Page 4 - Martin Shkreli Case Study

“After four years at Cramer Berkowitz, he moved on to jobs at UBS and
Intrepid Capital Management before starting his own hedge fund in
2006. Elea Capital Management, by his own description, wasn’t terribly
successful. In 2007, Lehman Brothers sued Elea in New York state court
for failing to cover a “put option transaction” in which Shkreli bet the
wrong way on a broad market decline. When stocks rose, Shkreli didn’t
have the funds to make the bank whole. In October 2007, Lehman won
a $2.3 million default judgment against Shkreli and Elea. The following
year, however, Lehman imploded. No one ever demanded the $2.3
million, Shkreli says, adding, “I would make them whole now if they
wanted.”’ (2)

On February 1, 2011, in a naked short sale on an account it held with
Merrill Lynch, MSMB Capital sold short 32 million shares of Orexigen
Therapeutics stock at about $2.50 per share the day after its price
plunged from $9.09, when the Food and Drug Administration (FDA)
declined to approve the drug Contrave. The stock price rebounded;
MSMB could not cover the position, although it had told Merrill Lynch
that it could. Merrill Lynch lost $7 million on the trade and MSMB Capital
was virtually wiped out.

Shkreli founded Retrophin (investing $4 million) in 2011 under the
MSMB umbrella and ran it as a portfolio company with an emphasis on
biotechnology, to create treatments for rare diseases. His initial idea for
Retrophin was to purchase two drugs from Valeant, Cuprimine and
Syprine, which are used to treat Wilson disease, an inherited disorder
that causes severe liver and nerve damage. His plan, he said, was to
jack up the prices. But the deal fell apart. Syprine, which had about
$200,000 in sales per month in the fall of 2012, now has sales of $10
million a month, an increase that is due purely to price increases by
Valeant. Cuprimine is a similar story