Morgan Stanley Deserves Repayment From Skowron, Court Rules

Morgan Stanley is entitled to $10.2 million in restitution from Joseph “Chip” Skowron, a former hedge fund manager serving a five-year prison term for insider trading, a U.S. appeals court ruled.

Skowron, 44, asked the U.S. Court of Appeals in Manhattan to overturn a restitution order imposed by a judge after he pleaded guilty to conspiring to commit securities fraud and obstruct justice. U.S. District Judge Denise Cote said Skowron owed the New York-based bank 20 percent of his salary from 2007 to 2010, or $6.4 million, and $3.8 million in legal fees.

The appellate court today upheld Cote’s ruling that the compensation is bank property because Skowron “manifestly failed to provide the honest services for which Morgan Stanley compensated him.” Skowron was a manager at Morgan Stanley’s (MS) FrontPoint Partners LLC until he was charged in April 2011 with using inside information to avoid $30 million in losses.

“Skowron deprived Morgan Stanley of his honest services by participating in a bribery scheme to obtain inside information” about the progression of medical clinical trials, a three-judge appellate panel wrote in the opinion.

The bank also deserves payment of its legal fees stemming from a Securities and Exchange Commission investigation, according to the panel. Morgan Stanley paid $33 million to settle with the SEC over Skowron’s illegal trades.

Photographer: Victor J. Blue/Bloomberg

Morgan Stanley signage is displayed outside of the company's headquarters in New York. Close

Morgan Stanley signage is displayed outside of the company's headquarters in New York.

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Photographer: Victor J. Blue/Bloomberg

Morgan Stanley signage is displayed outside of the company's headquarters in New York.

Trading Losses

Skowron in August 2011 admitted helping FrontPoint avoid more than $30 million in trading losses on Human Genome Sciences Inc., a Rockville, Maryland, pharmaceutical firm that was acquired by GlaxoSmithKline Plc. (GSK)

Skowron admitted he got secret tips from a French physician, Yves Benhamou, who helped oversee a clinical trial of a Human Genome hepatitis drug, Albuferon. After Benhamou told Skowron about disappointing results in the drug trial, Skowron sold Human Genome shares in FrontPoint’s funds.

Skowron’s attorney Joshua H. Epstein didn’t immediately return a call seeking comment on the ruling. Skowron, a Harvard-trained doctor who quit medicine for Wall Street, is serving his term at McKean Federal Correction Institution in northwestern Pennsylvania, according to the Federal Bureau of Prisons website.

“We are very, very pleased with the outcome,” Morgan Stanley’s attorney Kevin Marino said in a telephone interview.

At his sentencing in 2011, Cote ordered Skowron to forfeit $5 million. She also required him to pay restitution of $5.9 million to five investors that bought FrontPoint’s Human Genome stock in block trades just before the clinical-trial results were announced in January 2008. Deutsche Bank AG and Galleon Group LLC were among the funds.

Net Worth

When he was sentenced, Skowron had a net worth of $22 million.

Cote refused to require Skowron to repay Morgan Stanley the $33 million that it paid to settle with the SEC, or the 80 percent of his salary not covered by her restitution order.

On Oct. 31, Morgan Stanley sued Skowron, seeking the $33 million Cote said it was not entitled to, as well as the entire $32 million it paid Skowron from 2007 to 2010.

The bank called Skowron a “faithless servant” who lied repeatedly to continue being paid by the bank and to avoid the blow to his reputation that a loss on HGSI would have caused.

The District Court case is U.S. v. Skowron, 1:11-cr-00699, U.S. District Court, Southern District of New York Manhattan). The appeal is U.S. v. Skowron, 12-1284, U.S. Court of Appeals for the Second Circuit (Manhattan). Morgan Stanley’s suit is Morgan Stanley v. Skowron, 12-cv-8016, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporters on this story: David Voreacos in federal court in Newark, New Jersey, at dvoreacos@bloomberg.net; Patricia Hurtado in federal court in Manhattan at pathurtado@bloomberg.net.

To contact the editor responsible for this story: Andrew Dunn at adunn8@bloomberg.net.

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