Chapter 6, Part 3: Hedge fund hustler
Arizona businessman Josiah Austin was an early investor in one of Martin Shkreli's first hedge funds. Things did not go well.
Like a lot of industries, the Wall Street hedge fund world is kind of a small town. People get reputations, they get intimately familiar with big-shots and competitors, and they cross paths and sometimes clash. Particularly when it comes to traders, the space is heavily populated with intense (and mostly male) eccentrics, laser-focused on beating the market and achieving massive money-making ambitions.
But even in a sea of capitalist weirdos, Martin Shkreli stood out. Michael Kimelman, a former hedge fund guy convicted of insider trading in 2011 (as part of a huge crackdown spearheaded by the Manhattan U.S. attorney’s office), wrote a book about his experiences from prison and described meeting Martin on one occasion in the early 2000s.
This was about a decade before Martin, as the CEO of Turing Pharmaceuticals, jacked up the price of a toxoplasmosis drug by 5,000 percent in a day, and became almost instantly branded the “Pharma Bro” and the “most-hated man in America” in the press.
At the time Martin was a biotech trader, known for his work as an intern for CNBC “Mad Money” host Jim Cramer’s hedge fund Cramer Berkowitz & Co. and for work with other Wall Street stars closely associated with Steve Cohen’s former multi-billion-dollar firm SAC Capital. (If you’re familiar with hedge funds, Cohen needs no introduction. If you’re not — well, maybe the best way I can explain is that the “bad guy” in Showtime’s “Billions” is loosely based on him.)
Kimelman described Martin as “freakishly skinny” and “on the spectrum.”
“His uncombed, wild hair fell over a disturbed child’s face,” he wrote. “The visual presentation had me mentally running through the DSM-IV table of contents before we’d even said hello.” During the meeting, Kimelman watched Martin pepper another Wall Streeter with “rapid fire questions” about pharmaceutical stock prices, valuation methodologies, and drug trial results. The man he was speaking to “couldn’t hold a candle to Shkreli’s psychopathic level of statistical recall and brainpower,” Kimelman wrote.
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Kimelman added that he found Martin so irritatingly arrogant, especially after the young trader started dressing him down, that he quietly threatened to choke him. He said Martin gave him a “tough guy” stare that was like “watching a starved poodle with ricketts trying to impersonate a Great Dane.”
But not everyone felt driven to violent impulses by Martin’s “psychopathic” intelligence or his outsize bravado. Some wealthy investors were drawn to him for those exact qualities. One of them was Arizona businessman Josiah Austin.
Decades ago, Austin started out as a stockbroker in Baltimore, and then became a commercial banker before making millions by investing in financial institutions. He managed his $300 million or so in wealth through an investment entity called El Coronado Holdings.
Then in his late 60s, Austin met Martin around 2006, when the boyish huster was working as an analyst for a big investment brokerage firm. He took a liking to Martin, and found him smart and ambitious, if maybe also “a little cocky.” He started turning to the young analyst for ideas for pharmaceutical investments and eventually put $4.8 million in one of Martin’s early hedge funds, Elea Capital.
But things did not go well with Elea. The businessman lost all of the $4.8 million he invested in Martin’s fund. He also ended up sued by Lehman Brothers for $2 million worth of debt Martin had racked up through bad trades.
Apparently, Martin had overstated his relationship with Austin to the investment bank — implying to the firm that the older businessman would cover any of his losses. (Luckily for both Austin and Martin, Lehman Brothers collapsed and filed for bankruptcy in 2008, and the lawsuit was abandoned in the carnage.)
The businessman ended up telling his story in court, as a witness for the prosecution, in Martin’s securities fraud case in 2017. Lean and weather-beaten, unfussily dressed in khakis and a blazer with no tie, and exuding a plainspoken confidence, he looked like the sort of rich, white self-made person you’d find in an Ayn Rand novel.
From his testimony, which I watched while sitting in the gallery with other journalists, I got a picture of Martin as an eager opportunist, sensing a chance to prove himself to the wealthy older man and accelerate his success. Martin dove into research, apparently mostly on spec, for Austin, recommending dozens of biotech stocks to him. Austin told the court that sometimes he took Martin’s advice, and sometimes he queried other analysts to get other opinions.
It sounded to me like Martin was sticking like glue to Austin, hoping that an informal advisory relationship might turn into a paid one. After Austin invested heavily in a North Carolina-based biotech, Chelsea Therapeutics, partly at Martin’s urging, Martin took a trip with Austin to the company’s headquarters. “He asked to come,” Austin explained to the court. While there, Martin talked about the science behind Chelsea’s products with its top executives.
Back in New York, Martin would seek out blocks of Chelsea stock that were available for purchase, and tip off Austin so that he could increase his position. He also relentlessly read reports for Austin and talked to doctors to learn more about Chelsea. “He worked hard,” Austin said, agreeing with a defense lawyer’s characterization.
Finally Austin did give Martin the vote of confidence he was looking for — by sinking several million dollars in Elea. (Elea had little else in the way of assets besides Austin’s money.) Martin quickly demonstrated he was in over his head. There were some good days, but many bad days. He periodically asked Austin for additional investments to keep the ship afloat. But it didn’t last.
After the fund “blew up” in August 2007, ending up deeply in the red, Martin drafted an email to Austin. The subject line read “performance.”
“Markets go up, markets go down, but there are no excuses,” Martin wrote. “I’m embarrassed by my performance but steadfast in my conviction on top ideas.”
In the last line of the email, Martin wrote: “Sorry for all the inconvenience I’ve caused you — I know sorry doesn’t cut it.”
A prosecutor asked Austin whether his relationship with the cocky young trader was “different” after Elea went bust.
“Well, I had lost $4.8 million,” Austin said. “I certainly looked at his ideas and his recommendations with a different view. You know, I still thought Martin was an intelligent, smart guy, but I didn’t particularly want to do any more business with him.”
Despite that falling out, Martin continued to tout his relationship to Austin to potential investors a few years later, when he launched another hedge fund, MSMB. At times he bragged that the fund was worth as much as $35 million or $40 million. In reality, it was not really any bigger than Elea, and the $35 million to $40 million figure he cited was a vast exaggeration, based on the pharmaceutical investments he had advised Austin to buy. (Martin ended up convicted of securities fraud because he solicited investments based on lies like this.)
In the courtroom, Austin didn’t appear to harbor any grudges, though. He made no dirty looks or sideways glances at Martin, who was seated nearby at the defense table, watching intently and fidgeting now and then by playing with his hair. His face remained mostly expressionless as he described his dealings with Martin, while his voice was tinged with a little disappointment.
When a prosecutor asked him what his impressions were initially of Martin as a young trader in 2006, Austin replied declaratively, without flinching or qualifying himself, in the present tense: “You know, I like Martin.”
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