Sec. & Exch. Comm'n v. Shkreli
| Decision Date | 23 February 2022 |
| Docket Number | 15-CV-7175 (KAM) (JRC) |
| Court | U.S. District Court — Eastern District of New York |
| Parties | SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. MARTIN SHKRELI; EVAN GREEBEL; MSMB CAPITAL MANAGEMENT LLC; and MSMB HEALTHCARE MANAGEMENT LLC, Defendants. |
In this civil action, commenced on December 17, 2015, the Securities and Exchange Commission (“SEC”) alleges that defendants Martin Shkreli (“Mr. Shkreli”) and Evan Greebel (“Mr. Greebel”) participated in multiple fraudulent schemes in violation of this country's securities laws. (ECF No. 1, Compl.) The conduct at issue in the SEC's complaint was also the basis for criminal charges against Mr. Shkreli in the parallel proceeding before this Court, United States v Shkreli and Greebel, No. 15-cr-637 (KAM) (E.D.N.Y.). Presently before the Court is the SEC's motion to permanently bar Mr. Shkreli from serving as an officer or director of any public company, and for the imposition of civil monetary penalties against him. For the reasons stated herein, the SEC's motion is GRANTED in its entirety.
Following the Court's granting of the Government's motion seeking intervention and stay (see ECF No. 33, Mar. 22, 2016 Mem. and Order), Mr. Shkreli consented to a bifurcated resolution of the instant action. As part of that bifurcated resolution, on December 28, 2020, the Court entered a consent judgment (“Consent Judgment”) which ordered injunctive relief, and provided that the SEC's claims for monetary penalties and an officer and director bar would be decided on motion of the SEC. (See ECF Nos. 45, 45-1, Consent J. as to Martin Shkreli, Dec. 28, 2020.)
On April 2, 2021, the SEC filed a Motion for an Officer and Director Bar and Civil Monetary Penalties as to Mr. Shkreli. (ECF No. 48, Letter Enclosing Motion, ECF No. 48-1, Notice of Motion.) The SEC moves the Court to (1) permanently bar Shkreli from serving as an officer or director of any public company; and, (2) impose civil monetary penalties in the amount of $1, 392, 000 against him. (Id.) In support of its Motion, the SEC filed a memorandum of law, the declaration of Melissa Coppola, and a proposed final judgment. (ECF No. 48-2, SEC Memorandum of Law in Support (“SEC Mem.”); ECF No. 48-3, Declaration of Melissa A. Coppola (“Coppola Decl.”); ECF No 48-4, Proposed Final Judgment.) Also on April 2, 2021, Mr. Shkreli filed a memorandum in opposition to the SEC's Motion (ECF No. 49, Def. Opp. Mem.), and the SEC filed a reply in support of its Motion. (ECF No. 50, SEC Reply.) On April 7, 2021, Mr. Shkreli filed a letter seeking leave to file a sur-reply. (ECF No. 52, Def. Letter.) The Court granted Mr. Shkreli leave to file a sur-reply on April 8, 2021. (Dkt. Order, Apr. 8, 2021.) Mr. Shkreli filed a sur-reply in opposition on April 9, 2021. (ECF No. 53, Def. Sur-Reply.)
Pursuant to the terms of the Consent Judgment, in connection with the instant motion, Mr. Shkreli is precluded from arguing he did not violate the securities laws, and the allegations in the complaint are to be accepted by the Court as true. (ECF No. 45-1, pp. 2-3.) Additionally, the Consent Judgment provided that the Court may decide the issues raised in the SEC's motion on the basis of affidavits, declarations, excerpts of sworn deposition or investigative testimony, and documentary evidence, without regard to the standards for summary judgment contained in Rule 56(c) of the Federal Rules of Civil Procedure. (Id.)
The Court assumes familiarity with the factual background in this case, and incorporates by cross-reference in its entirety the background as provided in the Court's March 22, 2016, Memorandum and Order. (ECF No. 33, Mar. 22, 2016 Mem. and Order.) As noted supra, pursuant to the terms of the Consent Judgment, all allegations in the Complaint shall be deemed and accepted as true by the Court for the purposes of this Memorandum and Order.
By way of brief factual background, Mr. Shkreli was the founder and portfolio manager of two hedge funds, MSMB Capital Management LP (“MSMB”) and MSMB Healthcare LP (“MSMB Healthcare”). (See Compl. at ¶¶ 2, 13, 17-18.) Mr. Shkreli was also the managing member of the respective investment advisers to the two hedge funds, defendants MSMB Capital Management LLC (“MSMB Adviser”) and MSMB Healthcare Management LLC (“MSMB Healthcare Adviser”). (Id. at ¶¶ 2, 13, 15-16.) In March 2011, Mr. Shkreli founded the biopharmaceutical company Retrophin LLC, which became public in December 2012 as Retrophin, Inc. (“Retrophin”). (Id. ¶¶ 2, 13, 22.)[1] As will be discussed in greater detail infra, the Complaint alleges that Mr. Shkreli: (1) made material misrepresentations and omissions to investors and prospective investors in MSMB; (ii) lied to an MSMB executing broker about MSMB's ability to settle short sales that Mr. Shkreli made in MSMB's account; (iii) misappropriated funds from MSMB and MSMB Healthcare; and (iv) fraudulently induced Retrophin to enter into sham consulting agreements with certain disgruntled investors in MSMB and MSMB Healthcare to settle potential claims against himself. (Id. ¶¶ 2-3, 24-55.)
For violations of the Securities Act Section 20(e), Title 15 U.S.C. Section 77t(e), and Exchange Act Section 21(d)(2), Title 15 U.S.C. Section 78u(d)(2), courts may bar a person from serving as an officer or director of “any issuer that has a class of securities registered” under Exchange Act Section 12, Title 15 U.S.C. Section 78l, or “that is required to file reports” under Exchange Act Section 15(d), Title 15 U.S.C. Section 78o(d). The Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”), Pub. L. 107-204, 116 Stat. 745 enacted July 30, 2002, permits courts to impose an officer and director bar on an individual if a person's conduct demonstrated “unfitness” to serve in such a capacity.
Although Sarbanes-Oxley amended Exchange Act Section 21(d)(2), 15 U.S.C. Section 78u(d)(2), and Securities Act Section 20(e), Title 15 U.S.C. Section 77t(e) to reduce the Commission's burden of proof from “substantial unfitness” to “unfitness, ” the Court will consider the six non-exclusive factors previously identified by the Second Circuit in SEC v. Patel, 61 F.3d 137 (2d Cir. 1995), in evaluating Mr. Shkreli's unfitness to serve as an officer or director of a public company. In Patel, the Second Circuit highlighted several non-exclusive and non-mandatory factors that are relevant to determining whether a defendant was “substantially unfit” to serve as an officer or director of a public company:
(1) the “egregiousness” of the underlying securities law violation; (2) the defendant's “repeat offender” status; (3) the defendant's “role” or position when he engaged in the fraud; (4) the defendant's degree of scienter; (5) the defendant's economic stake in the violation; and (6) the likelihood that misconduct will recur.
Patel, 61 F.3d at 141. The Second Circuit in Patel was confronted with the earlier version of Section 21(d)(2) of the Exchange Act (“Section 21(d)(2)”), which permitted a ban only “‘if the person's conduct demonstrates substantial unfitness to serve as an officer or director.'” S.E.C. v. Bankosky, 716 F.3d 45, 48 (2d Cir. 2013). In 2002, Congress replaced the phrase “substantial unfitness” in Section 21(d)(2) with the term “unfitness.” See Sarbanes-Oxley Act of 2002 § 305(a), Pub. L. No. 107-204, 116 Stat. 745, 778-79 (2002) ( 15 U.S.C. § 78u(d)(2)) (emphasis added). Congress's intent in removing the term “substantial” from Section 21(d)(2) was to lower the threshold of misconduct to “unfitness” for which courts may impose director and officer bans. Bankosky, 716 F.3d at 48 ().
The Second Circuit in Bankosky clarified that though Patel, decided in 1995, predated Congress's amendment of Section 21(d)(2), the Patel factors are still just as relevant to determining “unfitness” as they were to determining “substantial unfitness.” Bankosky, 716 F.3d at 48-49 (citing SEC v. iShopNoMarkup.com, Inc., No. 04-cv-4057 (DRH) (ARL), 2012 WL 716928, at *3 n. 2 (E.D.N.Y. Mar. 3, 2012); SEC v. Miller, 744 F.Supp.2d 1325, 1347 (N.D.Ga.2010); SEC v. DiBella, No. 3:04-cv- 1342, 2008 WL 6965807, at *9 n. 12 (D. Conn. Mar. 13, 2008)).
The Patel factors, though helpful guidance, are not mandatory. Bankosky, 716 F.3d at 48. A court applying the Patel factors may impose an officer or director bar even if not all six factors are present. See Patel, 61 F.3d at 142 (). A district court may determine that some Patel factors are inapplicable and apply other relevant factors. Bankosky, 716 F.3d at 48. The Court enjoys “substantial discretion” in deciding whether to impose a bar and the duration of any bar, “so long as any bar imposed is accompanied with some indication of the factual support for each factor that is relied upon.” Id. (citing Patel, 61 F.3d at 141).
Pursuant to Securities Act Section 20(d), Title 15 U.S.C. Section 77t(d), Exchange Act Section 21(d)(3), Title 15 U.S.C. Section 78u(d)(3), and Section 209(e) of the Investment Advisers Act of 1940, Title 15 U.S.C. Section 80b-9(e), Court may order a civil monetary penalty and, if so, determine the amount of the civil penalty.
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