In April 2008, a Morgan Stanley hedge fund manager named Joseph F. “Chip” Skowron III allegedly met a consultant to a Rockville biotech company at a hotel bar in Milan and slipped him an envelope containing at least $10,000.
As the government tells it, Skowron knew the Securities and Exchange Commission was looking into suspicious trading in shares of Human Genome Sciences — and he had reason to worry. At his direction, the SEC says, hedge funds he helped manage had dumped shares in Human Genome Sciences after the consultant, French physician Yves Benhamou, tipped him about serious problems in the testing of a once-promising drug.
As he gave Benhamou the $10,000, Skowron urged Benhamou to mislead investigators, according to a court filing. Before they parted, Skowron allegedly assured the French doctor “that everything would be fine” and that the investigation “would soon end.”
No such luck.
On Wednesday, Skowron was charged with securities fraud and conspiracy to obstruct justice. He was also named in a civil insider-trading complaint by the SEC.
Skowron became the 47th defendant charged with insider trading in the Southern District of New York over the past 18 months, U.S. Attorney Preet Bharara said. A wider federal crackdown has snared corporate lawyers, accountants, consultants, a former board member at Wall Street titan Goldman Sachs, a Food and Drug Administration chemist and a hedge fund billionaire.
The government disclosed that, earlier this week, Benhamou pleaded guilty to related charges and was cooperating with the prosecution.
In a statement, an attorney for Skowron said he intends to plead not guilty.
“We look forward to responding to the allegations more fully in court at the appropriate time,” attorney James J. Benjamin Jr. said.
As for Benhamou, he “has acknowledged his serious mistakes in judgment and intends to live up to his obligations under his cooperation agreement,” his attorney David M. Zornow 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,” Zornow added.
Benhamou was helping to oversee a clinical trial of the Human Genome Sciences drug Albuferon, intended as a treatment for hepatitis. In late 2007, one of the patients developed lung disease and another died.
On Jan. 17 and 18, 2008, Benhamou allegedly received e-mails from the company saying that an independent committee had recommended stopping part of the trial and reducing the dosage. Minutes after receiving the second of the e-mails, Benhamou contacted Skowron. And minutes after the two began talking by phone, Skowron allegedly sent a message instructing a trader to “sell the hgsi . . . all of it.”
Benhamou’s inside information helped Skowron’s hedge funds avoid about $30 million in losses when Human Genome Sciences — whose stock ticker is HGSI — announced the setbacks and its share price tanked by 44 percent, the government said.
The hedge funds, part of the FrontPoint family of funds that was owned by Morgan Stanley, have agreed to give up alleged ill-gotten gains totaling about $33 million, including interest, the SEC said Wednesday.
Skowron, 41, of Greenwich, Conn., holds a doctorate and a medical degree from Yale. He left a residency in orthopedic surgery at Harvard to pursue a career in finance.
Skowron was placed on administrative leave from FrontPoint in November, the day of Benhamou’s arrest, and the government said he was later terminated.
“These two men may have been trained as doctors, but their practice was fraud,” Lorin Reisner, the SEC’s deputy director of enforcement, said at a New York news conference.
The alleged payoff in the Milan hotel was not the only inducement or reward Benhamou received for spilling secrets, prosecutors said.
In April 2007, during a medical conference in Barcelona, Skowron allegedly met Benhamou in a hotel suite and handed him an envelope containing about $6,700.
When Benhamou and his wife traveled to Manhattan in 2007, Skowron picked up the tab for four nights at the Mandarin Oriental hotel, plus dinner — a total of $5,125, which Skowron submitted as a business expense, the SEC said.
And in early 2008, after learning about the SEC’s investigation but before the trip to Milan, Skowron allegedly met Benhamou for lunch in Boston and, after driving him to a hotel, offered him two stacks of U.S. currency wrapped in bands.
“Benhamou, who was slated to fly back to France the next day, did not accept the money,” according to the SEC complaint.
FrontPoint said in a statement that Skowron’s alleged offenses were “completely contrary” to the firm’s principles. Since Benhamou’s highly publicized arrest, the FrontPoint health-care funds have been dissolved.