The Securities and Exchange Commission has charged a former hedge fund portfolio manager with insider trading in a bio-pharmaceutical company based on confidential information about negative results of the company’s clinical drug trial.
The SEC alleges that Dr Joseph F “Chip” Skowron, a former portfolio manager for six health care-related hedge funds affiliated with FrontPoint Partners LLC, sold hedge fund holdings of Human Genome Sciences Inc (HGSI) based on a tip he received unlawfully from a medical researcher overseeing the drug trial. HGSI’s stock fell 44 per cent after it publicly announced negative results from the trial of Albumin Interferon Alfa 2-a (Albuferon), and the hedge funds avoided at least USD30 million in losses.
The SEC previously charged the medical researcher – Dr Yves M 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 USD33 million to settle the charges.
“It’s a prescription for an SEC enforcement action to illegally trade on confidential clinical trial information from doctors and other purported consultants,” says Lorin L Reisner, Deputy Director of the SEC’s Enforcement Division.
Cheryl Scarboro, Chief of the Enforcement Division’s FCPA Unit, adds: “Skowron attempted to game the markets and buy the silence of his tipper. His sale of his hedge funds’ entire position in HGSI stock before the announcement of negative news is precisely the sort of conduct that telegraphs insider trading.”
In a parallel action today, the US Attorney’s Office for the Southern District of New York announced criminal charges against Skowron.
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.
The SEC alleges that Skowron acted on confidential information he received from Benhamou prior to the public announcement and ordered the sale of the entire position in HGSI stock – approximately six million shares held by the six health-care related funds that Skowron co-managed. These sales occurred during the six-week period prior to HGSI’s public announcement. Skowron caused the hedge funds to sell two million shares in a block trade just before the markets closed Jan. 22, 2008. Changes to the trial resulting from the negative developments were announced publicly on January 23. When HGSI’s share price dropped 44 per cent by the end of that day, the hedge funds avoided losses of at least USD30 million.
According to the SEC’s amended complaint, Skowron gave Benhamou an envelope of containing EUR5,000 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 USD10,000 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. Simultaneous with the filing of the SEC’s amended complaint, the six hedge funds named as relief defendants agreed to settle with the Commission and pay disgorgement of USD29,017,156.00 plus prejudgment interest of USD4,003,669.00 without admitting or denying the allegations. The proposed settlement is subject to court approval.