A former manager at hedge fund FrontPoint Partners LLC has been charged with insider trading, accused of showering a French doctor with cash and a luxury trip to New York in exchange for secret details on a biotechnology company.
Joseph (Chip) Skowron, who ran FrontPoint's health-care 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 Connecticut man, who also has a medical degree, is one of the most prominent traders to become embroiled in a crackdown on illegal stock tips solicited from consultants working for so-called expert network firms, which help hedge funds get 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 been a huge blow to FrontPoint, forcing it to shutter Dr. Skowron's $1.5-billion (U.S.) funds. FrontPoint has not been accused of wrongdoing.
Prosecutors contend that Dr. Skowron, a doctor-turned-stock picker, skirted the hedge fund's own rules against insider trading by setting up a side deal starting in 2007 with Yves Benhamou, an infectious disease expert from Paris who was a consultant to both a biotech company and an expert networking firm.
Dr. Benhamou pleaded guilty on Monday to securities fraud, admitting he illegally provided tips about biotech company Human Genome Sciences Inc. to Dr. 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.
Prosecutors said FrontPoint, based on the tip fed to Dr. Skowron, avoided $30-million of losses by selling its Human Genome stake before the company on Jan. 23, 2008, revealed problems with its experimental hepatitis C treatment. Human Genome shares fell 44 per cent that day.
To cement their secret arrangement, Dr. Skowron met with Dr. Benhamou in April, 2007, at a hotel in Barcelona and gave him an envelope containing about €5,000 ($7,200) in cash, the government said. Later he footed a $4,624 hotel stay for Dr. Benhamou and his wife in New York, according to the criminal complaint against Dr. Skowron.
After getting the tip about Human Genome and telling Dr. Benhamou to lie to regulators probing the sale, Dr. Skowron passed on an envelope with $10,000 in cash, prosecutors say.
Dr. Skowron's lawyer, James Benjamin, was not immediately available for a comment.
The case comes as the insider trading trial of Galleon Group hedge fund founder Raj Rajaratnam nears its conclusion, also in Manhattan federal court.
Dr. 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.
Dr. Benhamou's lawyer, David Zornow, said his client acknowledged his serious mistakes in judgment and intends to live up to his obligations under his co-operation agreement.
When he forged his arrangement with Dr. Skowron, Dr. 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.
Dr. 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 Dr. Benhamou, the government said.
A FrontPoint spokesman declined to comment.
In the wake of Dr. Benhamou's arrest, FrontPoint put Dr. Skowron on leave and investors pulled most of their money. Dr. Skowron's funds were subsequently closed.
Investment bank Morgan Stanley recently completed its planned spinoff of FrontPoint, announced before Dr. Benhamou's arrest. The hedge fund has offices in Connecticut and New York.
Dr. Skowron earned a medical degree and doctorate in cell biology from Yale University before moving to Boston for an orthopedic surgery residency at Harvard University.
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 Dr. Skowron as an aggressive investor who pushed for information that could affect share prices.