Shkreli is the “Pharma Bro” CEO whose company increased the price of one of its products from $13.50 to $750, a 5000% increase that caused the kind of internet outrage previously reserved for American dentists who kill large game in Africa without a license. Hillary Clinton tweeted that Shkreli’s “price gouging … is outrageous.” Donald Trump called him a “spoiled brat” who “ought to be ashamed of himself.”
Shkreli engendered another round of internet ire last week after it was revealed he paid $2 million for the only copy of an album by the Wu-Tang Clan, then told media that he had no plans to listen to it.
Yesterday, Shkreli was arrested on securities fraud charges. One internet commenter pointed out a valuable Risk Tip: “This investigation must have been going for a while and Shkreli must have known about it. So at some point he decided the best way to help his image before trial was … alienating every single human being in the country.”
But, Shkreli was not indicted alone. Criminal charges also were brought against a well respected corporate lawyer.
The indictment asserts that Shkreli and the lawyer schemed to engineer a series of fraudulent transactions to disguise the financial health of Shkreli’s enterprises. Among other things, the indictment alleges that they, in an effort to deceive company auditors, concocted several phony “consulting agreements” with individuals who had asserted claims asserted against Shkreli and his hedge fund, which were funded by assets of a company not responsible for those claims.
The indictment uses the email exchange between lawyer and client to paint an unflattering picture:
When SHKRELI suggested that the old agreements should be annulled, [the lawyer] responded that the auditor “didn’t like that idea.” When SHKRELI then admitted that “there were serious faults with the [settlement] agreements including lack of board approval” and that redoing the settlement agreements may be a good idea, [the lawyer] responded: “That will open up some very big issues. The current thinking is let rtrx pay, get a note from the fund[,] and if the fund cant [sic] fulfill the note[,] rtrx will write it off as a bad debt. It would be easier than the road you are referring to. Also, [the auditor] would get very spooked with what you are talking about (which could also spook your investors and counter parties).” In response, SHKRELI stated, “[o]n current thinking: that works for me.”
Later, the indictment alleges:
Initially, [the lawyer] sent an email to SHKRELI informing him that Investor 1 wanted 100,000 RTRX shares as part of his settlement and did not want to enter into a consulting agreement. When SHKRELI indicated that the proposal was acceptable to him, [the lawyer] stated, “Where will the 100k come from? If it’s from the company it would need to be in a consulting agreement.” SHKRELI questioned [the lawyer’s] approach and stated, “Why would it need to be a consulting agreement???! Have you heard of the term settlement?” In response, [the lawyer] explained, “We can call it a settlement agreement, but given [the auditor’s] recent behavior they may require it to be disclosed in the financials. I was trying to prevent that issue.”
Of course, these are only allegations, and the defendants are presumed innocent unless and until proven guilty.
The arrest of Martin Shkreli will likely find its place on anyone’s year-end top-10 internet-villain schadenfreude list, and it may be one of those rare times where there is more sympathy for the attorney. If there’s truth to the indictment, it serves to further underscore the principle that the Risk Tip has been talking about for years: the greatest risk of claims against lawyers arise in matters where the lawyer represents a bad client.
Lastly, we will end with an ethical take-home test: Model Rule 1.5 prohibits a lawyer from charging an “unreasonable” fee. Would it be ethical for a lawyer to increase his or her rates by 5000% before agreeing to defend Shkreli?