Ex-FrontPoint Partners LLC portfolio manager Chip Skowron joined those accused in a U.S. crackdown on insider trading of hedge funds when he was charged with conspiracy, securities fraud and obstruction.
Skowron, 41, of Greenwich, Connecticut, surrendered yesterday to agents at the Federal Bureau of Investigation’s New York office, said James Margolin, an FBI spokesman. Information Skowron obtained from an insider about hepatitis C drug trials enabled FrontPoint to avoid more than $30 million in losses, prosecutors said.
Skowron was linked to the case brought in November by U.S. Attorney Preet Bharara in Manhattan and the U.S. Securities and Exchange Commission against Dr. Yves Benhamou, an expert in hepatitis drugs and a former adviser for Human Genome Sciences Inc., prosecutors said. He pleaded guilty April 11 to federal charges and is cooperating with the U.S., prosecutors said.
“This case is also an example of insider trading gone global,” Bharara said at a news conference yesterday. “The alleged trail of cash and trade of information took the defendants from Manhattan to Milan and from Boston to Barcelona,” he said. “When Dr. Skowron needed information, Dr. Benhamou was always on call, helping Skowron and his hedge fund illegally benefit to the tune of $30 million.”
Benhamou acted as a paid consultant to hedge funds while also working as an adviser to HGSI and serving on its steering committee for trials of Albuferon, a hepatitis treatment, the U.S. said.
The U.S. alleged that Benhamou shared inside information with an unidentified co-conspirator at a hedge fund. The U.S. yesterday identified Skowron and FrontPoint as the recipients of Benhamou’s tips, prosecutors said. Skowron provided benefits to Benhamou, including paying him more than $14,600 in cash as well as other gratuities such as hotel rooms and expenses, the U.S. said.
Bharara said Skowron’s arrest marks the 47th person to be charged with insider trading as part of a U.S. probe of hedge funds and so-called expert networkers in the last 18 months.
“This case shows once again that there are consequences for casually breaking the laws against insider trading,” Bharara said.
Janice Fedarcyk, head of the FBI’s New York office, said yesterday the case is the latest in the office’s “Perfect Hedge” investigation, initiated three years ago, which uses traditional techniques used in organized crime investigations while investigating insider trading at hedge funds. The probe seeks to use court-authorized wiretaps, consensually-recorded calls, analysis of phone and other records as well as significant use of cooperating witnesses, she said.
Skowron appeared briefly yesterday before U.S. Magistrate Judge Ronald Ellis, who agreed to release him on $6 million bond secured by his Connecticut home and the signatures of three financially-responsible people. He declined to speak to reporters as he left the courthouse.
“Dr. Skowron intends to plead not guilty,” his lawyer James Benjamin Jr. said in a statement. “We look forward to responding to the allegations more fully in court at the appropriate time.”
The SEC yesterday separately accused Skowron of insider trading. Six hedge funds previously named as defendants in the case agreed to settle and pay more than $33 million in disgorgement and interest, without admitting or denying wrongdoing, the SEC said.
Benhamou, of Neuilly-sur-Seine, France, pleaded guilty before U.S. District Judge George Daniels in New York, said Ellen Davis, a spokeswoman for Bharara’s office. He has agreed to cooperate with prosecutors, according to a plea agreement unsealed yesterday. He was originally arrested and charged by Bharara’s office with insider trading on Nov. 2.
Benhamou pleaded guilty to four counts, including conspiracy, securities fraud, conspiracy to obstruct justice and making false statements to the FBI during their investigation of the expert-networking scheme. Securities fraud carries a term of as long as 20 years in prison, court papers said.
“Dr. Benhamou has acknowledged his serious mistakes in judgment and intends to live up to his obligations under his cooperation agreement,” David M. Zornow, his lawyer, said in a statement. “Dr. Benhamou’s conduct in this instance must fairly be considered in the overall context of his extraordinary contributions to his patients and to medical science.”
Benhamou is no longer a HGSI consultant and the company has “cooperated fully” with the SEC, spokesman Jerry Parrott said in November when Benhamou was arrested. Parrott didn’t return a voice-mail message yesterday seeking comment about Skowron’s case.
Oct. 20 Sentencing
Sentencing is for Oct. 20 before Daniels, said Zornow, a partner at Skadden, Arps, Slate, Meagher & Flom LLP.
Skowron was named in a three-count felony complaint unsealed yesterday in federal court in New York, charged with conspiracy to commit securities fraud, securities fraud and conspiracy to obstruct justice. He faces as long as 20 years in prison if convicted of securities fraud.
The U.S. alleges that between February 2008 and last November, Skowron engaged in an insider-trading scheme to obtain information from Benhamou. Skowron was in charge of FrontPoint’s investments in publicly-traded drug companies involved in the development of treatments for hepatitis C, a disease which affects the liver, prosecutors said.
Benhamou, an expert in that field and a known participant in the clinical trials of various hepatitis drugs, had access to non-public information about “serious adverse effects” that occurred during the Albuferon trials, the U.S. said.
Skowron arranged for telephone calls and meetings with Benhamou and others through an unidentified expert-networking firm that was advising FrontPoint, prosecutors said. The two met after a meeting in 2006 where Albuferon clinical trials were announced, the U.S. said.
While Skowron knew that Benhamou was engaged in drug trials and had an obligation not to disclose the results of such trials, he paid Benhamou for the information and traded on it for FrontPoint, the U.S. said.
Skowron also signed an annual ethics statement with FrontPoint agreeing to maintain the confidentiality of HGSI’s material, non-public information and pledging not to misappropriate or trade on it, the U.S. said.
Prosecutors described at least three payments Skowron made to Benhamou, including one in Barcelona in April 2007, where Skowron paid 5,000 euros ($7,223). In September 2007, Skowron paid Benhamou more than $4,624 in cash in Manhattan, the U.S. said.
Meeting in Milan
During a meeting in Milan in April 2008, Skowron gave Benhamou an envelope containing at least $10,000 in cash after telling Benhamou that he wanted to hire him as a consultant or “permanent adviser,” the U.S. said.
Benhamou repeatedly shared with Skowron non-public information he gleaned from working for Rockville, Maryland-based HGSI, prosecutors said. From Feb. 1, 2007, through Dec. 3, 2007, the hedge fund bought about 6.2 million shares of HGSI for about $64 million, at an average price of about $10.32 a share.
By late November 2007 and early December, HGSI learned that during the third stage of the Albuferon trial, a participant died and another developed a lung disease as a possible side-effect of the drug, the U.S. said.
Benhamou and other members of the HGSI steering committee discussed how to proceed with the trials by early December 2007, the U.S. said. On Dec. 5, the company sent an e-mail to the steering committee indicating that the trial’s independent safety committee members believed the adverse effects required further examination.
The U.S. said that Benhamou tipped off Skowron to the concerns about Albuferon. On Dec. 7, 2007, Skowron sent an instant message to a trader at the hedge fund, ordering the sale of HGSI shares. On or about the same day, the safety committee members “had become more alarmed” and were considering whether to stop part of the trial, prosecutors said.
Two days later, Human Genome held a conference call with steering committee members, which was scheduled partly to allow Benhamou to participate while he was at a hepatitis conference. Benhamou and Skowron exchanged e-mails that day, the U.S. said.
As a result, from Dec. 7, 2007, through Dec. 18, 2007, FrontPoint sold about 2.9 million, or about 47 percent, of its Human Genome shares at an average price of $10.65, the U.S. said.
On Dec. 12, 2007, HGSI’s independent safety committee agreed to permit the trial to continue. The panel said it would meet again to halt part of the trial if more adverse events occurred.
By Jan. 17, 2008, HGSI recommended that a part of the Albuferon trial be stopped. The next day, the company sent Benhamou an e-mail describing the safety committee’s recommendation and asking for his advice on how to convey that in a news release, according to the U.S.
On Jan. 18, Skowron told a trader to “sell the hgsi” adding “all of it,” Bharara said. On Jan. 22, the day before the HGSI announced it would discontinue a portion of the trial, Benhamou tipped Skowron to the news release over the telephone.
As a result, FrontPoint sold about 600,000 shares of HGSI on Jan. 22, 2008, at an average price of $10.37, the U.S. said.
The next day, the company issued a press release about the safety committee’s recommendation to stop part of the Albuferon trial, prompting the stock to plunge 44 percent to $5.62.
FrontPoint, which manages several hedge funds, closed its health-care funds last year because of the probe. It was subsequently spun off from Morgan Stanley in February.
The hedge fund had $7.5 billion under management at the start of November, before the charges were brought against Benhamou. The firm now manages $3 billion.
Skowron, whose employment contract at FrontPoint was terminated in December, was previously an analyst at hedge funds Millennium Partners LLC in New York and SAC Capital Advisors LLC in Stamford, Connecticut, according to FrontPoint’s marketing documents dated September.
Skowron graduated with a Ph.D. in cellular and molecular biology from Yale University, according to the documents.
FrontPoint yesterday said in an investor letter that it had entered into a settlement with the SEC and that the payment won’t have any financial impact on the fund.
Amount Set Aside
“The alleged conduct of the former portfolio manager is completely contrary to FrontPoint’s principles and represents a clear violation of FrontPoint’s policy against insider trading,” the hedge fund said yesterday in the letter.
FrontPoint said in the letter that no investor funds are being used to pay for the SEC fine and that the settlement was funded by an amount set aside before its February spin off from Morgan Stanley, meaning that the investment bank will be footing the bill for the payment to the government.
Mark Lake, a spokesman for New York-based Morgan Stanley, declined to comment. Steve Bruce, a FrontPoint spokesman, declined to comment.
In January, the Regulatory Compliance Association hosted a seminar on insider trading that drew 3,800 people, according to Walter Zebrowski, chairman of the New York-based non-profit group. That’s more than triple the number who registered for an event on general enforcement issues in 2009, he said.
The case is U.S. v. Skowron, 11-MAG-997, U.S. District Court, Southern District of New York (Manhattan).