Muddy Waters' Carson Block Sues Equifax For $500,000

Disgraced credit-monitoring company Equifax, which has seen its stock drop by nearly 40% since disclosing what will likely be remembered as one of the most damaging data breaches in US history, eliciting dozens of class-action lawsuits, calls for investigations by at least one state attorney general, and requests from multiple Congressional committees for more information about the exact timeline of when Equifax learned about the hack, and when it was disclosed – because somewhere between those two events, several of the company’s executives, including its CFO, cashed out of some $2 million in stock and options.

In the latest humiliating blow to a company that failed at its only job – safeguarding Americans’ sensitive personal and financial data – famed short-seller Carson Block has announced that he has decided to sue the company over its “abysmal” handling of the hack.

And here’s the kicker: He doesn’t even have an open short position against the company. In other words: There’s no profit motive here. Block – like millions of Americans - is just really, really pissed.

Here’s the Financial Times:

“Veteran short-seller Carson Block has launched a private lawsuit against Equifax, accusing the credit-reporting company of an “abysmal” handling of one of the worst cyber security incidents in history. Equifax said on September 7 that its systems were breached by criminals in a raid that went on for more than two months — an admission that has prompted a flood of regulatory inquiries, dozens of private lawsuits and a more than one-third collapse in the company’s share price. The data of up to 143m Americans was compromised, the company said, along with up to 400,000 people in the UK.

One of those was Mr Block, whose suit filed on Friday accuses Equifax of negligence in failing to safeguard and protect his personal identifying information from criminals, as well as a failure to disclose the breach in a timely fashion.”

Apparently, Block has learned that his personal information was compromised in the hack because he’s suing for personal damages. He has also accused the company of failing to disclose the breach in a timely fashion. The company’s CEO, Rick Smith, who is expected to deliver Congressional testimony early next month, has said that the company at first believed the hack was relatively minor."

According to the FT, the famed short sellers is seeking $500,000 in damages, a paltry sum considering Muddy Waters reportedly produced double-digit returns last year.

“Mr Block’s firm, Muddy Waters, has no short position that would benefit from a fall in the stock. In the suit, filed in the Northern District of California, San Francisco division, he seeks damages of at least $500,000 for the “stress, nuisance and annoyance” of dealing with issues stemming from the breach.

The suit notes that Equifax’s business revolves around being a “secure storehouse” for data and providing a clear financial profile of consumers that lenders and other businesses can rely on. According to its own description, Equifax organises, assimilates and analyses data on more than 820m consumers and more than 91m businesses worldwide.

Equifax could not be reached for comment at the time of publication.”

As the FT explains, hackers gained access to the company’s systems by exploiting a vulnerability in Apache Struts, a popular open-source framework for developing web applications in the Java programming language. On Friday, Equifax said that it had patched the hole on July 30, one day after it had detected strange activity on its servers. But cybersecurity experts note that the fix had been available since March, when the Apache Foundation put out an update which had been widely disseminated in tech circles. In short, the company’s cybersecurity experts committed an unforced error by neglecting to invest the meager resources required to patch the fix.

Amid the firestorm of controversy that has engulfed the company in the aftermath of the hacking disclosure, Equifax has actively tried to cover up the fact that Susan Mauldin, Equifax’s chief information security officer, and the person who was responsible for keeping the highly confidential and secret information of over 100 million Americans, has zero security or technology credentials…in fact, she was a music major at the University of Georgia.

Smith, Mauldin and nine other executives are named in Block’s lawsuit.  Mauldin, Equifax said, would retire immediately from the company on Friday, along with David Webb, chief information officer.

According to the suit, Equifax should’ve been more careful following two big breaches in 2016. In one of those, 430,000 names and other vital pieces of information were lost as a result of the company using “alarmingly poor” security for the generation of PINs from the last four digits of a social-security number and the four-digit year of birth.

Of course, with North Dakota Democrat Heidi Heitkamp calling for a criminal investigation into securities fraud, Block’s lawsuit for a meager half a million is probably the least of the company’s worries…
 

Shkreli Going To Jail After Judge Revokes Bail

“The most hated man in America” is going to prison over a joke.

Late Wednesday, Brooklyn Judge Kiyo Matsumoto ordered that former Turing Pharmaceuticals CEO Martin Shkreli’s bail be revoked after prosecutors claimed that a Facebook post published by Shkreli on Sept. 4 was tantamount to an invitation to assault on Hillary Clinton during her upcoming book tour. In a letter demanding a bail hearing, the former hedge fund manager was described as a “threat to the community.”

Matsumoto, who presided over Shkreli’s trial which resulted in convictions on three out of eight counts of wire and securities fraud, said she would not be swayed by the defense’s argument that the post was a harmless joke and that Shkreli didn’t intend to harm anybody. Instead, the Judge revoked Shkreli’s $5 million bail and ordered him directly remanded to jail pending his sentencing, according to the Daily News. No date has been set for his sentencing.

Shkreli told the judge, prosecutors and secret service agents who asked to interview him about the post that it was intended as satire. In the original post, Shkreli offered $5,000 for a strand of Hillary Clinton’s hair, claiming that he would have a DNA analysis done to confirm “that the Clinton Foundation is willing to KILL to protect its secrets.”

See the post in question below:

Since being unceremoniously thrust into the public eye in late 2015 when he was labeled “the most hated man in the world” after his company, Turing Pharmaceuticals, hiked the price of Daraprim, a drug that treats toxoplasmosis, by 5,000%, Shkreli has made a habit of publicly antagonizing lawmakers, prosecutors and judges. True to form, Shkreli took to Facebook to blast prosecutors immediately after the hearing.

Notably, Shkreli is being thrown in jail one day before the close of Shkreli’s auction of the only copy of the Wu-Tang Clan “Once Upon A Time In Shaolin” which he purchased for $2 million in 2015. Bidding has topped out at $1 million in recent days.

In their initial request, prosecutors tried to paint Shkreli as a serial harasser of women, citing his ban from Twitter earlier this year, allegedly for harassing Lauren Duca, a freelance writer who had authored an opinion essay that criticized President-elect Trump. The day before his verdict, Shkreli wrote in a Facebook post: "trial"s over tomorrow, b****. Then if I"m acquitted, I get to f*** Lauren Duca."

Shkreli edited the Facebook post after it was first reported in the media, clarifying that the post was meant as satire. Though he says he agrees with Democratic policies, Shkreli sided with President Donald Trump during the election after expressing a frustration with PC culture.

In his sentencing, Shkreli could face as much as 20 years in prison, and although a much shorter sentence - if any - had been expected, today"s latest snafu may have just cost Martin dearly.

Judge Halts Shkreli Trial

The trial of former Turing Pharmaceuticals CEO Martin Shkreli has been temporarily halted by Judge Kiyo Matsumoto after Shkreli’s lawyer objected emphatically as the prosecution planned to show jurors documents it claims are evidence of fraud committed by Shkreli, without calling witnesses to back them up, according to CNBC.

The documents allegedly detail payments that Shkreli"s drug company made to investors in two hedge funds he ran, as well as supposedly bogus consulting agreements he signed with some of his former investors entitling them to a salary and shares in Retrophin, a pharmaceutical company he co-founded and briefly led, according to CNBC. Jurors were given the rest of Wednesday off, as well as Thursday, to allow both the defense and prosecution time to file legal briefs on their arguments for and against requiring witnesses for the relevant documents. Testimony is expected to resume Friday, CNBC reported.
Benjamin Brafman, the celebrity defense attorney representing Shkreli, said denying him the opportunity to cross examine people involved with the documents would be tantamount to denying Shkreli his constitutional right to confront witnesses against him.

The documents included settlement agreements that Shkreli reached with investors at two of his hedge funds, as well as consulting agreements with some of those investors. Among the settlement agreements in dispute Wednesday included the terms of what investors received from Retrophin in exchange for dropping any claims against Shkreli and his hedge funds.

Shkreli is facing eight counts of wire and securities fraud stemming from his brief stint as a hedge-fund manager. Specifically, the prosecution is examining communications between Shkreli and several former investors in his fund for evidence Shkreli misled them about his qualifications, investment returns and other details like his investing track record and the amount of money he managed.  The prosecution also alleges that Shkreli falsified documents and backdated payments to corroborate his lies. Finally, prosecutors claim Shkreli defrauded Retrophin, which he founded in late 2012 just as his career as a money manager, CNBC reported.

Many of the witnesses called by the prosecution so far have described feeling betrayed by Shkreli. Some described Shkreli’s repeated evasions – he allegedly told one witness that he was “too busy” to give him his money back after starting Retrophin. Judging by the witnesses who’ve testified so far, it appears that many of Shkreli’s investors were small business owners who had invested between $100,000 and $300,000. After several investors threatened to sue, Shkreli allegedly offered to repay them using Retrophin’s resources. In addition to criticizing Shkreli for his dishonesty and strange behavior, many of the witnesses also admitted that they ultimately made money investing with Shkreli.

Matsumoto, the judge, indicated that she was sympathetic to the defense"s argument that settlement and consulting agreements should only be shown to jurors if a person who received those agreements takes the witness stand.

"I do think the fundamental right to confront the witnesses and question the witnesses is important," Matsumoto said.

If prosecutors are allowed to introduce the documents to jurors without calling related witnesses, they could rest their case soon. The trial began late last month, and is expected to last as long as six weeks. But if Matsumoto bars that method, prosecutors could be forced to call additional witness stand, meaning they would be unlikely to rest their case until next week sometime.

Former Investor Says Shkreli Reminded Him Of "Rain Man"

The prosecution in the trial of former Turing Pharmaceuticals CEO Martin Shkreli called more investors to testify about alleged malfeasance by Shkreli during his time as a hedge-fund manager on Monday. And while two witnesses echoed earlier descriptions of Shkreli being evasive when investors asked for their money, both ultimately admitted that they were paid back with interest.

One corroborated an earlier witness’s claim that Shkreli became evasive when asked to return clients’ money, stalling for more than a year before making investors whole with questionable payouts from Retrophin, the pharmaceutical company he co-founded, as well as grants of Retrophin stock, which is now worth $20 a share.

Another played into the portrayal of Shkreli that defense attorney Benjamin Brafman has sought to sell to the jury: That any liberties taken by Shkreli were ultimately made in good faith, but his clients’ odd behavior and personality quirks at times caused friction between him and his clients.

Schuyler Marshall, chairman of the board of the real estate company Rosewood Corp, said the former drug company executive reminded him of Dustin Hoffman"s autistic character in the movie "Rain Man," according to Reuters. Though Marshall added under cross-examination by Shkreli"s lawyer, Benjamin Brafman, that he was not claiming Shkreli was autistic.

""The reference here was that this was just an intensely focused, bright guy who knew his stuff,"" Marshall told jurors. Hoffman"s character in the 1988 film is an autistic savant with exceptional mental abilities but difficulty relating to other people.

Like other investors who have testified in the trial, Marshall, who invested more than $200,000 in MSMB Capital, said that while Shkreli misled him about the fund"s operations, he did not lose money. At one point, Marshall testified, he even used the phrase "no harm, no foul" in a communication with Shkreli.

"He paid back my investment and then some," Marshall said.”

Shkreli is being tried on eight counts of securities fraud and wire fraud related to his time running two hedge funds, MSMB Capital and MSMB Healthcare, and a pharmaceutical company he founded called Retrophin. In particular, Shkreli has been accused of falsifying investor statements, backdating documents and misleading investors about his record as a fund manager. He also allegedly misstated how much money was in the funds, according to prosecutor G. Karthik Srinivasan, who, in his opening statement, accused Shkreli of being a “con man” who managed to convince his investors that he was “a Wall Street genius.”

Last week, judge Kiyo Matsumoto hit Shkreli with a partial gag order, prohibiting him from talking about his case in or around the Brooklyn courthouse after he went on a rant to reporters gathered there last week. The order leaves him free to speak with journalists and conduct his marathon livestreams on YouTube.  

Another witness on Monday, the seventh day of a trial that’s expected to last for as long as six weeks, was somewhat less charitable.

Richard Kocher, 65, told a Brooklyn federal jury Monday that his construction business saw a deal fall apart while he begged Shkreli to return his investments in a hedge fund, but the former pharmaceutical executive told him he was too busy running his new drug company, according to Bloomberg.

Kocher told the Brooklyn jury that, in one of his first forays into the hedge fund world in early 2012, he put $100,000 into Shkreli’s fund because he was assured investors could get their money back anytime. In May 2012, Kocher said he bailed out the fund, putting in another $100,000 after one of Shkreli’s employees told him it had a shortfall. Shkreli announced in September of 2012 he was closing his funds to focus on Retrophin Inc., but promising customers a full refund or shares in the startup pharmaceutical company.

Kocher pleaded for his money for five months but said he got a “run around” and Shkreli only offered 23,654 shares of Retrophin stock, which at the time he couldn’t sell.

“When you were in trouble and needed $100,000, I wired it over to you the next day,” Kocher wrote Shkreli in a March 2013 email. “I expect to get, in addition to this (insulting) untradable stock” my money back, he wrote.

However, Kocher too was eventually paid back…with interest. Though he says it"s hard to say if he ultimately came out ahead, given the opportunity costs.

“Shkreli eventually returned Kocher’s investments. Kocher also sold the Retrophin stock, after several years, making about $350,000 in total profit. But Kocher said he had to pay a lawyer, lost a business deal and lost time from his business, so he’s not sure if he ended up ahead.”

If convicted, Shkreli could face up to 20 years in prison. He has repeatedly proclaimed his innocence.