s behavior, Su filed a complaint with the SEC.
Su quit his job in December 2012, having witnessed Shkreli reclassify an MSMB investment in Retrophin as a loan, backdate transactions months after processing, and more.
“The last day I was there, Martin took $10,000 of what was left — there was only $20,000 left in the bank account — and he transferred $10,000 to his own personal account,” Su testified. “That was the last straw.” MSMB failed because of a trade conducted by Shkreli, who later paid out investors with Retrophin assets.
Su quit that day, and other MSMB employees have stepped forward like he did, put off by Shkreli’s behavior.
Another of Shkreli’s associates was Caroline Stewart, an analyst at MSMB who alerted the hedge fund’s CEO about Shkreli’s deception in 2011, according to Bloomberg. Stewart sat next to Shkreli, analyzing the markets for him and the fund.
“I’m so sick of him saying all of his canned s—t all the time,” she wrote in an email to the CEO. She recounted him telling investors that “Nobody knows the FDA better than we do, nobody is smarter or better funded than we are.”
Su and Stewart both came forward, alerting internal executives and eventually participating in the SEC investigation surrounding Martin Shkreli’s activities. Their role as whistleblowers promoted justice and protected future investors.
What Laws Govern Securities Fraud?
Securities received significant scrutiny following the Great Recession, particularly derivatives like options and futures which had little oversight. Additionally, regulation surrounding reporting securities and other financial instruments has vastly increased. These regulations helped expose and punish Shkreli for his deception.
Sarbanes-Oxley came about following shocking revelations surrounding securities accounting in 2002, particularly the revelations surrounding Enron and WorldCom. WorldCom manipulated the price of their stock by disguising falling profits. Enron used unusual accounting practices and pressured their accounting firm, Arthur Andersen, to mask their company’s issues.
Both ultimately led to the Sarbanes-Oxley Act, designed to increase oversight regarding corporate accountability and the penalties for deception. The law issued several changes, including:
- Requiring the certification of financial reports by company executives;
- Protecting whistleblowers from retaliation;
- Establishing and maintaining internal procedures and financial assessments; and
- Criminalizing attempts to influence independent or public accountants and their reports.
Sarbanes-Oxley, also known as SOX, put many regulations into place surrounding financial reporting and accounting to prevent crimes like defrauding investors, overstating earnings, or tampering with audits.
Dodd–Frank Wall Street Reform and Consumer Protection Act
Dodd-Frank’s sweeping changes allowed the government to establish greater oversight over the financial system. It established an SEC whistleblower bounty program and gives job protections to whistleblowers that provide information to the government. It also called for improved reporting and a slew of studies designed to evaluate the industry.
In addition to increased oversight over the financial industry, the law also established the U.S. Consumer Financial Protection Bureau, an independent agency protecting consumers. Congress created the CFPB to regulate debt collection, mortgage services, banks, securities firms, and more. Many of the provisions in Dodd-Frank are susceptible to deception or fraud, and are sometimes only revealed through oversight or whistleblowing.
Dodd-Frank and SOX are the backbone of financial accounting and regulation reform over the past 15 years. They represent a strong effort to tamp down on white collar crime plaguing the financial system.
Stand Up to Securities Fraud
Blowing the whistle on securities fraud is a daunting proposition, especially when you’re putting your career on the line. Some of the crimes whistleblowers expose pit them against dangerous or vengeful employers and investors. However, whistleblowers receive government protection against retaliation, significant awards for their information, and frequently anonymity until a trial begins.
Securities crimes typically include:
- Money laundering, or making dirty money appear legal;
- Late trading or trading off-hours;
- Filing deceptive or falsified documents with the SEC; and
- Manipulating stock prices.
Our attorneys can help you investigate your claims, gather more evidence of fraud, and put you in contact with the government. Even if the government chooses not to pursue your case, retaining an attorney means having a confidante and the opportunity to continue seeking justice on your own. Contact us today for assistance.