Chip Skowron
| Joseph F. "Chip" Skowron III | |
|---|---|
| Born: | c. 1968 Cocoa, Florida |
| Charges: | Conspiracy to commit securities fraud, Securities fraud, Obstruction of justice |
| Sentence: | 5 years federal prison, 3 years supervised release |
| Facility: | FCI Schuylkill (Minersville, Pennsylvania) |
| Status: | Released (2017) |
Joseph F. "Chip" Skowron III (born c. 1968) is an American former hedge fund portfolio manager who became one of the most prominent figures in the federal government's largest insider trading crackdown.
Skowron served as co-portfolio manager of FrontPoint Partners LLC's healthcare funds before his 2011 conviction for insider trading and obstruction of justice. His case resulted in the collapse of FrontPoint Partners and civil judgments requiring him to forfeit over $31 million to his former employer, Morgan Stanley, under the legal doctrine of "faithless servant."[1]
Background and Education
Skowron was born and raised in Cocoa, Florida, where he attended Cocoa High School. He earned his undergraduate degree from Vanderbilt University in 1990, followed by a medical degree (M.D.) from Yale University in 1994 and a doctorate (Ph.D.) from Harvard University.[2] After completing his medical training, Skowron worked briefly as a healthcare analyst at SAC Capital Management in Stamford, Connecticut, and subsequently at Millennium Partners in New York, spending less than one year at each firm before joining FrontPoint Partners.[1]
Career at FrontPoint Partners
In 2003, Skowron joined FrontPoint Partners LLC, a hedge fund based in Greenwich, Connecticut, where he co-founded its healthcare investment team. He rose to the position of co-portfolio manager of the firm's healthcare funds and held the title of managing director at Morgan Stanley, which acquired FrontPoint for $400 million in 2006.[1] His compensation was tied to fund performance, earning him $13.5 million in 2007 and $7 million in 2008.[1]
Insider Trading Scheme
The Securities and Exchange Commission began investigating FrontPoint Partners' trading activity in Human Genome Sciences Inc. (HGSI) stock in February 2008, shortly after the company announced negative results from a Phase III clinical trial of its hepatitis C drug Albuferon, which caused the stock to drop approximately 14 percent.[3]
The Benhamou Connection
Skowron developed a relationship with Dr. Yves M. Benhamou, a French physician and hepatitis C expert who served on the Steering Committee overseeing HGSI's Albuferon clinical trial. What began as a legitimate consultant relationship through an expert networking firm evolved into an improper exchange of material, non-public information.[3] Between November 2007 and January 2008, Benhamou provided Skowron with confidential information about negative developments in the Albuferon trial.[3]
According to court filings, Skowron paid Benhamou in cash for his tips. During a medical conference in Barcelona, Spain, in April 2007, Skowron gave Benhamou an envelope containing 5,000 Euros. In February 2008, after the illegal trades were completed, Skowron met Benhamou in Boston and attempted to hand him a bag containing additional cash.[3]
Trading Activity
Acting on Benhamou's confidential information, Skowron ordered the sale of the FrontPoint healthcare funds' entire position in HGSI stock—approximately six million shares—during the six-week period before the company's public announcement. On January 22, 2008, the funds sold two million shares in a block trade just before markets closed. The following day, HGSI's share price dropped 44 percent after the negative trial results became public.[3] As a result of these trades, FrontPoint's hedge funds avoided at least $30 million in losses.[3]
Investigation and Obstruction
When Skowron learned of the SEC inquiry in February 2008, he contacted Benhamou and instructed him to fabricate a story denying any discussion of trial results and to destroy related records. Skowron himself submitted false testimony to the SEC, claiming his trades were based solely on publicly available information and independent analysis.[1]
Benhamou was arrested on November 2, 2010, in Boston. After his arrest, Benhamou cooperated with authorities and pleaded guilty to conspiracy and securities fraud charges in April 2011. His cooperation, including recorded admissions and evidence of cash payments from Skowron, proved critical in building the case against Skowron.[1]
Federal Indictment and Prosecution
On April 13, 2011, Skowron was arrested by the FBI and charged with securities fraud and conspiracy to obstruct justice by the U.S. Attorney for the Southern District of New York.[1] Initially, Skowron denied the charges and his defense attorney stated he would plead not guilty. However, after Benhamou's guilty plea and agreement to cooperate with the government, Skowron changed his position.[1]
In August 2011, Skowron pleaded guilty in federal court in Manhattan to conspiracy to engage in insider trading and obstruction of justice.[1]
Sentencing
On November 18, 2011, U.S. District Judge Denise Cote sentenced Skowron to five years in federal prison, followed by three years of supervised release.[2] The judge ordered Skowron to pay restitution to Morgan Stanley totaling $10.2 million, comprising $3.8 million in legal fees and $6.4 million representing 20 percent of his compensation during the conspiracy period from 2007 to 2010. These awards were upheld on appeal.[1]
U.S. Attorney Preet Bharara stated: "Chip Skowron's medical training and expertise, along with his knowledge of the health care industry, undoubtedly gave him a legitimate trading edge. But that wasn't enough. He still took a corrupt path to protect his hedge fund and himself from sustaining a multimillion-dollar loss, and then corruptly tried to obstruct the government's investigation."[2]
Faithless Servant Litigation
In October 2012, Morgan Stanley filed a civil lawsuit against Skowron seeking to recover the $33 million it paid to the SEC in settlement, plus the $32 million it had paid Skowron in compensation from 2007 to 2010.[1] The lawsuit invoked New York's "faithless servant" doctrine, which permits employers to forfeit an employee's entire compensation for the period of disloyalty when the employee's breach of fiduciary duty constitutes a material violation of their duty of loyalty.[4]
In December 2013, U.S. District Judge Shira Scheindlin ruled on a motion for summary judgment that Skowron must forfeit $31.1 million—100 percent of the compensation he earned from Morgan Stanley between 2007 and 2010. Judge Scheindlin wrote: "No reasonable jury could conclude that Skowron's insider trading and subsequent cover-up did not substantially violate the terms of his employment and permeate his service."[4] She described Skowron's conduct as "the ultimate abuse of a portfolio manager's position."[4]
Prison Experience
Skowron served his sentence at the minimum-security Federal Prison Camp adjacent to FCI Schuylkill in Minersville, Pennsylvania. He was released in 2017, subject to three years of supervised release and prohibited from working in the securities industry.[1]
Aftermath and Impact
Skowron's arrest and guilty plea had devastating consequences for FrontPoint Partners. Institutional investors immediately withdrew $3 billion from the firm, which at the time had $7 billion in assets under management and had previously managed as much as $11 billion. The withdrawals forced FrontPoint to shut down most of its funds in May 2011.[1]
Skowron later reflected on the impact of his actions: "Over 200 people lost their jobs because of me. My wife and my children endured extraordinary embarrassment, isolation, and absence because of my choices because of the empire I thought I needed to build."[1] His country club expelled him following his conviction.[1]
FrontPoint stressed that the FrontPoint Healthcare Funds were not charged with any securities law violations and that Skowron had breached the firm's compliance policies and Code of Conduct. The funds were named solely as relief defendants and agreed to make a disgorgement payment with prejudgment interest to the SEC for the losses avoided, totaling $33 million.[1]
Terminology
- Insider Trading: The illegal practice of trading securities based on material, non-public information in violation of a duty of trust or confidence.
- Expert Networking Firm: Companies that connect investors with industry experts for legitimate research purposes; these relationships became a focus of federal insider trading investigations.
- Faithless Servant Doctrine: A legal principle under New York law that allows employers to recover all compensation paid to an employee who breached their fiduciary duty during the period of disloyalty.
- Operation Perfect Hedge: The federal government's unprecedented crackdown on insider trading in the hedge fund industry that resulted in over 80 convictions.
Frequently Asked Questions
Q: What was Chip Skowron convicted of?
Chip Skowron was convicted of conspiracy to commit securities fraud, securities fraud, and obstruction of justice for insider trading at FrontPoint Partners hedge fund.
Q: How long was Chip Skowron's prison sentence?
Skowron was sentenced to 5 years in federal prison on November 18, 2011, plus 3 years of supervised release. He was released in 2017.
Q: How much did Chip Skowron have to forfeit?
Skowron was ordered to pay $10.2 million in restitution and later forced to forfeit $31.1 million under the faithless servant doctrine—100% of his compensation from 2007-2010.
Q: What happened to FrontPoint Partners?
FrontPoint Partners collapsed after Skowron's case. Investors withdrew $3 billion, forcing the firm to shut down most funds and over 200 people lost their jobs.
Q: Where did Chip Skowron serve his sentence?
Skowron served his sentence at the minimum-security Federal Prison Camp adjacent to FCI Schuylkill in Minersville, Pennsylvania.
References
- ↑ 1.00 1.01 1.02 1.03 1.04 1.05 1.06 1.07 1.08 1.09 1.10 1.11 1.12 1.13 1.14 1.15 Wikipedia. "Chip Skowron." https://en.wikipedia.org/wiki/Chip_Skowron
- ↑ 2.0 2.1 2.2 Greenwich Time. "Greenwich MD gets 5 years in prison for insider trading." November 19, 2011. https://www.greenwichtime.com/news/article/greenwich-md-gets-5-years-in-prison-for-insider-2276299.php
- ↑ 3.0 3.1 3.2 3.3 3.4 3.5 SEC. "Joseph F. 'Chip' Skowron III, et al." https://www.sec.gov/enforcement-litigation/litigation-releases/lr-21928
- ↑ 4.0 4.1 4.2 "'Faithless' Ex-Morgan Stanley Fund Manager Ordered to Repay $31m to Former Employer." IBTimes UK. December 20, 2013. https://www.ibtimes.co.uk/faithless-ex-morgan-stanley-fund-manager-ordered-repay-31m-former-employer-1429819