NEW YORK/BOSTON (Reuters) - An Ivy League-trained doctor-turned-stock-picker has been charged with insider trading, accused of showering a French physician with cash and a luxury trip to New York in exchange for secret details on a biotechnology company.
Joseph “Chip” Skowron, who ran hedge fund firm FrontPoint Partners’ healthcare funds, was expected to appear later Wednesday in federal court on criminal securities fraud and conspiracy charges. The FBI said he surrendered Wednesday morning in Manhattan.
The 41-year-old Connecticut man is one of the most prominent investors to become embroiled in a crackdown on illegal stock tips solicited from consultants working for so-called expert network firms, which help hedge funds obtain information about public companies in areas such as medicine and technology.
The case, which began with the arrest last year of the French doctor, has dealt a blow to FrontPoint, forcing it to shutter Skowron’s $1.5 billion funds. Skittish investors pulled money out of other FrontPoint portfolios as well, removing $3 billion and shrinking the firm’s assets to about $4.5 billion.
Prosecutors contend that Skowron, whose resume was filled with prominent schools and employers, skirted the hedge fund’s own rules against insider trading by setting up a side deal starting in 2007 with Yves Benhamou, 51, an infectious disease expert from Paris who was a consultant to both a biotech company and an expert networking firm.
Benhamou pleaded guilty on Monday to securities fraud, admitting he illegally provided tips about biotech company Human Genome Sciences Inc to Skowron, according to court papers unsealed on Wednesday. He also pleaded guilty to charges of conspiracy and making false statements to the FBI after his arrest, according to the court documents.
“When Chip Skowron needed inside information, Dr. Benhamou was always on call,” said Manhattan U.S. Attorney Preet Bharara. Based on the tip Benhamou fed to Skowron, his funds avoided $30 million of losses by selling their Human Genome stake before the company on January 23, 2008, revealed problems with its experimental hepatitis C treatment. Human Genome shares fell 44 percent that day.
FrontPoint has not been accused of any wrongdoing but agreed with the Securities and Exchange Commission to pay back $33 million, without admitting or denying guilt. In a letter to clients, FrontPoint’s chief executives said, “No investor funds are being used in making this payment. The entire payment is being funded by an indemnity agreement between Morgan Stanley and FrontPoint, leaving FrontPoint as a strongly capitalized independent entity.”
To cement their secret arrangement, Skowron met with Benhamou in April 2007 at a hotel in Barcelona and gave him an envelope with approximately 5,000 euros ($7,219) in cash, the government said. A few months later he footed a $4,624 hotel stay for Benhamou and his wife in New York, according to the criminal complaint against Skowron.
After getting the tip about Human Genome and telling Benhamou to lie to regulators probing the sale, Skowron passed on an envelope with at least $10,000 in cash when the men met in a hotel bar in Milan in April 2008, prosecutors say.
Skowron’s lawyer, James Benjamin, said “Dr. Skowron intends to plead not guilty.”
The case comes as the insider trading trial of Galleon Group hedge fund founder Raj Rajaratnam nears its conclusion, also in Manhattan federal court.
Benhamou was arrested in November, a few weeks before federal agents raided three hedge funds in a growing trading probe focused on the misuse of expert networking consultants.
Prosecutors say expert network relationships are not inherently wrong but that some consultants have crossed the line by taking fees to leak corporate secrets to hedge fund traders and analysts.
Benhamou’s lawyer, David Zornow, said his client acknowledged his serious mistakes in judgment and intends to live up to his obligations under his cooperation agreement.”
When he forged his arrangement with Skowron, Benhamou was a paid consultant with Guidepoint Global, which matches hedge funds with industry analysts.
Guidepoint has not been accused of wrongdoing. The firm had a deal with FrontPoint in which the hedge fund paid about $900,000 to get access to Guidepoint’s consultants.
A spokesman for GuidePoint did not immediately return a request for comment.
Skowron signed FrontPoint’s annual ethics statement - which forbids trading on non-public information - in January 2008, only weeks before he dumped stocks based on the tip he got from Benhamou, the government said.
In the wake of Benhamou’s arrest, FrontPoint put Skowron on leave as investors demanded their money back. A few weeks later FrontPoint liquidated his funds and laid off the entire team of analysts and managers, including Skowron.
Investment bank Morgan Stanley last month completed its planned spinoff of FrontPoint, announced before Benhamou’s arrest. The hedge fund has offices in Connecticut and New York.
Reuters first named FrontPoint and Skowron as the hedge fund and manager involved in the Benhamou case.
The arrest brings a dramatic end to Skowron’s quick rise in the hedge fund industry. After earning a medical degree and doctorate in cell biology from Yale University, Skowron enrolled in Harvard University’s orthopedic surgery residency.
He quit the five-year program to work on Wall Street, and found jobs at two of the best-known hedge fund firms, Steven Cohen’s SAC Capital Advisors and Millennium Partners LP.
He was wooed to FrontPoint in 2003.
Healthcare executives remember Skowron as an aggressive investor who pushed for information that could affect share prices.