Biotech and Pharma

Martin Shkreli sports jailhouse beard as judge weighs big questions on investor loss that could land him behind bars for long time

Key Points
  • Martin Shkreli will be sentenced on federal fraud charges on March 9.
  • Shkreli's crimes are not related to his infamously raising the price of the drug Daraprim in 2015.
  • Shkreli had his bond revoked last summer after he offered Facebook followers a cash bounty for samples of Hillary Clinton's hair.
Shkreli attorneys argue loss should be zero

"Pharma bro" fraudster Martin Shkreli soon could be getting a bit more time to work on his new jailhouse beard.

Shkreli sported his new look Friday in a Brooklyn, N.Y., federal court, along with a blue jailhouse outfit, as a judge heard arguments on the big question that might determine whether he spends little or no more time locked up, or many more years, when he is sentenced March 9.

But before that, Judge Kiyo Matsumoto gave Shkreli — making his first public appearance since the judge revoked his bond last September — a bit of bad news.

Matsumoto told Shkreli's lawyers she will deny their request to throw out a jury's verdict on one of the three criminal counts that he was convicted of last summer. That count was conspiracy to commit securities fraud, which was related the purchase and sale of shares of Retrophin, a pharmaceuticals company Shkreli founded.

Martin Shkreli and Ben Brafman in court, February 23, 2018.
Elizabeth Williams

However, Matsumoto left undecided, for now, how she would rule on the question of how much Shkreli's crimes cost in financial terms.

Prosecutors suggest that the loss is between $9 million to $20 million, or more — while defense lawyers have argued there is no actual loss.

The stark difference in opinion will be critical to Shkreli's fate when he is sentenced for defrauding investors in two hedge funds he ran, as well as for the securities fraud count.

If Matsumoto accepts the defense's version, federal sentencing guidelines could suggest a prison term as brief as 16 months — and Shkreli's lawyers will likely argue for even less time than that next month.

On the other hand, if the judge accepts prosecutors' claims, then the guidelines could recommend a prison term of up to 300 months or more for Shkreli.

The question could hinge on whether Shkreli gets no credit — or little credit — for how much his hedge fund investors actually netted in their troublesome dealings with him, as opposed to only being judged on the money they initially placed in two hedge funds he ran.

Former pharmaceutical executive Martin Shkreli speaks to the media in front of U.S. District Court for the Eastern District of New York with members of his legal team after the jury issued a verdict, August 4, 2017 in the Brooklyn borough of New York City.
Getty Images

Matthew Schwartz, a lawyer not affiliated with the Shkreli case, told CNBC: "In fraud cases, the loss amount is by far the biggest component of the sentencing guidelines."

"In Shrkeli's case, if the government is right that the losses are between $9.5 to $25 million, then there will be a 20-level increase to the applicable sentencing guidelines; whereas if Shkreli is right, the loss amount would be zero," Schwartz said.

"A 20-level difference in the sentencing guidelines could easily mean a difference of literally decades in prison," he said. "Of course, the guidelines are just that, and the court is not required to adhere to them."

Shkreli already has spent five months in federal jail in Brooklyn after Matsumoto revoked his $5 million bond a month after his conviction by jurors on three of eight criminal counts. The judge said in September that Shkreli represented a danger because of his bizarre offer on Facebook of a $5,000 bounty to anyone who could provide him with a sample of Hillary Clinton's hair.

That stunt was just the latest in a series of controversial antics by Shkreli.

He first came to public notoriety in the summer of 2015 when he created the company then known as Turing Pharmaceuticals, bought a decades-old anti-parasite drug, Daraprim, and promptly hiked the medication's price from $13.50 per pill to $750.

That act made Shkreli the poster child for exorbitant drug pricing, in no small part because of the fact that Daraprim's users include infants, pregnant women and people with HIV.

"Under the circumstances, I think he's doing reasonably well," said Shkreli's lawyer, Benjamin Brafman after the hour-long court hearing, when asked how his client was faring in the notably unpleasant lockup.

Asked about his client's beard — Shkreli was relatively clean-cut when he was jailed last summer — Brafman quipped, "How would you like it if I wrote an article about your beard?"

With Martin Shkreli seated, left, Ben Brafman speaks to Judge Matsumoto, February 23, 2018.
Elizabeth Williams

Shkreli, who seemed relaxed and looking like his physique filled out a bit since his jailing, said nothing out loud during the hearing and kept what was – for him, at least – a relative poker face.

However, when a prosecutor suggested that one of the defense's arguments was "preposterous," Shkreli arched his eyebrows and turned to make a smilingly devilish face at another of his lawyers, Marc Agnifilo.

Also Friday, Matsumoto reserved ruling on the question of the amount of money Shkreli should forfeit to the federal government when he is sentenced.

Prosecutors want Shkreli to fork over $7.36 million. They also want him to set aside assets that include a one-of-a-kind Wu Tang Clan album and pricey artwork to secure that penalty during his planned appeals of his conviction.

Matsumoto has refused to release Shkreli's bond despite his incarceration because of the possibility that she will apply the $5 million toward a forfeiture she orders.

Brafman, as he has in the past, argued during the hearing that Shkreli's case is rare, if not unique, since all of the investors in his hedge funds, which ended up going bust, actually ended up with much more than their initial money back, after he launched Retrophin and paid investors back with cash and company stock.

"All of these people made substantial money back at the end of the ordeal," Brafman argued.

Brafman noted that Shkreli did not use the money from hedge fund investors to "support a lavish lifestyle," but instead created a legitimate drug company, which was financed in part by money from one of the hedge funds.

But assistant U.S. Attorney Alixandra Smith argued that Shkreli fraudulently concealed the awful performance of his funds to make it seem that he was a successful hedge fund manager.

Smith also said Shkreli "frittered away" investor money that ended up in Retrophin by buying Jay-Z concert tickets, and paying for cab rides and meals for himself.

Additional reporting by Meg Tirrell

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