UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK X Retrophin, Inc., : : Case No. Plaintiff, : : v. : COMPLAINT : Martin Shkreli, : : Defendant. : X Retrophin, Inc. ( Retrophin or the Company ), by its counsel C

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF NEW YORK

Retrophin, Inc. ( Retrophin or the Company ), by its counsel Cooley LLP, brings this

Complaint against Martin Shkreli, its founder and former CEO, for repeatedly breaching his duty of loyalty to Retrophin. Retrophin seeks $65 million in damages and disgorgement of the compensation that Shkreli received from Retrophin, including

pursuant to his employment contract dated December 16, 2013 (the Employment Agreement ), option agreement dated December 16, 2013 (the Option Agreement ), and the option grant dated February 24, 2014 (the

February 2014 Option Grant ).

The allegations in this Complaint are made on information and belief based on, among other

things, a review of the Company s records. Shkreli did not agree to be interviewed by Cooley LLP in connection with its pre-filing investigation of the matters covered in this Complaint.

Statement of the Case

1. Retrophin is a publicly-held biopharmaceutical company focused on the development of therapies for the treatment of serious, catastrophic,

2. Retrophin was formed in March 2011, as Retrophin, LLC, a Delaware limited liability company. In September 2012,

Retrophin was incorporated as a Delaware corporation called Retrophin, Inc. In December 2012, Retrophin entered into a reverse merger with Desert

Gateway, Inc. ( Desert Gateway ), a publicly-traded Delaware shell corporation (the Reverse Merger ). As a result, Retrophin has been a publicly-held Delaware corporation

since December 17, 2012.

3. Retrophin brings this case against its founder, Martin Shkreli, for repeatedly breaching his duty of

loyalty to Retrophin. At all relevant times, Shkreli was the President or CEO of Retrophin, and a member of its board of directors (the Board ). He was also the manager of a group of hedge funds that he started before founding Retrophin

(the MSMB Funds ). On September 30, 2014, the Retrophin Board decided to replace Shkreli as CEO. On October 13, 2014, Shkreli resigned his positions with the Company. After leaving Retrophin, Shkreli founded a biopharmaceutical

company called Turing Pharmaceuticals, where he serves as the Executive Chairman.

4. Directors and officers of a company incorporated

under Delaware law owe the corporation a duty of loyalty. That duty requires them to act in good faith and to refrain from putting their personal interests ahead of the interests of the corporation. Directors and officers of a Delaware corporation

cannot use their power over corporate property and processes to benefit themselves. Delaware law requires a director or officer who seeks to engage in a transaction that benefits him personally to fully disclose his self-interest to his board of

directors, even if he believes that the transaction is in the best interests of the corporation. Failure to do so results in a breach of the duty of loyalty. Even when a company s board of directors is fully informed of and authorizes a

self-dealing transaction which is not the case with the transactions at issue here the transaction must not be unfair to the company, either as a matter of process or price.

5. Under Delaware law, a director or officer who breaches his duty of loyalty should be required to compensate the company for any damages

that the company sustained as a result

of his misconduct. Such damages are to be liberally calculated and any uncertainty as to the amount is resolved against the wrongdoer. The director or officer should also be required to forfeit

any assets he obtained or pay the company the current market value of such assets.

6. Under New York law, which governs the terms of

Shkreli s employment, Shkreli was prohibited from acting in any matter inconsistent with his agency or trust, and was bound at all times to exercise the utmost good faith and loyalty in the performance of his duties for Retrophin. A

faithless servant is not entitled to compensation or post-separation benefits, and can be required to disgorge all the compensation and benefits he received from the company during his period of disloyalty.

7. Shkreli was the paradigm faithless servant. Starting sometime in early 2012, and continuing until he left the Company, Shkreli used his

control over Retrophin to enrich himself, and to pay off claims of MSMB investors (who he had defrauded). Shkreli s self-dealing schemes include:

(a) Causing Retrophin to enter into settlement agreements with seven defrauded MSMB investors (Lindsay Rosenwald, Richard Kocher, Sarah

Hassan, Spencer Spielberg, David Geller, Michael Lavelle and Schuyler Marshall) to resolve their claims about the returns they received on their MSMB investments. See generally 59-76 and 81-89, infra. As a

result of these agreements, Retrophin paid out $2.8 million in cash and issued 11,000 Retrophin shares, and Shkreli diverted an additional 47,610 Retrophin shares for the benefit of himself and his MSMB Funds, resulting in a benefit to him and to

them of more than $4.5 million (at current market prices).1

(b) Causing Retrophin to enter into sham consulting agreements with three other defrauded MSMB

investors (Alan Geller, Steven Rosenfeld and Darren Blanton) to resolve their claims about the returns they received on their MSMB investments. As a result of these agreements, Retrophin paid out $200,000 in cash and issued 581,000 Retrophin shares,

resulting in a benefit to Shkreli and his MSMB Funds of more than $17.3 million (at current market prices). See generally 90-95, 108-117 and 118-127, infra.

(c) Using a Retrophin corporate opportunity the Company s opportunity to allocate 2.4 million unrestricted shares in the

Reverse Merger entity (i.e., the Fearnow Shares )2 to induce two Retrophin employees to give 90,000 of their Retrophin shares to him. Those shares were multiplied as a

result of the Reverse Merger (i.e., exchanged for a larger number of Retrophin shares). As a result, the 90,000 shares became 450,000 Retrophin shares, and are worth more than $13.3 million at current market prices.3 See generally 27-39, infra.

(d) Causing individuals who were

allocated Fearnow Shares in connection with the Reverse Merger to subsequently transfer a portion of their Fearnow Shares to Shkreli or persons designated by Shkreli to satisfy obligations that he had to them as a result of their investment in the

MSMB funds. These 150,000 shares are worth more than $4.4 million at current market prices. See generally 63-69 (Shkreli, Rosenwald and Kocher) and 128-138 (Thomas Koestler).

(e) Unilaterally recharacterizing a $900,000 investment that a MSMB Fund made in equity securities of Retrophin as a loan, causing

Retrophin to pay off that loan with

interest, and then using the loan proceeds together with other funds misappropriated from Retrophin to satisfy a settlement agreement with Merrill Lynch concerning a trade made by a

MSMB Fund. See generally 47-58, infra.

(f) Using funds raised by Retrophin in a private investment in public

equity ( PIPE ) transaction in February 2013 (the February PIPE ) to make a personal investment in that PIPE and thereby acquire 180,000 shares worth over $5.3 million today. See generally 40-46, infra.

(g) Using Retrophin assets to resolve a non-Retrophin obligation to Lee Yaffe. See generally 40-46,

(h) Causing Retrophin to pay vendors for obligations incurred by MSMB Funds. See generally

(i) Causing Retrophin to sue a Fearnow Share recipient (John Doe)4 in order to obtain Doe s 50,000 Fearnow Shares for himself. Those shares are worth more than $1.4 million at current market prices. See generally 145-157, infra.

(j) Using litigations commenced by two former Retrophin employees (Jackson Su and Chun Yi Huang) in an effort to obtain their Retrophin shares

for himself at Retrophin s expense. The shares Shkreli obtained from Su are worth more than $3.7 million at current market prices. See generally 158-170, infra.

(k) Causing the Company to breach a series of agreements in connection with a convertible note offering because it was in his self-interest to

do so. See generally 171-181, infra.

8. Through these schemes, Shkreli obtained over $5.6 million in cash and Retrophin shares or the

use of Retrophin shares worth over $59 million (at current market prices).

Parties, Jurisdiction and Venue

9. Plaintiff Retrophin, Inc. is a Delaware corporation with its principal place of business in San Diego, California.

10. Defendant Martin Shkreli is a citizen of New York, New York.

11. This Court has subject matter jurisdiction under 28 U.S.C. 1332 because there is complete diversity of citizenship between

Plaintiff and Defendant, and the amount in controversy exceeds $75,000, exclusive of costs and interests.

12. Jurisdiction over Shkreli

is proper because he is a citizen of New York.

13. Venue is proper in this district under 28 U.S.C. 1391(b) because a substantial

part of the events giving rise to these claims occurred in this district.

Background: The MSMB Funds and the SEC Investigation

14. Much of Shkreli s self-dealing related to the MSMB Funds. Accordingly, we first describe the MSMB Funds and their

relationship to the self-dealing transactions at issue in this Complaint.

15. In or about 2009, Shkreli founded MSMB Capital Management

LP, a hedge fund and private-equity firm focused on healthcare investments ( MSMB Capital ). Shkreli ran MSMB Capital and other funds he established under the MSMB umbrella through MSMB Capital

Management LLC ( MSMB Management ). Shkreli was the sole managing member of MSMB Management.

16. In or about February 2011,

Shkreli caused MSMB Capital to make a disastrous trade with Merrill Lynch (the Orex Trade ). MSMB Capital lost over $7 million, and was left virtually bankrupt. Shkreli did not tell his MSMB Capital investors that he had lost all their

money as a result of the Orex Trade.

17. Shortly after the Orex Trade, Shkreli formed MSMB Healthcare LP ( MSMB Healthcare )

and Retrophin. Shkreli created these entities so that he could continue trading after MSMB Capital became insolvent and to create an asset that he might be able to use to placate his MSMB Capital investors.

18. On or about September 10, 2012, Shkreli sent an email to the investors in MSMB Capital and MSMB Healthcare telling them he planned to

devote all his time to Retrophin and would be dissolving MSMB Capital and MSMB Healthcare. Shkreli told them that the original MSMB Capital investors have just about doubled their money net of fees, and he included a Monthly Net

Performance chart which seemed to back up that representation. But that chart was false. As described above, investments in MSMB Capital had been wiped out by the Orex Trade.

19. In the same email, Shkreli represented that all MSMB Healthcare or MSMB Capital investors could redeem their investments in their choice

of cash or Retrophin stock by the end of October 2012. But Shkreli did not make the promised distribution. Indeed, as of September 10, 2012, MSMB Capital was insolvent. MSMB Healthcare had a substantial investment in Retrophin, but little, if

20. Following Shkreli s investor letter, multiple MSMB investors complained about Shkreli s lack of transparency and

failure to redeem them as he had promised. For example, in or about December 2012, Steven Rosenfeld, a MSMB Healthcare investor, contacted Shkreli, asking about the redemptions for MSMB and wanting to know when he would get his

money back. In or about January 2013, Spencer Spielberg, another MSMB Healthcare investor, told

Shkreli that I have zero idea how much equity I have with MSMB, Retrophin and the other investments, and asked, When can I expect to get some clarification??? At least one

MSMB investor complained to the SEC.

21. In the fall of 2012, the SEC opened an investigation entitled In the Matter of MSMB

Capital Management LLC Valuation (the SEC Investigation ). On or about October 1, 2012, the SEC issued a subpoena to MSMB Management asking for documents showing MSMB Capital and MSMB Healthcare s assets under management.

In response, Shkreli created a Schedule of Funds Managed by MSMB which showed that MSMB Capital had $2,600,000 in assets under management as of November 4, 2012, the date of Shkreli s submission to the SEC. In fact, MSMB

Capital had no assets under management.

22. Having advised the SEC that MSMB Capital had $2,600,000 in assets under

management, Shkreli decided to create the appearance that his representation was true by giving Retrophin stock to MSMB Capital. Rather than use his own stock, Shkreli induced two Retrophin employees (Thomas Fernandez and Kevin Mulleady) to deliver

90,000 of their Retrophin shares to him in exchange for a promise of Fearnow Shares i.e., unrestricted shares in Desert Gateway, the Reverse Merger entity.5 Those 90,000 shares were

multiplied to 450,000 shares after the Reverse Merger. Shkreli transferred 75,000 of those shares (375,000 shares after the Reverse Merger) to MSMB Capital. The documents effecting these transactions were back-dated to July 1, 2012 to create

the misimpression that Shkreli s representation to the SEC was true. See generally 14-39, infra.