Martin Shkreli, who founded Turing Pharmaceuticals AG after being fired from Retrophin in September, forced Retrophin to pay off settlements and other financial woes from the failed hedge fund and manipulated the company's employees and finances for personal gain, the suit alleges.
“Shkreli was the paradigm faithless servant,” Retrophin said. “Starting sometime in early 2012, and continuing until he left the company, Shkreli used his control over Retrophin to enrich himself, and to pay off claims of [MSMB Capital Management LP] investors (who he had defrauded).”
When Shkreli’s hedge fund, MSMB Capital Management, lost $7 million after a "disastrous trade" with Merrill Lynch, leaving it "virtually bankrupt," Shkreli hid the failure from investors, according to the complaint. He eventually said that he would be ending MSMB to focus on Retrophin and said that he would give investors their capital back through cash or Retrophin stock.
He failed to follow through, leading to furious investors and a U.S. Securities and Exchange Commission investigation, during which he made it appear that MSMB had assets by giving Retrophin shares to the company and then backdating the transactions, Retrophin said.
“Contrary to what he represented to them in September 2012, the MSMB investors were not given the option to take cash,” the suit alleges. “Ten MSMB investors ultimately threatened to sue Shkreli, report him to regulators and contact the media unless he gave them more for their MSMB investments. Shkreli caused Retrophin to enter into settlement agreements and sham consulting agreements with those investors to resolve their claims about their returns on their MSMB investments.”
Through those settlements, Retrophin paid the investors more than $2.7 million in cash and issued more than 590,000 shares of the company, according to the complaint.
Later, Shkreli got two employees to give him 90,000 shares of Retrophin through a reverse merger when the company went public, the suit states. Through the merger, those shares increased fivefold, totaling $13.3 million.
He induced people with shares in the shell company used during the reverse merger to transfer some of their shares to him or designated MSMB investors, the company alleges. Those 150,000 shares were worth more than $4.4 million.
The company is also accusing Shkreli of recycling proceeds from a private offering of shares and warrants. Retrophin failed to meet the $10 million promised to a key investor when it went public, so Shkreili promised to make up the difference with his own funds.
However, instead of paying personally, Shkreli got Retrophin to wire himself and two others money from the proceeds and then reinvested some of that into the company, "depriving Retrophin of the full $10 million investment, and enriching himself at Retrophin's expense," according to the suit.
The personal investment in the company is now worth more than $5.3 million, Retrophin said.
Shkreli then claimed that the $900,000 MSMB owed Merrill Lynch as part of a 2011 arbitration settlement was a loan, and used Retrophin proceeds to pay it off, the complaint states.
In all, the suit alleges 11 different ways that Shkreli allegedly breached his loyalty, leading to a total proceed of $5.6 million in cash and $59 million in shares.
Shkreli refused to be interviewed by attorneys for Retrophin while they were drafting the lawsuit, according to the complaint.
Shkreli took to Twitter on Monday morning, saying that Retrophin owes him money. “[I] think our lawsuit is for $150m. [I]t will be fun,” he tweeted in response to the suit. He also said that Retrophin investors deserves a better CEO.
Retrophin is represented by Celia Goldwag Barenholtz and Ian Shapiro of Cooley LLP.
Counsel information for Shkreli was not immediately available on Monday.
The case is Retrophin Inc. v. Shkreli, case number 1:15-cv-06451, in the U.S. District Court for the Southern District of New York.
--Editing by Stephen Berg.