Martin Shkreli, the Ponzi Scheme, and Why Investors Should Stay Aware

Martin Shkreli, the 32-year-old former CEO of Turing Pharmaceuticals known for hiking up the price of a vital drug, was arrested Thursday and charged with securities and wire fraud in the Federal District Court in Brooklyn. Shkreli, previously considered a Wall Street wunderkind, made news when it was discovered that he had run both his previous biopharmaceutical company, Retrophin, and his hedge fund like a Ponzi scheme.

While the Ponzi Scheme, and securities litigation in general, can be overwhelming to understand, it’s important to know the basics in order to protect yourself. Investors every day are fooled by large companies who use this scheme to maintain an illegitimate cash flow.

The Ponzi Scheme is named after Charles Ponzi. Ponzi invented the scheme in the 1920s, when he lived Boston. Ponzi initially tried to make a living doing menial jobs. He failed to save money and started to deceive people in order to make quick cash. His most notorious deception was through his sale of international reply coupons (IRC).

Back then, when a person wanted to send mail overseas, they usually also needed to buy an international reply coupon. An international reply coupon is a coupon that comes with international mail. It can be exchanged for the postage stamp needed to send a reply.

Ponzi would buy reply coupons through his agents in countries where they were cheaper and then exchanged those IRC stamps for IRC stamps in countries where they were worth more. He sold the exchanged IRC stamps and received more money for them. When his idea took off and he started making a profit, he attracted investors with the idea that they would all receive profits within two to three months.

Soon, reality set in and Ponzi didn’t rake in as much profit as he imagined. However, he continued to attract investors and started paying off old investors with the money that new investors brought in. In doing so, he kept the cash flow going – for a short while. Although he was ultimately caught and sent to jail, he initiated a scheme that many other people would soon implement in their own companies.

Martin Shkreli was charged with running his company essentially like a Ponzi scheme. He started new companies to pay off investors from old ones that failed. He initially suffered from financial losses while running his hedge fund firm, MSMB Capital Management. Shkreli then formed Retrophin and used it to pay off debts regarding MSMB. According to Fortune, Shkreli took almost $11 million in cash and stocks for himself and for MSMB shareholders.

Investors are increasingly getting duped by companies using the Ponzi scheme. Always make sure you study the company that you are investing in carefully before actually providing funds. Do not give into a company that is pressuring you into investment. Watch out for fluctuations in your return – because they are a sign of a real investment. Carefully examine what information the company provides and conduct your own research into what laws back your investment.

If you, or someone you love, has been the victim of securities and wire fraud, we may be able to help you receive compensation. Contact Morgan & Morgan for a free, no-obligation case review.