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Texas investor testifies Martin Shkreli dragged feet for years paying him back, then sent him 'consulting agreement'

  • Darren Blanton reported Shkreli's suspected fraud to the SEC after delays in getting paid.
  • "I was worried Martin might be lying to me and not credible," Blanton testified.
  • Blanton was an advisor on Donald Trump's presidential transition.

Martin Shkreli delayed and delayed and delayed for years redeeming an investor's $1.3 million stake in Shkreli's hedge fund, and then cooked up a purported "consulting agreement" from a new drug company to finally pay off that man, the investor testified Wednesday.

The investor, Dallas-based Darren Blanton, served as an advisor to the transition of President Donald Trump earlier this year.

On Wednesday, Blanton served as the fourth witness for prosecutors trying to convict Shkreli in Brooklyn, New York, federal court of defrauding investors in two hedge funds he ran, and of then looting Retrophin, the company he founded, to repay those investors.

Blanton, 52, was a catalyst for Retrophin's creation.

Shkreli set out on founding that company after hearing from Blanton about a boy, Joshua Frase, who had a rare muscular condition known as myotubular myopathy, which killed him at age 15 in 2010.

Blanton testified that, in addition to trying unsuccessfully for years to get Shkreli to grant him a promised 20 percent "founder's share" in Retrophin, Shkreli never fulfilled his promise to give either the Joshua Frase Foundation or Joshua's dad Paul each a 3.3 percent stake in Retrophin.

Prosecutors claim Blanton was one of several people to be granted sham consulting agreements from Retrophin to funnel them money and stock after they were defrauded at Shkreli's hedge funds.

"I was worried Martin might be lying to me and not credible," Blanton testified about one point in time during his long, extensive efforts to get Shkreli to redeem money he had put in Shkreli's MSMB Capital hedge fund.

He also testified that when Shkreli was in the process of creating Retrophin, and when some questions were raised about MSMB Capital's performance, Blanton's firm Colt Ventures contacted both the auditor and administrator which MSMB claimed were associated with that hedge fund.

The auditor said "no comment" when asked about his relationship with Shkreli's fund, Blanton testified.

And the purported administrator "said they were not the administrator," Blanton said.

Blanton's Colt Ventures originally put $1.25 million in MSMB Capital. He later was told by Shkreli that the position had grown to $1.318 million.

But he described a nearly three-year-long process in trying to get Shkreli to redeem that money, a process that featured Shkreli making multiple excuses for the delay, and the revelation that he had used Blanton's money to help capitalize Retrophin.

During that time, Blanton filed a complaint with the Securities and Exchange Commission about MSMB Capital, because "we thought there might be some type of fraud."

In a 2013 email, Shkreli wrote Blanton, "I'm actually at the SEC all day tomorrow thanks to you lol."

Blanton ended up actually making money due to his relationship with Shkreli, albeit from what prosecutors argue was the result of defrauding Retrophin of company stock shares. Blanton testified that he received $2.6 million — $200,000 in cash, and the balance in sales of Retrophin stock he was granted in part under the consulting agreement he signed with Shkreli for Retrophin.

Blanton also said he still owns 150,000 shares of Retrophin stock he received. That stake is worth almost $3 million at its current trading price.

If Blanton were to sell that remaining stake now, he would have netted about $4.6 million on his original $1.25 million investment in Shkreli's hedge fund.

Blanton said that after Shkreli proposed several different versions, with different amounts of stock shares being paid, of a consulting agreement between Retrophin and Blanton before one was finalized in March 2014. The final agreement had Blanton granted 200,000 restricted stock shares in the company.

Asked by prosecutor Alixandra Smith who was providing him the shares, Blanton said, "Retrophin."

Smith then asked, "Had you ever discussed with the defendant [Shkreli] providing consulting services with Retrophin?"

"No," Blanton said.

The prosecutors asked him he signed the agreement, given that fact.

"To get my shares in the company, and to try to receive a redemption for my funds, my investment in MSMB Capital," Blanton said.

"Who signed on behalf of Retrophin?" Smith asked.

"Martin Shkreli," Blanton said.

During cross examination, Shkreli's high-powered defense lawyer, Benjamin Brafman, asked Blanton if, when he put money in MSMB Capital, "You were investing in Martin Shkreli?"

"If Martin Shkreli was honest," Blanton replied.

Blanton later told Brafman, under questioning, that he could not recall whether he and his wife prayed with Shkreli at their home in Texas, although he added it was possible they did.

"Did you tell him if it was an abomination of God if he was a homosexual?" Brafman asked.

"No," Blanton replied.

That exchange prompted an objection by prosecutors, which was sustained by Judge Kiyo Matsumoto.

A lengthy sidebar conference between the judge, prosecutors and defense lawyers then ensued, out of earshot of the jury. Matsumoto then excused jurors.

Blanton's cross-examination is expected to resume Thursday.

Additional reporting by Zachary Basu

Watch: Shkreli ordered not to discuss case near courthouse