Here’s a fun story a few weeks in the making, starring everyone’s favorite price-gouging pharmaceuticals asswipe, Martin Shkreli. This one involves another small and fading pharmaceutical company, the stink of market manipulation, and a lot of pissed off investor-types.
Let’s start at the top: on November 5, pharmaceutical company KaloBios announced they’d be laying off 61 percent of their workforce and looking for funding alternatives after a five-year, up-to-$290 million collaboration with Sanofis, one of the world’s largest drugmakers, ended this summer.
In the aftermath of its funding drying up, investors started doing what investors do: walking away, or picking over the carcass. Many investors shorted KaloBios stock, figuring it was inevitable that it would bottom out and they’d make a buck or two. Shorting—as we will all see in the upcoming film adaptation of “The Big Short”—is often and too easily positioned as a sort of heroic victory for the rational over the irrationally exuberant, as if profiting obscenely off of financial calamity is in any way commendable. At any rate, you had a lot of smart guys sitting around rubbing their hands together at the prospect of a company going belly up and other investors going broke.
On November 16, KaloBios looked to be throwing in the towel. It hired an outside group to usher it through a “winding down” phase, with plans to shut down completely by the end of January at the latest. Score one for the smart guys, right? Way to go, investment bros!
The company’s stock price, which started 2015 near $15 per share, was already in a free fall, sinking as low as $0.90 per share on November 13—the stock had been cheap for a while, and now it was going in the tank. Investors who’d shorted KaloBios stock in the $2 to $3 range were just waiting for it to fade a bit so they could buy cheap and turn their profit.
Here comes evil-ass Martin Shkreli. Along with a team of investors, Shkreli quietly bought up an ownership stake in the company over November 16 and 17, at these low low prices—70 percent of all shares, according to reports. On November 19, after the close of trading, KaloBios dropped the bomb (via zerohedge.com):
“We have received communications from Mr. Shkreli informing us of his group’s ownership position, and a proposal to continue the company’s operations,” said Ronald Martell, Executive Chairman of KaloBios. “Our board of directors is prepared to entertain any constructive proposal, which we will act upon promptly. Addressing short-term cash needs is our first priority, and we continue to be open to further dialogue,” he concluded.
Like that, the company was not closing, and, as one might expect, the stock price began to rise. This makes sense—a company that was dropping out of existence suddenly had a pulse. But there was more at play, of course. Those shorts! Investors suddenly on the hook for shares whose prices were climbing now found themselves in the dreaded “short-squeeze,” where those short KaloBios had to get in and buy shares, even at a loss, even at a terrible loss, because the potential losses for someone on the wrong end of a short are infinite.
KaloBios stock rose 4,000 percent in six days. And, hey, look at that, your boy Martin Shkreli was holding 70 percent of the company’s stock. This looked to some like a bogus spike, if not outright market manipulation, and so there were investors looking to score by shorting KaloBios again, at its new, higher price. And this was facilitated by, yes, Martin Shkreli, who was happily lending his own shares out for shorting purposes. That supply kept investors in the game, shorting KaloBios.
Then, on November 24, Shkreli did this:
I spoke with my counsel & advisers and decided to stop lending my $KBIO shares out until I better understand the advantages of doing so. 1/2— Martin Shkreli (@MartinShkreli) November 26, 2015
I apologize for any inconvenience this may create in lending markets and I will probably resume lending at some point. Happy Thanksgiving!— Martin Shkreli (@MartinShkreli) November 26, 2015
And, like that, the supply of shares with which to short KaloBios was devastated. The price began to rise, and another short-squeeze led to another dramatic jump in the stock’s price. It soared upwards of $40 per share on the morning of November 27. It slid at open this morning, then jumped another 30.8 percent in the afternoon, then slid again, finishing at just under $33 per share.
These waves? Pure, unadulterated speculation. No one has any idea whether KaloBios is suddenly a viable company, and none of the movement in its stock price has anything to do with its outlook as a drugmaker. The smirking, pinched-face shitheel behind it all is making an outrageous killing on his ownership stake, of course. Others, not so much:
However where this story gets abusrdly entertaining, or woefully tragic, depending on one’s perspective, is that one trader, Joe Campbell, was on the wrong side of last night’s massive surge. As the RutRho blog, which noticed it first explains, a “dummy” E-trader, Joe Campbell, decided to go $35,000 short KBIO “and now owes $ETFC a wonderful $106K.”
Hello to all you traders out there. I’m starting this page out of the recommendation of other traders in the community.
I hesitated on doing this but I literally owe Etrade $106,445.56 as of this moment what would you do if you were in my situation?I’ll do whats needed and sell what I have to get them paid but if someone feels my pain and is willing to help out—-who am I to say no?
I have a fairly small account, but its over PDT. As of this morning it was $37,000. I keep it small because I wanted to manage risk, the most I can afford to lose is what I have in the account....$37,000.When I get some profits I take them out of the account because I wouldn’t want to lose more than $37k.
I was holding KBIO short overnight for what I thought was a nice $2.00 fade coming. At the close of the bell I saw the quote montage clear out and figured today there was no action after hours in the stock. So I went to my office for a long meeting. I got out of the meeting and saw a message from one of my buddys, he asked if I was ok since I was short KBIO....my heart dropped. “Shoot did I blow up my account, everything I worked for? I don’t want to lose all $37,000 that would be terrible.” —-It was much worse.
My plan moving forward is to liquidate mine and wife’s 401k’s and try work out a payment plan with Etrade. I’m also going to ask them to help out in some way...thats a longshot. I will pay them and be back trading....only with set stops this time. What an expensive lesson that was.
So, here we are. Martin Shkreli, as vile a person as there is, took a worthless stock in a folding company and turned it into a personal windfall, because the stock market is cool and good and yay capitalism and all that.
Meanwhile, hey, maybe the Securities and Exchange Commission could get involved? Or should we all just wait to see what great new medicine KaloBios develops under its new leadership? That’s what pharmaceutical companies do, right?