A former employee of Martin Shkreli's hedge fund revealed in dramatic testimony Thursday how the fund "imploded" from a failed stock trade in February 2011, leaving "Martin ... just slumped in his chair, his hoodie up, and depressed in a way I had never seen before" in following days.
"When the firm had imploded, all that energy just sort of deflated," said Caroline Stewart, who testified that before the botched short trade Shkreli's MSMB Capital fund had an "intense" atmosphere.
"Everything was quiet. The lights were not turned on. People stopped coming into work," Stewart said in Brooklyn, New York, federal court at Shkreli's securities fraud trial.
Shkreli told her "he owed Bank of America/Merrill Lynch $10 million," Stewart recalled.
"He said he wanted to make sure the bank didn't get a hold of Retrophin. But that was a little bit later." Retrophin was the drug company later started by Shkreli.
A Merrill Lynch employee testified Wednesday that Shkreli told that bank, which was processing his electronic trading, on Feb. 2, 2011, that he did not have the shares or assets to cover a 11-million-share short trade he made in Orexigen Therapeutics.
In that trade, Shkreli was betting the stock price of that company would go down. When the price went up instead, he was required to either come up with stock or cash to cover the position, or reimburse the opposite party in the trade for the difference in the share price appreciation. But Shkreli had neither.
Stewart said that in the weeks following that botched trade, "I showed up to work every day."
"And I never heard any such phone call" to MSMB's investors to inform them about them about the devastating loss to the hedge fund from the Orexigen trade, she testified.
"My impression was that [the fund] had gone completely bust, since he owed nearly $10 million to Bank of America/Merrill Lynch," Stewart said.
An earlier witness Thursday, Dr. Lindsay Rosenwald, told jurors that Shkreli, in a performance statement issued for February 2011, had claimed Rosenwald's investment in the hedge fund was still rising, and not going down.
A prosecutor asked Rosenwald if he ever heard about the "trade in OREX," or Orexigen.
"No," replied Rosenwald, 62, the chairman of Fortress Biotech.
Stewart testified that soon after the Orexigen trade, she was called into a room at MSMB Capital's office by another employee, who showed her a screen displaying the fund's stock positions.
"The assets were just barely north of $2 million," Stewart said.
Stewart's testimony contrasted with the picture Shkreli painted at the time for investors in MSMB Capital. He was allegedly telling them the fund had between $30 million to $40 million in assets under management.
Before the Orexigen trade, Stewart said, Shkreli was claiming MSMB Capital had between $200 million to $250 million in assets under management during meetings with bankers. Shkreli also claimed the fund had investment returns of between 20 and 25 percent.
Stewart testified that "the implosion of MSMB Capital was the catalyst, the genesis, that gave birth to Retrophin, the biotech company."
Prosecutors claim that Shkreli looted stock from Retrophin, which he founded after MSMB blew up, in order to repay investors he had defrauded at MSMB Capital and a related fund, MSMB Healthcare.
Shkreli had pleaded not guilty to related charges of securities fraud, and conspiracy to commit securities and wire fraud.