December 17, 2015 / 10:49 PM / 2 years ago

COLUMN-How Big Law partner allegedly aided Martin Shkreli's fraud: Frankel

(The opinions expressed here are those of the author, a columnist for Reuters.)

By Alison Frankel

Dec 17 (Reuters) - In the fall of 2013, the controversial pharmaceutical executive Martin Shkreli was under considerable pressure.

Investors in two Shkreli-run hedge funds were demanding the profits Shkreli told them he'd earned and threatening to sue if he didn't redeem investments. But Shkreli's hedge funds, according to federal prosecutors in Brooklyn in an indictment issued Thursday, had no money.

Shkreli had already staved off disaster by transferring $3.4 million in shares and cash from Retrophin Inc, - the public company he created in 2013 through a reverse merger - to seven of his hedge fund investors. But Retrophin's auditor, according to the indictment, was asking a lot of questions about those share-transfer settlements.

So Shkreli and Retrophin's lead outside counsel, Evan Greebel, allegedly came up with a new idea: Retrophin would enter sham consulting agreements with disgruntled hedge fund investors as a way to settle their claims using money from the public company.

According to a complaint by the Securities and Exchange Commission, Greebel drafted at least three of the phony agreements, which allegedly cost Retrophin $7.6 million.

Martin Shkreli, who achieved notoriety earlier this year when his privately held startup Turing Pharmaceuticals drastically jacked up the price of a generic drug used to treat toxoplasmosis, got himself into big trouble when he duped investors and then lied about his investment results, according to the indictment and SEC complaint.

But the government contends Greebel advised Shkreli on how to extend his fraud by misappropriating the assets of a public company.

Greebel was a partner at Katten Muchin during the time he worked for Retrophin as outside counsel and corporate secretary. His involvement with the company ended in the fall of 2014 when Retrophin's board ousted Shkreli as CEO.

Greebel, who is known for his expertise in M&A and virtual currency, joined Kaye Scholer last summer. He is now facing a criminal wire fraud conspiracy charge and an SEC accusation of aiding and abetting Shkreli's securities fraud.

Neither the indictment nor the SEC complaint describes when Greebel became Shkreli's lawyer, but in the second half of 2012, when Retrophin was still a private company, Greebel allegedly advised Shkreli on a plan to trick the SEC into believing Shkreli's hedge funds had held large positions in Retrophin since the summer of 2012.

The indictment describes a series of emails in which Greebel appears to oversee the backdating of a stock transfer agreement between a Retrophin employee and Shkreli, who passed the shares to one of the hedge funds. According to the government, Greebel saw revised Retrophin capital tables that reflected the alleged backdating.

'BAD DEBT' AND SHAM CONSULTING

The indictment also claims Greebel knew Shkreli was using Retrophin money to settle claims by his hedge fund investors in 2013, after Retrophin became a Nasdaq-traded company through a reverse merger.

When Retrophin's auditor began to question the settlements because Retrophin wasn't liable for the claims they resolved, Greebel allegedly advised Shkreli how to handle the problem. "The current thinking is let (Retrophin) pay, get a note from the fund, and if the fund can't fulfill the note (Retrophin) will write it off as a bad debt," the lawyer said in an email.

According to the indictment, that's just what happened: Shkreli's no-asset hedge funds indemnified Retrophin for the settlement agreements but never paid off the debt.

Later in 2013, Greebel and Shkreli supposedly devised and executed the sham consulting fee plan - which was allegedly never disclosed to the Retrophin board.

The indictment quoted an email exchange in which Shkreli asked Greebel why a $100,000 payment from Retrophin to one of his unhappy hedge fund investors had to be structured as a consulting fee.

"We can call it a settlement agreement, but given (the auditor's) recent behavior they may require it to be disclosed in the financials," Greebel responded. "I was trying to prevent that issue."

The government's allegations echo claims Retrophin asserted in a complaint against Shkreli in federal court in Manhattan last August. Greebel isn't named as a defendant in the company's suit.

He's actually not mentioned by name in the complaint at all, though the suit details the deep involvement of Retrophin's "outside counsel" in settlement agreements and consulting deals with Shkreli's hedge fund investors.

Greebel's defense lawyer, Jonathan Sack of Morvillo Abramowitz, didn't return my call for comment. (Reporting by Alison Frankel. Editing by Alessandra Rafferty.)

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