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UNITED STATES OF AMERICA Beforethe SECURITIES AND EXCHANGE COMMISSION RECEIVED

ADMINISTRATIVE PROCEEDING OCT 12 2017 File No. 3-18127 OFFICE OF THE SECRETARY

In the Matter of DIVISION OF ENFORCEMENT'S MOTION FOR SUMMARY DISPOSITION , AGAINST RESPONDENT 1\1ARTIN SHKRELI Respondent.

The Division ofEnforcement hereby moves for summary disposition pursuant to Rule 250

of the Securities and Exchange Commission's Rules of Practice [17 C.F.R. § 201.250]. The

Division respectfullysubmits that summary disposition is appropriate and that the Comt should

resolve this proceeding in favor of the Division and bar Respondent Martin Shkreli from

associating with any broker, dealer, investment adviser, municipal secu1ities dealer, municipal

advisor, transfer agent, or nationally recognized statistical rating organization

In supportof this Motion, the Division relies upon the accompanying memorandum oflaw

and the Declaration of Eric M. Schmidt. The Division respectfully requests that the Court grant

this motion.

Dated: , New York October 11, 2017 Respectfullysubmitted,

Paul G. Gizzi ([email protected]) Eric M. Schmidt ([email protected]) Counsel for the Division of Enforcement 200 Vesey Street, Suite 400 New York, NY 10281 (212) 336-1100 .-

Certificate of Service

I hereby certify that I served (i) The Division of Enforcement'sMotion for Summary Disposition Against Respondent Martin Shkreli, (ii) Memorandum of Law in Support of the Division of Enforcement's Motion forSummary Disposition; and (iii) Declaration of Eric M. Schmidt in Support of the Division of Enforcement's Motion for Summary Disposition on:

1h The I J day of October, 2017, by email on:

The Honorable James E. Grimes Administrative Law Judge U.S. Securities and Exchange Commission 100 F Street, NE Washington, DC 20549-2557 [email protected]

Benjamin Brafman, Esq. Andrea Zellan, Esq. Brafman & Associates, P.C. 767 Third Avenue, 26th Floor New York, NY 10017 [email protected] [email protected]

The I th day of October, 2017, by facsimile and UPS (original) on:

Brent J. Fields, Secretary Office of the Secretary U.S. Securities and Exchange Commission 100 F Street, NE Washington, DC 20549-2557

��� Eric M. Schmidt Senior Counsel Division of Enforcement Securities and Exchange Commission Brookfield Place 200 Vesey Street, Suite 400 New York, New York 10281 (212) 336-0150 [email protected] UNITED STATES OF AMERICA Beforethe SECURITIES ANDEXCHANGE COMMISSION

ADMINISTRATIVEPROCEEDING File No. 3-18127 RECEIVED OCT 12 2017 In the Matterof OFFICE OF THESECRETARY MARTINSHKRELI,

Respondent.

MEMORANDUM OF LAW INSUPPORT OF THE DIVISION OF ENFORCEMENT'S MOTION FOR SUMMARY DISPOSITION

The Division of Enforcementrespectfully submits thismemorandum of law in supportof

its motion forsummary disposition. For thereasons set forthbelow, an industrybar is

appropriateand in the public interest as to respondent MartinShkreli ("Shkreli")based on the

application of theSteadman factorsto the factsof this case. Specifically, a juryconvicted him

on twocounts of securities fraudand one count of conspiracy to commit .

Nonetheless, he has refusedto acknowledge thewrongful nature of his conduct or express any

remorse forhis wrongdoing. And he has suggested publicly thathis illegal conduct was

profitable. Accordingly, an industrybar is in thepublic interest. The Division therefore respectfullyrequests thatthe Court order a bar. BACKGROUND A. Respondent Shkreli,age 34, is a resident of New York, NY. OIP ,r11.A.1. 1 Shlcreliwas the managing partner andportfolio manager-fortwo hedge funds,MSMB Capital ManagementLP ("MSMB

Capital") and MSMB HealthcareLP ("MSMBHealthcare") (together, the "MSMB Partnerships").

Id. Shkreliobtained a Series7 license in 2003. Id. Shlcreliis not currentlyassociated with a registered broker dealer or registered investmentadviser. Id. In March2011, Shkrelifounded

RetrophinLLC, a pharmaceuticalcompany that went public, by way of a reverse merger, in

December 2012 and became Retrophin, Inc. (collectively withRetrophin LLC, "Retrophin"). Id.

Shkreli was Retrophin's President and CEO until September 30, 2014. Id. Shkreli admitted in his investigative testimony that he provided investment advisory services to the MSMB

Partnerships. (Deel. of Eric M. Schmidt Ex. E).

B. Shkreli'sCriminal Conviction

Following a jury trial,Shkreli was convictedon twocounts of securitiesfraud and one countof conspiracy to commit securities fraudin United States v. Shkreli,15-cr- 637-KAM (E.D.N.Y.). (Schmidt Deel. Ex. B, Ex. C); Answer,r 5. Thecounts of the supersedingindictment on which Shkreliwas convicted charged,inter alia,that he employedfraudulent schemes in connectionwith his managementof theMSMB Partnerships. (Schmidt Deel. Ex. A). Shkreli controlled two Delaware limited liability companies thatserved as the investment advisers to

MSMB Capital and MSMB Healthcare. Id. (superseding indictment,r,r 3-4). At theinception of MSMBCapital, Shkreli inducedinvestors into investingnearly $700,000 in MSMBCapital

1 Shkreli asserted his FifthAmendment privilege against self-incrimination to theallegations in this paragraph. See Answer of Martin Shkreli,r 4 (Sept. 6, 2017).

2 withoutdisclosing thathe had lost all money associated with Elea Capital Management("Elea"), a hedgefund he had previously managed,and thathe wasfacing a $2.3 million judgmentagainst him forhis past tradingactivity. Id. ,I8. Shlcrelialso falselyrepresented to potential investors that

MSMBCapital had retainedan independentaccountant to provide annual audits. Id. Between

2010 and 2011, Shlcrelicontinued to solicit investmentsthrough misrepresentations and omissions to investors in MSMB Capital regarding its performance,assets andauditor andadministrator. Id.

,I9. Specifically, he misled one investor into believing thatMSMB Capital's assets totaled $35 million, and upon thatinvestor's request, provided the investor withthe namesofMSMB Capital's supposed independentauditor and administrator. Id. In reality, MSMB Capital only had approximately $700 remaining, as Shlcrelihad spent or lost the bulkof the money invested through trading. Id. Moreover, MSMBhad not retainedan auditor or administrator at thattime. Id. Based on thesemisrepresentations and material omissions, thatinvestor invested $1,250,000 in MSMB

Capital, while otherindividuals, based on the same misrepresentations and/or materialomissions, invested anaggregate of$1,000,000. Id. ,I10.

Under Shlcreli's management, MSMB Capital suffered substantial trading losses. Id. ,I11.

Shlcreli placed a massive sale in MSMBCapital's account, which resulted in losses of more than$7,000,000, andMSMB Capital lost anadditional $1,000,000 in othertrades. Id. Shkreli concealed MSMB Capital's performancefrom investors formonths following these losses, misleading theminto believing thatMSMB Capital was actually realizing profitsas highas forty percent. Id. ,I12. In addition, Shkrelimisappropriated MSMB Capital's assets, withdrawingfunds farin excess of themanagement fee permitted by MSMB Capital's partnershipagreement. Id. ,I

13.

3 Shlcreliwas also convicted of engagingin securitiesfraud in connection with his

managementof MSMB Healthcare. As alleged in thesuperseding indictment, following the

collapse of MSMB Capital, Shlcreli used thenewly formedMSMB Healthcareas a vehicle to

fraudulentlysolicit andmisappropriate fundassets. While soliciting investments,Shkreli

concealedfrom potential investors his disastrous history as a manager of Elea andMSMB Capital

andhis personal liability fortrading activity, at the sametime sharing positive informationabout

himself. Id. 1 16. He also made misrepresentationsregarding thevalue of MSMBHealthcare assets. Id.1 17. Consequently, thirteenindividuals invested a totalof approximately $5 million in

MSMBHealthcare. Id. ,I 16. Thereafter,Shkreli continued to makemisrepresentations to MSMB Healthcareinvestors

and ultimately misused MSMB Healthcareassets forhis own benefit. Id. ,i18. To prevent

investors fromseeking redemption fortheir investments, Shkreli falsely informedMSMB Capital

investors thatthey had doubled theirinvestments and thatMSMB Healthcarehad thenecessary

monthly liquidityto accommodate redemption requests. Id. He misappropriated MSMB

Healthcareassets by withdrawing fundsfrom MSMB Healthcarethat were far in excess of the

managementfee permittedby the partnership agreement. Id. ,i 19.

Additionally, Shkrelimisappropriated MSMBHealthcare assets to pay obligationsthat

were not MSMB Healthcare's responsibilityto pay. Id. ,i19. For example,Shkreli causedassets

fromMSMB Healthcareto be used to pay money owed by MSMBCapital and Shkreli to settle claims broughtin connection withthe failed short sale made by Shkrelifor MSMB Capital. Id. Additionally,Shkreli improperly reclassifieda $900,000 equityinvestment by MSMB Healthcare in Retrophinas aninterest-bearing loanthrough the use of a backdated promissory note. Id ,i20.

Shkrelithereby caused Retrophinshares that had been purchased by MSMB Healthcareto be

4 deleted from Retrophin'scapitalization table. Id. In January2013, Shkreli caused Retrophinto transfer $150,000 into MSMB Healthcare's bank account as partial payment of theimproperly reclassifiedloan, $125,000 of which he wire transferred fora settlementpayment forthe losses fromthe short sale. Id.

Shkreliwas also convicted of conspiracy to commit securities fraud. As alleged in the superseding indictment,Shkreli schemed to gain controlof unrestrictedand freetrading Retrophin shares. Id. ,r36. Shkreli'smotivation wasto use his controlover these shares to manipulate the price andtrading ofRetrophin stock. Id. ,r37. Shkreli sent anemail to several employees saying theywere no longer employeesso thateach could be classifiedas an independentshareholder capable of holding the unrestrictedand freetrading stock. Id. Contraryto thesubstance of the emails, each employee was permittedto remainat Retrophin andcontinue their work there. Id.

Shkreliand others thenacquired sharesof Retrophinstock and distributedthe sharesamong the employeesso thateach person's holdings were below theCommission's fivepercent ownership reporting requirement. Id. ,r38. Shkreli succeeded in controlling these unrestricted shares, preventedthem from being sold, anddirected the transferof stock to settle debts withMSMB

Capitaland MSMB Healthcareinvestors. Id,r39. Shkreliconcealed in Schedules13D filedwith theCommission thathe retained controlover the unrestricted shares. Id. ,r40. Finally,one Schedule 13D falselyreported that MSMB Capital had purchased Retrophinshares with working capital. Id.

ARGUMENT

It is appropriate in the public interest to bar Shkrelifrom association with any broker, dealer,investment advis er, municipal securities dealer, municipal advisor, transfer agent, or nationallyrecognized statistical rating organizationunder Section 203(f)of theInvestment

5 Advisers Act of 1940 ("Advisers Act"), 15 U.S.C. § 80b-3(f),which empowersthe Commission to baran investmentadviser who has been convicted of fraud, such as Shkreli.

In considering whether sanctionsare in thepublic interest,and if so what sanctionsto impose, theCommission typically considers several factors,referred to as theSteadman factors.

Specifically, the Commission considers theegregiousness of respondent's actions, the isolated or recurrentnature of the infraction,the degree of sci enter involved, thesincerity of therespondent's assurances against futureviolations, the respondent's recognitionof thewrongful nature of his conduct, andthe likelihood thatthe respondent's occupationwill presentopportunities for future violations. Matter ofEric Butler, Exchange ActRelease No. 65204, 2011 SEC LEXIS 3002, at

*13-14 & n.21 (Commission opinion, Aug. 26, 2011) (citing Steadman v. SEC, 603 F.2d 1126,

1140 (5th Cir. 1979)), ajf'don other grounds,450 U.S. 91 (1981). While the inquiry is a "'flexible one, andno one factoris dispositive"'Id. at *14 & n.22 (quoting Matter ofDavid HenryDisraeli,

ExchangeAct. Rel. No. 57027, 2007 SEC LEXIS 3015, at *61 (Commission opinion,Dec. 21,

2007)), petition denied, Disraeli v. SEC, 334 Fed. App'x 334 (D.C. Cir. 2009), in thisproceeding each of these factorssupports theimposition of a barfrom the securities industry.

The Commission routinely upholds barsagainst securitiesindustry professionalswho have been eitherenjoined or convicted. See, e.g., Matter ofJeffrey L. Gibson, ExchangeAct Rel.

No. 57266 (Feb. 4, 2008) (https://www.sec.gov/litigation/opinions/2008/34-57266.pdf).

Advisers Act Section 202(a)(6)specificallydefines "conviction" to include a juryverdict. 15

U.S.C. § 80b-2(a)(6). And the Commission has made clear thata respondent cannot contest in theadministrative proceeding the fact of the entry of an injunction or a conviction. E.g., Matter ofJoseph P. Galluzzi, Admin. Proc. File No. 10209 (Commission opinion, Aug.23, 2002) ("a partycannot challenge hisinjunction or criminal conviction in a subsequent administrative

6 proceeding"). In addition, Shkreliwas, by his own admission, servingas an investment adviser to two hedge funds. (Schmidt Deel. Ex. E). He was convicted forhis illegal conduct related to his investmentadvisory services. (Schmidt Deel. Ex. C). Shkreli shouldnot be permittedto provide investmentadvice to the investing public in the future.

Theundisputed facts and analysisof the Steadman factorsdemonstrate that the public interestweighs heavily in favorof barringShkreli from associating withany broker, dealer, investmentadviser, municipalsecurities dealer, municipal advisor, transferagent, or nationally recognizedstatistical rating organization. Shkreli'scriminal conviction fortwo counts of securities fraudand one count of conspiracy to commit securities fraudsupports this conclusion. And the factsthat gave rise to Shkreli's conviction, as alleged in the counts of thesuperseding indictment, establish thatsuch a baris themost appropriate remedy and is necessary forthe protection of investors.

Shkreli'sconduct was egregious,performed with a highdegree of scienter, and was not isolated,but rathercharacterized by an unchanging persistence to defraudinvestors. Theseparate counts of securities fraudon whichShkreli was convicted were virtually identical formsof the samefraudulent scheme. In both instances,he solicited investmentsbased on blatant misrepresentations,concealed substantial tradinglosses frominvestors, andmisappropriated fund assets forhis own benefit. Thesefacts highlight Shkreli's intent to defraud investors andhis utter disregardfor investors generally. The overlappingnature of each scheme demonstrates that

Shkreli'sconduct was not isolated or unintentional. And his conduct continuedover a periodof years. He deliberately preyed on investors, took advantageof theirmisguided trust, and usedtheir assets to enrichhimself, to pay offhis personaldebts, andto cover thelosses he imposed on other victimsof his fraud. His actionsto controlRetrophin's unrestricted shares also demonstrate that in

7 thefuture Shlcreli will likely exploit any positionof power to defraudthe investment community forhis ownbenefit.

And thefact that, ultimately, many investors in theMSMB Partnershipsmade money is a red herring. The investors were repeatedly lied to by Shlcreli. More importantly,they did not knowthat their money was at riskover a periodof years. Theinvestors had placed theirtrust in

Shlcreli. But he betrayedtheir trust and acted forhis own interests.

It is also clear that Shkreli has neither accepted responsibility forhis actions nor provided any reassurances against futureviolations. Shkrelihas fileda motion fordismissal notwithstanding theverdict withrespect to his conviction on theconspiracy to commit securities fraudcharge (count 8 in theindictment). (Schmidt Deel. Ex. F). In thismotion, Shkreliargues that"the evidence of Shkreli'sguilt on Count 8 is remarkablythin," and that"[t]he Government was able to secure a conviction on Count 8 only because it provided the jury with an inaccurate andseverely prejudicial definitionof the term 'affiliate."' Id. In his Answer to theOIP, Shkreli contends thatif his motion to dismiss is denied, he will appeal his conviction on all threecounts. Respondent's Answer to OIP,r 2. Thus, he has not accepted responsibility forhis misconduct. In addition, Shkrelihas expressed anutte r lack of remorse over social media following his conviction. Within one hour followinghis conviction, Shkreli set up a livestreamthrough

YouTube2anddiscussed his impressions of theconviction withhis followers. E.g., http://www.businessinsider.com/martin-shkre/i-live-stream-securities-fraud-guiltv-conviction-

2017-8. Shkreli boasted about the ease of his potential "Club Fed" prison sentence, and predicted that lifewill not change forhim going forward. Martin ShkreliIs Found Guilty of

2 Shkreli has since made the video private so thatonly subscribers whom he permitsto view the stream may watch it.

8 Fraud (Aug. 4, 2017), https://www.nytimes.com/2017/08/04/business/dealbook/martin-shkreli­ guilty.htm;Shkreli Criticized For Trash-TalkingOn YouTube Live Stream AfterConviction

(Aug. 3, 2017), http://newyork.cbslocal.com/2ol7/08/05/shkreli-youtube-live-stream/. In another Y ouTube livestream,Shkreli boasted3 that his sentence will be so light that the "risk" he too� on in the past fiveyears of his life4 will have been "worthit" given theprofits he made in that time. Martin ShkreliE xplains Conviction on H3H3 Podcast (Sept. 3, 2017), http://www.youtube.com/watch?v=LuDIGqFW09c&t= l 0m28s. In other words, Shkreli believes that defrauding investors is acceptable behavior andhis illicit profitsare a distinguished accomplishment. Shkreli not only denies responsibility forhis crimes but also exhibits a willingnessto defraud investors againif thebenefits outweigh the costs.

Finally, Shkreli'sbail was recently revoked, and he was remanded to prison, based on his threatto SecretaryHilary Clinton made to his approximately 70,000 followers.

(Schmidt Deel. Ex. D). In sum,Shkreli's actions followinghis juryconviction demonstratean utterlack of remorse or even recognition of the wrongful nature of his conduct. Considering the

Steadman factors, it is clear that Shkreli should be barred fromthe securitiesindustry.

3 The link begins at 43:30, whichis when Shkrelibegins to speak.

4 Shkrelicontends that themoney he made andhis jail time are not connected,so he does not explicitlysay thathis profits from committing fraud were worth the jail time.

9 CONCLUSION

In short, Shkreli has no remorse forhis illegal conduct. The public interest calls forhim

to be barred fromever again workingin thesecurities industry.

Dated: New York, New York October 11, 2017 Respectfully submitted,

Paul G. Gizzi ([email protected]) Eric M. Schmidt ([email protected]) Counsel forthe Division of Enforcement 200 Vesey Street, Suite 400 New York, NY10281 (212) 336-1100

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