On July 18, 2019, the Second Circuit issued a summary order in United States v. Shkreli (Jacobs, Livingston, Bianco) affirming the conviction and sentence of Martin Shkreli after his highly publicized 2017 trial in which he was convicted on two counts of securities fraud and one count of conspiracy to commit securities fraud.  Shkreli was often known as the “Pharma Bro” because of his public statements about his drug company’s price increases in the pharmaceutical industry.  On appeal, Shkreli challenged the district court’s “no ultimate harm” (“NUH”) jury instruction and its order requiring him to forfeit approximately $6.5 million that had been invested in his hedge funds.

First, Shkreli argued that the lower court erred (1) by providing the jury with an NUH instruction with respect to the securities fraud charges, and (2) by varying the NUH instruction as applied to the charged securities fraud and wire fraud counts.  The Court rejected these contentions, stating that it had previously held on several occasions that an NUH instruction was proper for a securities fraud charge.  The Court further observed that the absence of an NUH instruction would have been a “windfall” to Shkreli because his defense included the very type of “improper argument” that NUH instructions were designed to address.  In particular, these instructions prevent securities fraud defendants from arguing that their misrepresentations and omissions were not made with intent to defraud because they believed investors would ultimately make money from their investments.  The Court also held that the instructions correctly stated the law, thereby negating Shkreli’s second challenge to the NUH instructions.

Second, Shkreli challenged the district court’s forfeiture order, arguing that (1) the government failed to prove that funds associated with non-testifying investors were acquired by fraud, (2) the forfeiture amount should be reduced to account for costs Shkreli incurred in trading for his hedge funds, and (3) the large returns obtained by investors justified reduction of the forfeiture amount to zero.  The Court quickly dispatched with Shkreli’s first two contentions.  It held that the forfeiture amount was supported by evidence that false promises were “routinely” made to Shkreli’s investors and that Shkreli made continuing misrepresentations that were sent to all fund investors.  As to the alleged costs that Shkreli incurred in trading, the Court held that he did not carry his burden of proving these alleged costs.  Finally, the Court rejected Shkreli’s contention that the forfeiture amount should be reduced based on the positive investment returns of investors in his hedge funds.  In doing so, the Court observed that forfeiture is focused on gains to the defendant, rather than losses or gains accruing to the defendant’s victims, and it held that there was no clear error in the district court’s conclusion that the gains to Shkreli included “at the very least” the amounts that he caused investors to invest in his hedge funds via fraud.

Analysis

The Court’s short decision rejecting Shkreli’s appeal reinforces the well-established notion that a securities fraud defendant generally cannot seek to avoid liability or forfeiture by claiming that defrauded investors profited from their underlying investments.  It is easy for someone engaged in financial fraud to say that they didn’t want their investors to lose money, but the federal securities laws are not meant to protect these “well-intentioned” defendants from prosecution.  This principle is likely well-founded as a theoretical matter, as it fosters an even application of the law to defendants who engage in similar conduct regardless of whether market conditions result in financial losses to victims.  The principle also reinforces that the harm to securities fraud victims cannot be reduced to financial loss.  Rather, as the Court reaffirmed, even investors who profit have been harmed by the fraud as they have been deprived their right to control their assets by being denied information necessary to make discretionary economic decisions.