Martin Shkreli, "America's Most Hated "… The "most hated man in America" just got arrested for securities fraud. Shkreli, the baby faced, former Jim Cramer protege and serial biotech mogul who famously raised the price of a toxoplasmosis drug by 5000% in September, igniting a media and political firestorm in the process, is accused of using Retrophin (a company he founded and ran until he was ousted by the board) as a kind of slush fund. – ZeroHedge
Dominant Social Theme: Shkreli is a horror. Capitalism, too.
Free-Market Analysis: This ZeroHedge article reports the facts and is competent so far as it goes. But an article by libertarian publisher Simon Black provides us with a deeper perspective. More on Black and his article in a moment.
ZeroHedge on Shkreli:
While Shkreli is known for laughing in the face of criticism and ridicule, this one might be hard to shrug off. It's at least possible he could end up banned from running a public company…
"Some of these companies seem to act more like hedge funds than traditional pharmaceutical companies," said Senator Susan Collins, a Maine Republican who ran the recent hearing into the soaring cost of specialty drugs.
On the bright side for Shkreli, he'll have plenty of time to listen to the one-of-a-kind Wu-Tang album he bought in May for $2 million if he ends up incarcerated. Incidentally, we predicted this might happen way back in September …
The idea here is that Shkreli is a fairly repugnant guy and not deserving of much sympathy. This may be true as far as it goes, but as Sovereign Man's Simon Black points out, there are reasons why the current Shkreli bloodlust is disturbing.
Black identifies Shkreli as "the guy who rose to infamy a few months ago when he increased the price of a life-saving medication by over 5,000%." He admits, "Something tells me he's not going to win any humanitarian awards anytime soon."
He also admits that Shkreli's business strategy may have been flawed. Shkreli, a former hedge fund manager, started a new firm called Turing to buy up "orphan drugs" that fight rare diseases with an eye toward hiking their prices.
The first purchase was a drug called Daraprim, and he boosted the drug's price from $13.50 per pill to $750. Black again: "Frankly, raising prices by more than 50x overnight was an idiotic, short-sighted move."
But Black also points out that the market itself reacted against Shkreli's idea. "Another drug company called Imprimis Pharmaceuticals announced that they would produce a Daraprim alternative and sell it at a lower price. Imprimis will effectively boot Turing Pharmaceuticals out of the market, meaning that Shkreli's idea was totally pointless and poorly conceived."
Case closed – but perhaps not. Among others horrified by Shkreli's idea was Hillary Clinton who called for a government investigation of Shkreli and Turing.
61 days later Shkreli was arrested by federal agents. Now, the FBI's press release on Shkreli's arrest lists numerous fraud allegations which make him seem like a complete scumbag … Most of the charges involve lying and intentionally screwing people. And yeah that's obviously bad stuff. But it's no different than what happens on Wall Street on a daily basis.
Black gets to the larger point here, which is that Shkreli has been targeted because people don't like his ideas and business strategies and "want to make an example out of him." Black calls this a dangerous precedent, especially in a country with a presumption of innocence.
When they don't like you, or what you're doing, you become a target. And they keep digging until they find a litany of charges they can bring against you. In Shkreli's case they didn't have to look far. He has a checkered past, and it seems to be catching up with him.
In fact, charges such as "misappropriating funds" seem "pretty flimsy" given that such accusations could be leveled at many in the business. Shkreli, Black says, should have been treated with contempt while the market itself put him and his silly ideas out of business – as they were well on the way to doing.
He calls what has just happened the stuff of "banana republics" and he has a good point. The trouble is this sort of idiocy has a long history and it is no aberration.
So while we agree with Black's perspective and think it sheds light on yet another sordid regulatory episode, we would suggest that Shkreli's treatment is nothing unusual. In fact, when one examines the relationship between Wall Street and regulators generally, favoritism becomes obvious.
It is so obvious, in fact, that it has a name: regulatory capture. The largest firms in a given industry basically end up using regulations as a tool to foster a competitive advantage.
For the very largest players, even the most onerous regulations are not too much of a burden – especially because they may be putting the competition out of business. And regulators need to come from somewhere and often come from the private sector of the industry they serve.
Thus, a large firm may have previous business relationships with its regulators and may also have reason to support certain regulations, especially onerous ones that can damage other private sector enterprises.
Seen from this perspective, the US securities industry has been functioning like a "banana republic" for a very long time, indeed. One needn't exempt other industries. The regulatory structure of the US is in many senses out of control, not that it made much sense to begin with.
But at the beginning, the structure was a small one and had an insignificant impact. Today, Washington's bloated regulatory fiefdoms are making it increasingly impossible for any sort of marketplace to function. Price discovery is increasingly marginalized and large, trouble entities are routinely supported by government bailouts.
The US marketplace needs a thorough overhaul and more than a small dose of competition. Will that be forthcoming? Probably not. A point to note, please.