UPDATE 5-FrontPoint was tippee in insider trade case-sources

* Yves Benhamou charged with securities fraud, conspiracy

* Civil charges also over alleged insider trading scheme

* Hedge funds alleged to improperly avoid $30 mln losses

* Hedge funds allegedly sold before stock fell 44 pct (Releads to highlight FrontPoint involvement)

By Jonathan Stempel and Svea Herbst-Bayliss

NEW YORK/BOSTON, Nov 2 (Reuters) - FrontPoint Partners LLC allegedly traded on illegal tips passed on by a French doctor about a clinical drug trial that saved the hedge fund firm $30 million in losses, regulators and industry sources said on Tuesday.

The U.S. government did not name the Greenwich, Connecticut-based hedge fund firm, which investment firm Morgan Stanley (MS.N) is in the process of spinning-off. Federal authorities also did not charge the fund or anyone associated with it with any wrongdoing, in connection with the criminal and civil charges it brought against Yves Benhamou, an infectious diseases expert.

Reuters first named FrontPoint on Tuesday and the hedge fund firm later issued a statement that it would cooperate with the ongoing investigation and that it had placed one of its managers on leave pending the outcome.

Federal authorities this week arrested Benhamou in Boston. Authorities charged Benhamou with tipping the hedge fund about negative results from a clinical trial that biotechnology firm Human Genome Sciences Inc (HGSI.O) was conducting for an experimental treatment for hepatitis C. The clinical trial took place in late 2007 and early 2008.

The U.S. Justice Department and the U.S. Securities and Exchange Commission, which brought civil charges, said Benhamou leaked to a portfolio manager bad news he learned while on a committee overseeing the drug trial.

FrontPoint said it put Dr. Chip Skowron, who joined the hedge fund in 2003 on leave, pending the outcome of the investigation. (To view a FACTBOX on Skowron, click on [ID:nN02211733])

The government said the unnamed hedge fund manager caused the hedge fund to sell its entire 6.16 million-share stake in Human Genome before the bad news about the drug was made public on Jan. 23, 2008. Human Genome shares fell 44 percent that day, investigators said.

By giving hedge funds an "unfair" advantage, Benhamou "undermined the integrity of the securities market and sold out his employer," Preet Bharara, the U.S. attorney for the Southern District of New York, said in a statement.

FrontPoint, which oversees about $7 billion in assets, launched a healthcare-focused hedge fund group in 2003, after hiring Skowron, Dr. Jason Bonadio and Ajay Bhalla from SAC Capital Management trader. Skowron worked at SAC for less than a year before joining FrontPoint.

The hedge fund recently gained some celebrity because one of its top managers was profiled in Michael Lewis's book "The Big Short." The manager, Steve Eisman, was early to bet on the collapse of the subprime mortgage market.

PRISON POSSIBLE IN CRIMINAL CASE

Tuesday's case is the latest by U.S. investigators examining the trading activity of hedge funds. It comes a year after the government unveiled the largest U.S. hedge fund insider trading case ever, centered on Galleon Group and its founder Raj Rajaratnam.

Prosecutors said Benhamou lives in Neuilly-sur-Seine in France. He was arrested on Monday in Boston, and had been scheduled to appear Tuesday morning in the U.S. District Court in Boston, they said.

The SEC complaint said Benhamou at the time of the alleged wrongdoing oversaw clinical research in hepatology and was a professor at the Hopitaux de Paris-Pitie-Salpetriere in Paris. Messages left there on Tuesday were not immediately returned.

Prosecutors charged Benhamou with one count of securities fraud, punishable by up to 20 years in prison, and one count of conspiracy, which could carry a five-year term.

The SEC alleged violations of U.S. insider trading laws, and is seeking civil penalties, restitution and other damages.

Both lawsuits were filed in the U.S. District Court in Manhattan.

Benhamou is well known in France, and people familiar with him say his expertise makes him a popular expert or consultant for hedge funds trying to learn about the medical industry.

The defendant has also worked as a paid consultant for expert network firms, which collect fees for putting hedge funds in contact with consultants.

A spokesman for Gerson Lehrman Group, one of the largest such firms, said Benhamou did not consult for it during the period covered by the Justice Department and SEC complaints.

Investigators have since 2007 been examining the so-called expert networking industry to determine whether some consultants had improperly divulged confidential information to traders hoping for a quick profit. [ID:nN18227550]

DRUG TRIALS

Shares of Human Genome plunged on Jan. 23, 2008, after an independent safety monitor found a higher number of serious lung problems in patients who took a higher dose of the drug. The Rockville, Maryland-based company moved the patients, who had been receiving 1200-microgram dosages of Albuferon, to a lower dose.

"People entrusted with confidential information, including doctors and researchers, cannot use their positions to help others game the system," SEC enforcement chief Robert Khuzami said in a statement.

Human Genome spokesman Jerry Parrott said the company has cooperated fully with the SEC probe, and that Benhamou is no longer a consultant with the company.

Shares of Human Genome closed down 21 cents at $26.39 on the Nasdaq.

The New York criminal case is U.S. v. Benhamou, U.S. District Court, Southern District of New York, No. 10-mag-02424. The SEC case is SEC v. Benhamou in the same court, No. 10-08266. The Boston case is U.S. v. Benhamou, U.S. District Court, District of Massachusetts, No. 10-mag-00286. (Reporting by Jonathan Stempel in New York and Rachelle Younglai in Washington, D.C.; Additional reporting by Dena Aubin, Matthew Goldstein and Grant McCool in New York; Toni Clarke and Svea Herbst-Bayliss in Boston, and James Regan in Paris; editing by Andre Grenon, Dave Zimmerman, Gary Hill and Bernard Orr)