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Martin Shkreli arrested for securities fraud, allegedly ran 'Ponzi scheme' type of shell game

Shkreli was arrested in his Manhattan home and charged with illegally taking stock from Retrophin, a biotechnology firm he started in in 2011.

Image via <a href="">Twitter</a>.Image via Twitter.

Martin Shkreli, the reviled CEO who increased the price of an AIDS drug by 5,000 percent, ran his former hedge fund companies like a Ponzi scheme, said Brooklyn U.S. Attorney Robert Capers Thursday in announcing a seven-count indictment against the Turing Pharmaceutical founder.

The Federal Bureau of Investigation arrested Shkreli, 32, at his Manhattan home Thursday morning. He is charged with security fraud, security fraud conspiracy and wire fraud conspiracy.

"These charges are a securities and wire fraud trifecta," said Michael Harpster, the FBI's special agent in charge of the Criminal Division.

[Also: Senate committee targets Martin Shkreli, big pharma, over sky-high drug prices]

The Securities and Exchange Commission has also filed a civil lawsuit against Shkreli, according to Andrew Ceresney, director of Enforcement.

Shkreli pleaded not guity through his attorney and was released on a $5 million bond, according to published reports.

Also indicted Thursday was Attorney Evan Greebles, 42, a New York City-based lawyer, who is charged with wire fraud conspiracy.

Both men used funds from the company Shkreli founded in 2011, Retrophin, to pay investors of two former hedge funds he managed,  and masked the money as consultant fees for work that was never performed, according to authorities.

Investors are out $11 million, Harpster said.

[Also: Daraprim competitor to market $1 pill after Turing chief Martin Shkreli hikes price]

Shkreli lied and continued to lie, Capers said.

While running the hedge funds MSMB Capital Management, Shkreli took $3 million from investors and lost the money through a series of bad trades, Capers said.

"He didn't tell his investors he lost their money," Capers said.

Instead he founded the MSMB Healthcare Management hedge fund to hide the prior performance, according to Capers.

"Through those lies he was able to get $5 million from 13 additional investors and lied to them, telling them their investments were performing well," he said.

[Also: Turing Pharmaceutical CEO Martin Shkreli defends $750 for Daraprim pill ]

In a Ponzi-like scheme Shkreli used money from MSMB Healthcare to pay off bad debts from MSMB Capital, according to Capers. He also used the money to found the biotech firm Retrophin in 2011.

"So he lied to them, he lied to the investors," Capers said. "He lied to them about what he was actually doing with the money."

When he took Retrophin public a year later, the company did well, Capers said. It was then Shkreli either had to come clean or somehow pay the investors.

"As he did in the past, he made the wrong choice," Capers said. "He lied, and used Greeble to deceive Retrophin."

Shkreki used company assets to pay off personal debts, he said.

Shkreli was Retrophin's president and CEO until September 30, 2014, when he was ousted. Shkreli currently is CEO of Turing Pharmaceuticals, a privately-held company he founded after he left Retrophin.

As chief executive of Turing Pharmaceuticals he gained infamy and spurred a Congressional investigation into the rising price of prescription drugs, after jacking up the price of the AIDS drug Daraprim from $13.50 a pill to $750.

Shkreli stood by the move as necessary to shore up more money for drug research. He later dropped the price for hospitals only.

While today's arrest is unrelated to the price hike for Daraprim, the New York Times reported in October that the New York Attorney General is examining whether Turing violated anti-trust laws by restricting distribution of Daraprim in a move to curb competition.

Shkreli is also majority owner in the pharmaceutical company KaloBios. He bought the company's outstanding stock as it was about to fold and kept the company in operation. Shares of KaloBios soared more than 600 percent in premarket trade in November.

After news broke of Shkreli's arrest, shares were down by 50 percent before being halted indefinitely, pending receipt of additional information requested by the Nasdaq, according to MarketWatch.

The long term implications for the company are unknown.

For Shkreli, MarketWatch reports he is losing more than $25 million on stock in KaloBios.

Shkreli's online persona hasn't helped him win public favor, either. Often taking to Twitter, the "pharma bro" regularly picked fights with anyone who criticised his business practices. He also recently made headlines when it was announced he was the sole owner of a rap album by Wu-Tang Clan. The group only made one copy, which Shkreli bought for $2 million.

That persona led to an outpouring of scorn on Twitter in Thursday, with many claiming karma had come back to haunt Shkreli.

Here are some of those Tweets:

And here is the indictment:


Susan Morse contributed to this report.

Twitter: @HenryPowderly

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