FrontPoint Insider-Trader Ordered To Pay $38.2 Million

Nov 18 2011 | 2:32am ET

The former FrontPoint Partners healthcare hedge fund manager who admitted to insider-trading was ordered to pay almost $40 million in disgorgement and fines.

Joseph Skowron, who pleaded guilty to trading on confidential information in August, was hit with $38.2 million in disgorgement, prejudgment interest and civil penalties by U.S. District Judge Deborah Batts on Wednesday. The man who passed Skowron his information, French doctor Yves Benhamou, was ordered to pay more than $60,000.

Much of Skowron's liability may be covered by Morgan Stanley, the former owner of FrontPoint. Morgan Stanley agreed to indemnify FrontPoint when the latter spun off from the bank earlier this year.

But Morgan Stanley is trying to get that money right back from Skowron, who admitted he used information received from Benhamou about a Human Genome Sciences drug trial to avoid some $30 million in losses. Morgan Stanley is seeking $37.4 million in restitution from Skowron, which it accuses of causing "very substantial damages," including its $116 million write-down of its FrontPoint investment after the allegations against Skowron became public late last year.

Morgan Stanley settled the Securities and Exchange Commission's allegations against FrontPoint for more than $33 million, and said that FrontPoint paid Skowron at least $32 million during the four years he was breaking the law.

Also seeking restitution is another hedge fund brought low by insider trading, Galleon Group. Raj Rajaratnam's defunct outfit claims it lost more than $1.5 million on its Human Genome investments due to Skowron's actions. Deutsche Bank claims similar losses of $2.4 million.

Skowron is to be sentenced today. His plea agreement calls for five years in prison.

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