Ex-FrontPoint Manager Must Pay Morgan Stanley $10.2 Milli

An ex-FrontPoint Partners LLC fund manager, Joseph F. “Chip” Skowron, who began serving a five- year sentence for insider trading in January, must pay Morgan Stanley (MS) $10.2 million, a judge ruled.

The amount consists of $3.8 million in legal fees the bank spent on Skowron’s case and an internal investigation, plus 20 percent of his salary from 2007 to 2010, or $6.4 million, U.S. District Judge Denise Cote in Manhattan ruled yesterday.

Morgan Stanley acquired FrontPoint in 2006 and spun off the unit last year.

Cote denied the New York-based bank’s request for repayment of the $33 million it paid to settle claims by the U.S. Securities and Exchange Commission. The amount represents the disgorgement of the losses the FrontPoint unit avoided as a result of Skowron’s insider trading, Cote said in the ruling.

“There is no question that the losses avoided by FrontPoint represent ill-gotten gains which it is not entitled by law to retain,” Cote said. Reimbursing Morgan Stanley would undermine the deterrent value of the remedial action, Cote said.

Skowron, who began serving his prison sentence in January at the Federal Correctional Institution Schuylkill in Pennsylvania, argued that Morgan Stanley shouldn’t collect any funds under the Mandatory Victims Restitution Act.

Skowron, who has a medical degree from Yale School of Medicine, pleaded guilty to getting illegal tips from a former adviser for Human Genome Sciences Inc. (HGSI) that trials of the company’s hepatitis C drug were being halted.

FrontPoint sold its stock before the announcement was made public, avoiding $30 million in losses, the government said.

Stock Sale

Morgan Stanley argued it was a victim of Skowron’s crimes and entitled to $8.02 million it paid him from 2007 to 2010.

Cote said the bank was entitled to recover some of the money paid to Skowron. “Morgan Stanley is a victim because it was directly and proximately harmed by Skowron’s scheme in a variety of ways,” the judge said.

Morgan Stanley is pleased with Cote’s decision and plans to seek the $33 million from Skowron in a separate civil action, Matt Burkhard, a spokesman for the bank, said today in a phone interview.

Skowron agreed to forfeit $5 million to the U.S. in the criminal case, Cote said in November. She made a legal finding yesterday that Skowron’s personal net worth is $22.2 million.

Skowron Reaction

“While we are reviewing the court’s decision, and considering our options, Dr. Skowron has made it clear he will accept all responsibility for his actions under the law,” his attorney, Josh Epstein, said in an e-mailed statement.

“However, we do not believe that Morgan Stanley is even entitled to the amount of restitution it has secured with this decision. We can assure you that Morgan Stanley’s attempt to claw back $33 million in ill-gotten gains, as Judge Cote herself referred to those monies in rejecting Morgan Stanley’s claim, is meritless. It is startling that Morgan Stanley would ignore the court’s clear decision to make a grab for money to which it has no legal right.”

U.S. District Judge Deborah Batts in New York, who is presiding over the separate SEC suit against Skowron, on Nov. 16 ordered Skowron to pay a $38.2 million final judgment in the case, which includes disgorgement, interest and civil penalties.

The criminal case is U.S. v. Skowron, 1:11-cr-00699, and the SEC case is SEC v. Benhamou, 10-cv-8266, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporters on this story: Sophia Pearson in Philadelphia at spearson3@bloomberg.net; Patricia Hurtado in New York at pathurtado@bloomberg.net.

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net

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