Morgan Stanley Can Pursue Skowron Fraud Claim, Judge Says

Morgan Stanley won a judge’s permission to pursue a fraud claim as it seeks to recover damages from Joseph “Chip” Skowron, a former hedge fund manager serving a five-year prison term for insider trading.

Skowron managed Morgan Stanley’s FrontPoint Partners LLC until he was charged in 2011 with using inside information to avoid $30 million in losses. The New York-based bank sued Skowron after he pleaded guilty to conspiring to commit securities fraud and obstruct justice, seeking to recover $33 million it paid U.S. regulators and the $32 million it paid him.

Skowron, 44, asked U.S. District Judge Shira Scheindlin in Manhattan to dismiss three of Morgan Stanley’s claims, including that he defrauded the bank and breached his fiduciary duty. The judge ruled that the bank can seek to prove its fraud claim, while dismissing its fiduciary duty claim. She said Skowron covered up his crimes as the bank and U.S. government investigated.

“I decline to impose on Morgan Stanley the duty to ferret out the truth from a man who lied for years not only to Morgan Stanley but also to his own lawyers and to the government,” Scheindlin ruled July 23 in federal court in New York.

The judge also granted Skowron’s motion to dismiss Morgan Stanley’s breach of fiduciary duty claim relating to the bank’s payment of $33 million to settle with the U.S. Securities and Exchange Commission. Morgan Stanley had agreed to cover any liabilities incurred by FrontPoint for alleged violations of the law, according to the judge.

‘Losses Avoided’

“That the losses were avoided because of Skowron’s insider trading and not Morgan Stanley’s wrongdoing does not alter the conclusion that the settlement amount represented money which FrontPoint and Morgan Stanley were never entitled to retain,” according to the judge.

Josh Epstein, a lawyer for Skowron, didn’t immediately return a call seeking comment about the ruling.

Kevin Marino, a lawyer for Morgan Stanley, said “We’re very pleased that the court rejected Mr. Skowron’s attempt to escape the consequences of his fraud and look forward to pursuing this case to a successful resolution.”

On July 16, the U.S. Court of Appeals in Manhattan ruled that Morgan Stanley is entitled to $10.2 million in restitution from Skowron. The court upheld a judge’s ruling that Skowron owed the bank 20 percent of his salary from 2007 to 2010, or $6.4 million, and $3.8 million in legal fees.

Secret Tips

In August 2011, Skowron admitted to 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.

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, a Yale University and Harvard University-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.

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).

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