The SEC charged a former portfolio manager for six health-related hedge funds with insider trading.  The individual, Dr. Joseph “Chip” Skowron, affiliated with FrontPoint Partners LLC, sold hedge fund holdings after he received an unlawful tip from a medical researcher that Human Genome Sciences Inc. was going to announced disappointing results from a drug trial .

The Doctor's timing was immaculate, as HGSI stock fell 44% after the announcement relating to the trial of Albumin Interferon Alfa 2-a (Albuferon).  He avoided at least $30 million in hedge fund losses.

The SEC previously charged the medical researcher – Dr. Yves Benhamou – who illegally tipped Skowron with the non-public information and received envelopes of cash in return according to the SEC’s amended complaint filed today in federal court in Manhattan to additionally charge Skowron. 

The hedge funds, which have been charged as relief defendants in the SEC’s amended complaint, have agreed to pay $33 million to settle the charges.

In a parallel action today, the U.S. Attorney’s Office for the Southern District of New York announced criminal charges against Skowron.

        SEC Allegations.   According to the SEC’s amended complaint, Benhamou served on the Steering Committee overseeing HGSI’s trial for Albuferon, a potential drug to treat Hepatitis C.  While serving on the Steering Committee, Benhamou provided consulting services to Skowron through an expert networking firm.  But over time, he and Skowron developed a friendship.  By April 2007, many of their communications were independent of the expert networking firm.  Benhamou tipped Skowron with material, non-public information about the trial as he learned of negative developments that occurred during Phase 3 of the trial.

Skowron acted on confidential information, ordering the sale of the entire position in HGSI stock – some 6 million shares held by the 6 health-care related funds that Skowron co-managed.  These sales occurred during the 6-week period prior to HGSI’s public announcement. 

For his efforts, Benhamou allegedly received from Skowron an envelope containing 5,000 Euros while they were attending a medical conference in Barcelona, Spain in April 2007.  The cash was in appreciation for Benhamou’s work as a consultant.  In February 2008, after the illegal HGSI trades were completed, Skowron asked Benhamou to lie about his communications with Skowron, which he did.  In late February 2008, Skowron met Benhamou in Boston and attempted to hand him a bag containing cash in appreciation for his tips on the Albuferon trial and his continued silence.  Benhamou refused the cash.  However, while attending a medical conference in Milan, Italy in April 2008, Skowron gave Benhamou another envelope containing at least $10,000 in cash that Benhamou accepted.

        The SEC is Seeking ...   permanent injunctions, disgorgement of any ill-gotten gains with prejudgment interest, and financial penalties against Skowron and Benhamou.  As noted above, simultaneous to the SEC filing, six hedge funds named as relief defendants agreed to settle with the Commission and pay over $33mn in disgorgement and prejudgment interest

        SEC Staff Credits.   Suzanne Romajas is leading the SEC’s litigation.  Matthew Skidmore, Deborah Tarasevich, Joshua Felker conducted the investigation.    [SEC Release 11-91, 4/13]