Health and Science

Martin Shkreli kept hedge-fund investor in dark about botched short trade, misled him on auditors: testimony

Key Points
  • Biotech investor testifies Shkreli never told him about a botched short trade that devastated Shkreli's hedge fund.
  • Dr. Lindsay Rosenwald said Shkreli's fund wouldn't redeem his investment in cash as promised, but instead gave him 80,000 shares in Retrophin.
  • Rosenwald also details lags of several months in receiving performance statements from Shkreli's hedge fund.
Martin Shkreli's lawyer and 'cowboy' venture capitalist duel over what horses and investments are worth
Martin Shkreli's lawyer and 'cowboy' venture capitalist duel over what horses and investments are worth

A well-known biotech investor testified Thursday that "pharma bro" Martin Shkreli never told him about a disastrous short trade in February 2011 that allegedly left Shkreli's hedge fund tapped out of its assets.

The investor, Dr. Lindsay Rosenwald, said Shkreli sent him an email saying that his original $100,000 investment in MSMB Capital fund had grown to $131,000 by February 2011.

However, an earlier witness testified in Brooklyn, New York, federal court, that same month Shkreli's fund was unable to cover an 11 million share short position in Orexigen Therapeutics.

Shkreli ended up owing Merrill Lynch $7 million because that firm had processed the short sale for MSMB Capital, that witness had said at Shkreli's securities fraud trial.

Merrill Lynch later settled that claim in arbitration for about $1 million.

A prosecutor asked Rosenwald on Thursday if he ever heard about the "trade in OREX."

Lindsay Rosnewald
Source: Fortress Biotech

"No," replied Rosenwald, 62, the chairman of Fortress Biotech.

Rosenwald also said that he was told by Shkreli that MSMB Capital had the accounting firm Fulvio & Associates as an auditor when Rosenwald first invested $100,000 in the fund.

"You're giving people money, and you're expecting audited returns," Rosenwald said. "That's standard in the industry."

In fact, both prosecutors and Shkreli's defense team stipulated in a statement read aloud to jurors Thursday that Fulvio & Associates never served as an auditor to Shkreli or any of his hedge funds.

Rosenwald said that when he first invested with MSMB Capital in 2009, Shkreli sent him an email that said, "Thanks again for this great opportunity, and I will not let you down."

At that time, Rosenwald said, Shkreli also promised there would be "no lockups" of investors' money in MSMB Capital.

That meant, Rosenwald testified, "that if I want to redeem my investment, get my money back, I can get it back ... On 30 days notice, whenever I wanted to."

But that turned out not to be the case.

Rosenwald testified that in 2012, Shkreli told him he was winding down MSMB Capital. And Shkreli offered Rosenwald the opportunity to roll over what Shkreli purported was by then Rosenwald's $200,000 stake in MSMB Capital into Retrophin, a new drug company he was creating.

Martin Shkreli, former chief executive officer of Turing Pharmaceuticals AG, left, arrives at federal court with his attorney Benjamin Brafman in the Brooklyn borough of New York, U.S., on Wednesday, July 5, 2017.
Peter Foley | Bloomberg | Getty Images

'I was given the option of taking the cash or taking the stock," Rosenwald said.

"I wanted the cash," he testified.

But, "I didn't get the cash."

Rosenwald said that months later, in 2013, he eventually ended up being given 80,000 shares in Retrophin.

Prosecutors charge that Shkreli looted Retrophin of stock to pay off investors in his hedge fund that he is also accused of defrauding. Shkreli denies the charges.

Rosenwald testified that he later, over time, sold off his shares of Retrophin.

He said that, taking into account his original stake of $100,000 in MSMB Capital, he did make a profit on those stock sales.

Asked how much, Rosenwald said, "Somewhere between $400,000 and $600,000, I think."

Rosenwald also agreed under questioning that it was unusual that there was sometimes a lag of several months in Shkreli sending him statements about the monthly performance of his hedge fund.

Rosenwald identified one statement for August 2011 that he received two months later, another for December 2011 that he received in May 2012, and a performance statement for May 2012 that he received in September 2012.

"You usually get them as soon as practical, at the end of the month," Rosenwald said.

Watch: Shkreli's lawyer speaks after Wednesday in court

What Martin Shkreli's lawyer said as he was leaving the court house today
What Martin Shkreli's lawyer said as he was leaving the court house today