shkreli - lehman complaint

:CANNED ON 712612007

SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK

X

Lehman Brothers Inc. : Index No.

Plaintiff 1 :

Plaintiff designates New York 4x6 82 5 1. 7 the place of trial. The basis of venue is

vs. : Plaintiffs placc of business.

: SUMMONS

Martin Shkrcli, Elea Capital Managerncnt LLC, : Elea Partners LP, Elea Investors LLC and Josiah T. : Austin,

PlaintifPs placc of business is located at 745 Seventh Avenue, New York, New

TO THE ABOVE-NAMED DEFEN a YOU ARE HEREBY SUMMO ed to serve upon plaintiffs

attorney an answer to the complaint in this action within tw 0) days after the service of this

summons, cxclusive of the day of service, or within thirty (30) days after service is complete if

this summons is not personally delivered to you within the State of New York. In case of your

failure to answer, judgment will be taken against you by default for the relief demanded in the

complaint.

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Supreme Court Records OnLine Library - page 1 of 14

Plainti F designates New York County as the place of trial. Tk basis for the

venue dcsignated is pursuant to 9 503(c) of the Civil Practice Law and Rules.

Dated: New York, New York July 25,2007

HERRICK, FEINSTEIN LLP -.

an Brothers Inc. 2 Park Avenue New York, New York 10016 (212) 592-1400

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H F 373266Sv.l #99999/1000


De fendaii t s :

Elea Partners LP 708 Third Avenue 5"' Floor New York, New York 10017

Elea Capital Management LLC 708 Third Avenue 51h Floor New York, New York 10017

Martin Shkreli 2080 Ocean Avcnue, Apartment 6C Brooklyn, New York 1 1230-73 18

Elea Invcstors LLC 160 West 2Znd Street, Suite 1001 New York, New York 1001 1

Josiah T. Austin 4673 Christopher Place Dallas, Texas 75204

andlor

Josiah T. Austin 91 22 South Highway Willcox, Arizona 85625

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SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW Y O N

X

Lehnan Brothers Inc. : Index No.

Plaintiff

vs . : COMPLAINT

Martin Shkreli, Elea Capital Management LLC, : Elea Partners LP, Elea Invcstors LLC and Josiah T. : Austin,

Defendants :

F )

Y > Y

Plaintiff, Lchman Brothers Inc. (“Lchman”), by it errick, Feinstein LLP, for

LLC, Elea Partners

LP, Elea Investors LLC and Josiah T. Austin (collectively, the “Defendants”), alleges as follows:

NATURE OF THE ACTION

1. This is an action to recover monies owed to Lehman as a result of a

transaction effected by Lehman as ordered by Defendant Martin Shkreli, acting as portfolio

manager for a partnershiphedge fund account maintained at Lehman and/or acting as an

undisclosed agent of Defendant Josiah T. Austin. We request expedited discovery in light of

facts to be further developed to ensure that the obligations of the Defendants to Lehman are fully

satisfied.


PARTIES

2. Lehman is a global investment bank duly organized and existing under the

laws of thc State of Delaware having its principal place of business at 745 Seventh Avenue, New

York, New York 10019.

3. Defendant Elea Partners LP (the “Partnership”) is a hedge fund and has its

principal place of business at 708 Third Avenue, 5th Floor, New York, New York 10017.

4. Defendant Elca Capital Management LLC (thc “Advisor”) is responsible

for managing the Partnership and has its principal place of business at 708 Third Avenue, 5‘h

Floor, New York, New York 1001 7.

5 . Defendant Martin Shkreli (“Shkreli”) is the portfolio manager for

Defendant Partncrship, and on information and bclief residcs at 2080 Ocean Avenue, Apartment

6C, Brooklyn, New York 11230-7318.

6. On information and belief Defendant Elea Investors LLC (the “General

Partner”) is the solc general partner of the Partnership. Thc General Partner oversees the

Advisor, as well as the management and control of the Partnership. On information and belief

Dcfendant Gcneral Partncr is a Delaware limited liability company and is located at 160 West

22”d Street, Suite 1001, New York, New York 1001 1.

7. On information and belief, Defendant Shkreli is an agent for Defendant

Josiah T. Austin (“Austin”).

8. On information and belief, Defendant Austin is a majority shareholder of

the Partnership and is thc undisclosed principal on whose bchalf Defendant Shkreli effected


transactions with Lehman.

Christopher Place, Dallas, Texas 75204 andlor 9122 South Highway, Willcox, Arizona 85625.

On information and belief, Defendant Austin resides at 4673

JUFUSDICTION AND VENUE

9. This Court has jurisdiction over this matter pursuant to N.Y. C.P.L.R. 302

because Defendants Martin Shkreli, Elea Capital Management LLC, Elea Investors LLC and

Elea Partners LP all rcside in New York and do business or are authorized to do business in New

York.

10. This Court has personal jurisdiction over Defendant Austin pursuant to

N.Y. C.P.L.R. 302 (a)(l) because upon information and belief he transacted business within New

York.

11. Plaintiff’s choice of venue is proper pursuant to N.Y. C.P.L.R. 503(c)

because Plaintiff maintains a place of business in New York County.

Allepations Common To All Causes Of Action

12. In or about March 2006, Defendant Shkreli on behalf of the Partnership

opened a securities account with Lehman (the “Account”). The Account was not a plain vanilla

securities account, but rather it was an account in which transactions were cleared through a third

party financial institution, Mcrrill Lynch & Co., Inc. (“Merrill”). Accordingly, with respect to

the Account Lehman acted as execution agent only and did not act as clearing or settling broker.

13. For this institutional account, Lehman functioncd solely as the executing

broker, i.e, the broker executing as agent transactions for the Partnership. Although Lehman had

the Account of Defendant Partnership on its books, Lehman did not hold the client’s assets and


was not responsible for effecting clearance, settlement or payment on its behalf. Rather, trades

executed on behalf of the Partnership were designated by the client to be cleared and settled at

Merrill, a carrying clearing member, that housed the client’s assets and effected payments for

Partnership transactions. The designation of a clearing and settlement broker in industry

parlance is called Clearing Member Transfer Assignment or “CMTA”ing the trade.

14. On information and belief, including representations made by Defendant

Shkreli, Defendant Austin functioned as an undisclosed principal for the Account and in fact

effected substantial control over the Account. In addition, on information and belief Defendant

Austin was a substantial investor in the Account as well.

15. On July 11, 2007, Defendant Shkreli engaged in certain put option

transactions on the SPY fund by placing orders through a representative of Lehman. The SPY

fund is a Standard & Poor (“S&P”) 500 Index Exchange Traded Fund (“ETF”), a common tool

to invest in the S&P 500, which is a broad market index of stocks, More specifically, Defendant

Shkreli purchased a total of 20,000 July 151 puts at a price of $131.25 per contract for a total

financial commitment of $2,625,000 (plus transactional costs), hereinafter referred to as the

“Transaction”. In effecting the Transaction, Defendant Shkreli was investing with the hope and

expectation that the market would decline, in which case the position would be closed out at a

profit. Concomitantly, should the market risc, the position would result in a loss which could be

significant if the market moved significantly, especially given the size of the position.

16. Applicable laws, rules and regulations known to Defendants required that

Lehman get paid for the Transaction within one (1) business day (in the morning before the

market opened) from the datc the Transaction was executed, which is commonly known in the


industry as T + 1. In reliance upon Defendants’ representation that they would comply with such

replations, Plaintiff, in good faith and as is common in the industry, executed the Transaction

for thc Account to be cleared and settled in its Merrill account for a total dollar commitment of

$2,625,000 without payment being made in advance by the Defendants. Per the ordinary course

of business described above, Lehman then CMTA’d the Transaction to Merrill.

17. However, in this case, on July 12, 2007 Merrill rejected the Transaction.

On information and belief it did so because, among other reasons: (1) the client did not at such

time have sufficient assets to pay for thc transaction, and/or (2) the Defendants had wrongfully

instructed Merrill to reject the trade, and/or (3) the Defendants purposcfully omitted to providc

sufficient details to Merrill necessary to clear the transaction.

18. However, Defendant Shkreli reprcsented to Plaintiff that a separate second

financial institution, UBS Financial Services Lnc. (“UBS”), would step into the role of clearance

and settlement broker and thus honor the Dcfendants’ commitment to pay for the Transaction.

Specifically, Defendant Shkreli advised Plaintiff in writing that it should refer to Defendant

Austin’s portfolio company, El Coronado Holdings L.L.C. (“El Coronado”), in assigning the

Transaction to UBS. Following that conversation, Plaintiff assigncd the Transaction to UBS.

Howcver, Defendant Shkreli’s promises turned out be unsubstantiated. Indeed, on July 13,2007

(after the Transaction failed to settle) UBS rejected the request for payment claiming that it did

not know the Transaction (or “DK’d” it as is known in thc industry).

19. At no time did any of the Defendants inform Plaintiff that they had

intended to “free ride” the Transaction, i.e. not pay for the Transaction unless its market value

increased, in which case payment would bc made from the sale proceeds.


20. Similarly, at no time did any of the Defendants inform Plaintiff that they

did not have the financial ability to honor the purchase commitment.

21. In view of the fact that payment was never cffected for the aforementioned

Transaction and Plaintiff was at further market risk as it was holding an unpaid for position that

already failed to settle, Plaintiff exercised its right to remove the Transaction from the Defendant

Partnership’s account and sought to mitigate the loss on the Transaction that had already moved

in a substantially unfavorable direction.

22. On July 13, 2007 Plaintiff ultimately sold 1,100 contracts at twenty dollars

($20) pcr contract for $22,000 and 18,900 contracts at sixteen dollars ($16) per contract for a

total of $302,400, for a total liquidation amount of $324,400. As the aggregate purchase price

was $2,625,000, the liquidation pricc of the securities was $324,400, and the commission for the

Transaction was $61,750, the total loss on the Transaction was $2,362,350.

23.

which have been rejected to date.

Plaintiff has made numerous demands for payment from Dcfendants

24. In fact, Defendmt Shkreli has made various representations ranging from

promises to pay the legitimate debt owed on an installment basis, to claims of complete financial

inability to pay and finally veiled threats of filing a bankruptcy to avoid Defendants’ otherwise

financial obligation in this matter.

25. Dcfendants’ account currently possesses a deficit/loss in the amount of

approximately $2,362,350 which remains unpaid.


FIRST CAUSE OF ACTION - BREACH OF ORAL CONTRACT

(AS TO DEFENDANTS SHKRELI, THE PARTNERSHIP, THE ADVISOR AND THE GENERAL PAFtTNER)

26. Lehman repeats and realleges each and every allegation set forth in

paragraphs 1 through 25 as if fully set forth herein.

27. On July 11, 2007, Defendant Shrekli requested Lehman to execute the

Transaction on behalf of Defendants Partnership, the Advisor, and the General Partner and, in

accordance with industry custom and practice, Lehman executed such Transaction, In doing so,

Dcfcndants entered into a valid, binding and enforceable oral contract. This contract was

affirmed in writing by Defendant Shkreli.

28. As set forth above, Lehman has not been paid the amounts due as a result

of the Transaction effected by Defendant Shkreli on behalf of the Defendants. If it is ultimately

determined that Defendants Shkreli, the Partnership, the Advisor, and the General Partner (and

not Defendant Austin) are the true parties in interest, then Defendants Shkreli, Partnership, the

Advisor, and the General Partner, on whose behalf the Transaction was executed, should be held

liable for failure to pay amounts due for the Transaction made on their behalf and at their request

which caused Plaintiff a loss of $2,362,350.

29. Plaintiff has demanded that the Defendants Shkreli, Partnership, the

Advisor, and the General Partner pay Plaintiff the amounts due which have not been paid and the

Defendants Shkreli, Partnership, the Advisor, and the General Partner have failed to pay Plaintiff

such amounts due.

30. As a rcsult, Defendants Shkreli, Partnership, the Advisor, and the General


Partner have breached their oral agreement to pay Plaintiff the amounts due for transactions

executed on their behalf which caused Plaintiff a loss of $2,362,350.

31. Plaintiff is entitled to recover damages from the Defendants Shkreli,

Partnership, the Advisor, and the General Partner for the said breach of the oral agreement in a

sum which is no less than $2,362,350, together with interest, costs and expenses.

SECOND CAUSE OF ACTION BREACH OF ORAL CONTRACT

(AS TO DEFENDANT AUSTIN AND THE OTHER NAMED DEFENDANTS)


paragraphs 1 through 3 1 as if fully set forth herein.

33. As noted above, Defendant Shkreli advised Plaintiff to assign the

Transaction that had been made on behalf of the Partnership to UBS. In doing so, Defendant

Shkreli advised Plaintiff to reference El Coronado when assigning thc Transaction to UBS.

34. If it is ultimately determined that Defendant Austin (and not Defendant

Shkreli) is the true party in interest, then Defendant Austin as well as the other named

Defendants should be held liable for failure to pay amounts due for the Transaction made on his

behalf and at his request which caused Plaintiff a loss of $2,362,350.

35. Plaintiff has demanded that Defendant Austin, via his agent Defendant

Shkreli, pay Plaintiff the amounts due which havc not been paid and Defendant Austin has failed

to pay Plaintiff such amounts due.

36. As a result, Defendant Austin has breached his oral ugreement to pay

Plaintiff the amounts due for transactions executed on his behalf.


37. Plaintiff is entitled to recover damages from Defendant Austin as well as

the other named Defendants for the said breach of the oral agreement in a sum which is no less

than $2,362,350, together with interest, costs and expenses.

THIRD CAUSE OF ACTJON UNJUST ENRICHMENT/CONVERSJON


paragraphs 1 through 37 as if fully set forth herein.

39. Plaintiff, acting as a broker-dealer, performed brokerage services.

Pursuant to Dcfendants’ instructions, Plaintiff effected the Transaction ordered by the

Defendants based upon the expectation that Defendants would pay for the Transaction

irrespective of whether the Transaction was profitable or unprofitable.

40. As a result, Defendants were conferred the benefit of receiving Plaintiff’s

services in connection with the Transaction. In settling thc trade, Lehman paid for the

Defendants’ obligation and thus, by virtue of Plaintiffs payment, Defendants effectively used

Plaintiffs money to pay for the Transaction.

41. In fact, Defendants ordcred the purchase of said securities in amounts

beyond their ability to pay and/or with the intention of not paying for said securities in the event

that such securities did not appreciate in value.

42. By reason of the forcgoing, Plaintiff has been damaged in an amount not

less than $2,362,350, with the exact amount of Plaintiffs damages to be determined at trial.

WHEREFORE, Plaintiff Lehman Brothers Inc. demands judgment:

a. Awarding Lehman Brothers Inc. damages in an amount to be


determined at trial but, in no event, no less than two million three hundred thousand six hundred

dollars plus interest;

b. Expediting discovery as against all Dcfcndants, including but not

limited to determining promptly who all thc real parties in interest are; and

c. Awarding Lehman Brothers Inc. such other and further relief as

this Court may deterrninc.

Dated: July 25,2007

Yours, etc. HERRICK FEINSTEIN LLP

Attorneys for Plaintiff Lehman Brothers Inc. 2 Park Avenue, 20th Floor New York, NY 10016 Tel: (212) 592-1400

HF 3731515v.l #9YY99/1000


shkreli - lehman complaint

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