Martin Shkreli was arrested and indicted in December on securities fraud charges involving improper practices between his former hedge fund and Retrophin, a pharmaceutical company he founded. Shkreli, a pharmaceutical executive and hedge fund manager, earned the ire of AIDS activists, politicians, and the public at large when he acquired the rights to and subsequently raised the price of a drug that treats a parasitic condition known as toxoplasmosis. According to reports, the price increase amounted to more than 55 times the previous price.

This matter concerns investors in a pair of hedge funds (the MSMB Funds) that Shkreli founded with a business partner. Shkreli later left those funds to found and take public a pharmaceutical company, Retrophin, Inc. (Retrophin), but not before leaving behind a series of personal claims against him from investors in the MSMB Funds. The complaint filed by the SEC alleges that Shkreli improperly used assets of his new pharmaceutical company to fund settlements with former MSMB investors. According to the complaint, "Shkreli made material misrepresentations and omissions to investors […] in [the MSMB Funds]" and "fraudulently induced Retrophin to fund settlements with persons who had claims against Shkreli arising out of their investments in [the MSMB Funds]." Shkreli allegedly perpetrated the fraud by issuing stock of Retrophin to disgruntled investors in the MSMB Funds and entering into consulting agreements with such investors or their proxies to conceal the true purpose behind these arrangements – to settle potential claims that those investors might assert against Shkreli.

This case highlights an area of focus for regulators – conflicts of interest. As fund structures continue to become more complicated, good governance, policies and procedures become increasingly important in managing conflicts and mitigating the associated risks.