Martin Shkreli and how the ruling class loots its own

The world's self-appointed most eligible bachelor was hiding under a hoodie as police marched him out of his midtown Manhattan apartment tower Thursday morning.

That would be Martin Shkreli, the 32-year-old entrepreneurial enfant terrible who earned widespread public hatred earlier this year when Turing Pharmaceuticals — which Shkreli founded and runs as CEO — acquired a crucial drug that treats a rare parasitic infection and jacked its price up from $13.50 to $750 per pill. After hinting he might drop the price, Shkreli reneged, and later lamented he hadn't hiked it higher.

The arrest wasn't for anything to do with that business, though. It was related to a previous pharmaceutical company he founded and temporarily ran as CEO, which also employed that same less-than-appetizing business strategy of buying the rights to particular drugs and then raising their prices through the roof. Shkreli started that firm, called Retrophin, in 2011 while he was also running a hedge fund called MSMB Capital Management. And according to federal prosecutors, Shkreli essentially used Retrophin as his personal slush fund, raiding its finances to make investors at MSMB whole after the hedge fund began bleeding money.

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So one of the most widely loathed men in America is going to be charged with securities fraud. Retrophin booted Shkreli some time ago, and he now faces a civil suit from the company over the same shenanigans. The Securities and Exchange Commission is expected to sue him as well. It's a rare moment of the universe responding to gluttonous capitalist excess with some genuine consequences. But it also reveals on odd complication in the world of the economic elite.

We tend to think of corporations, investors, and CEOs as one monolithic group with the same interlocking interests, which is often true. But public corporations also represent a weird "socialization" of the company structure — where ownership does not lie with the people who run the firm on a day-to-day basis, but rather with a cloud of shareholders scattered throughout society. The CEO and management are hired to work at the behest of shareholders, as the good and faithful steward of their finances.

In fact, if stock ownership — and the stream of capital income it comes with — was actually widely dispersed among everyday American workers, the system's effects would rival the most left-wing populist dreams of Bernie Sanders. But wealth holdings are even more grossly skewed toward the elite than income. Sometimes this produces intra-elite tension, like when a CEO or management turns on investors to loot the corporation they're all a part of. Think of Ken Lay and the Enron disaster, for example. How to prevent this sort of thing is one of the more interesting and under-discussed questions in corporate governance.

Corporate governance is itself a creation of actual government. Our national legislature sets the rules for how corporations are governed, and what the balances of power are. Restructuring that governance can thus reform corporate behavior. Alterations to the rules for lobbying, transparency, disclosure, and how shareholder votes are counted are all worth looking into.

There's also the interplay between CEOs and corporate boards, who together form the core management team overseeing most public corporations on shareholders' behalf. In America, this relationship often devolves into a kind of mutual back-scratching society, with CEOs largely able to pick their preferred board members and vice versa, while everyone votes one another enormous pay packages that bleed the company of revenue that could be going to shareholders instead. So while corporations can often seem like a hotbed of intra-elite collusion, they can also be filled with intra-elite tension or even intra-elite fratricide.

This is all at least nominally legal. So how did Shkreli get into trouble?

According to the various legal filings reported by Bloomberg, a trade Shkreli engineered between MSMB and Merrill Lynch in 2011 went horribly south and nearly cleaned the hedge fund out. So Shkreli organized payout schemes with as many as 10 MSMB investors to repay his obligations. He allegedly siphoned money from Retrophin "through fake consulting agreements," "unauthorized appropriations of stock and cash," and by "fraudulently reclassifying a $900,000 equity investment that MSMB made in Retrophin as a loan." He looted some rich people to enrich other rich people. And he did it because he himself was aiming to get even richer than he already was in a particularly free-wheeling sort of way.

Perhaps we can take a certain amount of comfort that the corporate and legal governance systems worked like they're supposed to in this case. That said, things like wage theft regularly go unpunished, while bilking workers out of vastly greater sums. And regardless of whether shareholders and management are fighting or cooperating, both tend to minimize the slice of revenue left over for everyday employees in both cases. In other words, a big part of why the system worked in this case was probably because the victims being looted were other rich people.

But maybe there's at least a rough poetic justice here: Shkreli clawed his way up from a working-class immigrant family to plant his flag on Wall Street, even taking an internship on Jim Cramer's Mad Money. (Naturally.) He embraced all the worst values of the capitalist elite to the Nth degree, and then inflicted the system's own demons back upon it.

How do you like them apples?