Lawyer as Gatekeeper: Ending up on the wrong side of the law

There were plenty of headlines in 2015 for Martin Shkreli, the 32-year old former CEO of Turing Pharmaceuticals, who eventually became known as the “most hated man in America.” Shkreli rose to infamy and spurred a Congressional investigation after it was reported that Turing had obtained a manufacturing licence for Daraprim, a drug used by HIV patients, and had hiked the price by over 5,000 percent from $13.50 to $750.00 per tablet. The negative publicity was only the beginning of Shkreli’s troubles. In December 2015, Shkreli was charged with securities fraud, securities fraud conspiracy, and wire fraud conspiracy for allegedly orchestrating three interrelated “Ponzi-like schemes”: schemes to defraud investors in MSMB Capital Management LP (“MSMB Capital”), MSMB Healthcare Management LP (“MSMB Healthcare”), and Retrophin Inc. (“Retrophin”). Of particular interest to those in the legal field, the accusations and charges did not stop with Shkreli. Evan Greebel, a New-York based lawyer who served as Retrophin’s outside counsel and corporate secretary (while also working at an external law firm), is also the subject of the federal indictment and the SEC Complaint. Greebel has been charged with one count of conspiracy to commit wire fraud for his role in aiding and abetting the fraudulent conduct of Shkreli. Both Greebel and Shkreli have pled not guilty and have stated that they intend to fight the charges.

The facts as alleged by prosecutors are as follows: Shkreli co-founded MSMB Capital in 2009.  MSMB Capital subsequently suffered significant losses, which Shkreli concealed from investors. In 2011, Shkreli started another hedge fund, MSMB Healthcare. Prosecutors say that Shkreli used the moneys he raised from investors of MSMB Healthcare to pay back investors in MSMB Capital.  MSMB Healthcare too eventually suffered significant losses, which Shkreli again failed to disclose to investors. By then, Shkreli had co-founded yet another enterprise, Retrophin, which went public in 2012. It is alleged that Shkreli, aided and abetted by Greebel, fraudulently induced Retrophin to issue Retrophin stock and make cash payments to disgruntled investors in MSMB Healthcare. To conceal the payments, Shkreli had the investors enter into  sham “consulting” agreements with Retrophin (made to look like they related to the company’s business) when in fact the payments were for the release of potential claims against Shkreli. The accusation against Greebel is that he drafted certain of these consulting agreements with knowledge or reckless disregard for the true purpose of such agreements and that Greebel did not disclose this information to Retrophin’s Board of Directors.

Robert L. Capers, United States Attorney for the Eastern District of New York, made the following statement on the day of the indictment:

As alleged, Martin Shkreli engaged in multiple schemes to ensnare investors through a web of lies and deceit. His plots were matched only by efforts to conceal the fraud, which led him to operate his companies, including a publicly traded company, as a Ponzi scheme, where he used the assets of the new entity to pay off debts from the old entity. When regulators and auditors questioned Shkreli’s decisions, he joined forces with Evan Greebel, who used his law license and training to conceal and further the scheme.

Role of Counsel when Client is an Organization

The case against Greebel focuses on his role as one of Retrophin’s gatekeepers, claiming that the failure to protect his client – Retrophin – constitutes aiding and abetting the alleged fraud perpetrated by Shkreli. The prosecution of Greebel raises questions about when legal advice crosses the line into aiding and abetting a fraud. It is paramount in any lawyer-client relationship that the lawyer always be aware of who the client is, because that is the party the lawyer must ensure receives the benefit of the legal services. When providing legal advice to corporations in particular, lawyers must be cognizant not to slip into thinking that it is the individual officers to whom the legal services are being provided; legal duties are owed to the corporation.

Lawyers are increasingly viewed as one of the gatekeepers for a corporation entrusted with ensuring that it stays within the limits of the law. When a company’s lawyer steps out of that role by facilitating an individual officer in advancing his/her own interests, one of the key protections in place for shareholders is lost.

“Lawyers are important players in corporate transactions, ensuring their clients comply with the rules. But when legal advice pushes over the line into enabling fraud, then a lawyer can wind up on the wrong side of the law.”

In fact, in many jurisdictions, lawyers have a professional obligation not to knowingly assist or encourage criminal behaviour and those lawyers who are employed or retained by a corporation have a professional obligation to take certain steps when the lawyer knows that the organization is acting or intends to act dishonestly, fraudulently, criminally or illegally.  For example, in Ontario, the LSUC Rules of Professional Conduct (Rule 3.2-8) require a lawyer to advise the person for whom the lawyer takes instructions and the chief legal officer, or both the CLO and CEO, that the conduct is wrongful and that it must be stopped. If this advice is refused or not acted upon, the lawyer must then advise progressively the next highest person or groups within the corporation, including ultimately the board of directors, about the conduct and advise that it must be stopped. If the organization, despite the lawyer’s advice, continues or intends to pursue the wrongful conduct, the lawyer has a duty to withdraw from acting. In some cases, this will mean resigning. These rules recognize that lawyers as the legal advisers to the corporation are in a central position to encourage lawful conduct and to advise that it is in the corporation’s best interest to not violate the law.

The charges against Shkreli and Greebel were brought in connection with President Obama’s Financial Fraud Enforcement Task Force. The task force was established to wage an aggressive, coordinated, and proactive effort to investigate and prosecute financial crimes. The charges brought against Greebel reflect a continued attempt to hold corporate executives and licensed professionals who betray their positions of trust accountable. There are currently multiple internal investigations into Greebel’s actions being conducted by Greebel’s past and present law firms.

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