FrontPoint Said to Be Hedge Fund in Albuferon Probe

Date: Wednesday, November 3, 2010
Author: Patricia Hurtado, Saijel Kishan and Katherine Burton, Bloomberg

A Human Genome Sciences Inc. consultant allegedly tipped hedge fund FrontPoint Partners LLC employees on the results of trials involving the hepatitis-C drug Albuferon, a person familiar with the matter said.

Dr. Yves Benhamou, 50, of France, was charged yesterday by U.S. prosecutors with insider-trading. Benhamou, whose expertise is hepatitis and liver diseases, was arrested in Boston on two charges filed in federal court in Manhattan.

FrontPoint, which is being spun out of Morgan Stanley, said in an e-mailed statement that it’s “cooperating fully.” Dr. Chip Skowron, a co-portfolio manager of the Greenwich, Connecticut-based firm’s health care funds, was placed on leave pending the outcome of the probe, the firm said.

Benhamou held dual roles, acting as a paid consultant to at least six hedge funds while working as an adviser to Human Genome, a developer of gene-based drugs, and serving on its steering committee for Albuferon trials, the U.S. Securities and Exchange Commission alleged in a parallel lawsuit also filed yesterday. Benhamou is no longer a Human Genome consultant and the company has “cooperated fully” with the SEC, Jerry Parrot, a company spokesman, said.

“By profiting from his sensitive position and providing the hedge fund an unfair advantage, Benhamou undermined the integrity of the securities market and sold out his employer,” Manhattan U.S. Attorney Preet Bharara said in a statement.

News Release

FrontPoint held 3.3 million shares of Human Genome at the end of the fourth quarter of 2007, valued at $34.3 million, according to data compiled by Bloomberg News. It held none at the end of the following quarter. Human Genome fell 44 percent on Jan. 23, 2008, after saying it will change the dosing of its experimental hepatitis-C drug Albuferon in patient tests.

Messages left by Bloomberg News for Skowron weren’t returned.

Before joining FrontPoint, he was an analyst at hedge funds Millennium Partners LLC in New York and SAC Capital Advisors LLC in Stamford, Connecticut, according to FrontPoint’s marketing documents dated September.

Skowron ran FrontPoint’s health-care investments with Dr. Jason Bonadio, Ajay Bhalla and Kevin Caliendo. They had also worked at SAC Capital, run by Steven Cohen, before joining FrontPoint, according to the documents. They didn’t return messages seeking comment.

Yale Graduate

Skowron graduated with a Ph.D. in cellular and molecular biology from Yale University, according to the documents.

The FrontPoint Healthcare Flagship Fund has returned 0.7 percent this year through September, according to an investor letter, while the FrontPoint Healthcare Enhanced Fund has gained 2.2 percent. Hedge funds have returned 4.7 percent in the same period, according to Hedge Fund Research Inc. in Chicago.

Morgan Stanley, the sixth-largest U.S. bank by assets, last month agreed to give up control of FrontPoint, four years after it bought the firm as part of a push into alternative assets.

FrontPoint’s managers, led by co-chief executive officers Daniel Waters and Michael Kelly, are gaining a majority stake in the asset manager and will replace New York-based Morgan Stanley’s affiliates as the funds’ investment adviser and general partner.

FrontPoint had $7 billion of assets under management as of Oct. 20, including $1 billion of net new money that the firm attracted from clients this year.

Non-Public

Benhamou repeatedly shared non-public information he gleaned from working for Rockville, Maryland-based Human Genome with his unidentified co-conspirator at the fund, prosecutors alleged in court papers. For example, on Jan. 18, when the company asked Benhamou for advice on a news release to disclose negative information about the Albuferon trial, he immediately shared the development with his co-conspirator, prosecutors said.

The co-conspirator at the hedge fund seven minutes later directed a trader at the fund by instant message to “sell the HGSI” and “all of it,” prosecutors said.

The fund avoided about $30 million in losses, Bharara’s office said, by selling a total of about six million shares before the adverse disclosures were publicly announced.

Benhamou, of Neuilly-sur-Seine, France, was charged in a criminal complaint that accuses him of one count of conspiracy to commit securities fraud and one count of securities fraud. He faces as long as 20 years in prison if convicted.

Boston Court

Benhamou appeared briefly in federal court in Boston before U.S. Magistrate Judge Jennifer C. Boal. He is being held without bail and will be taken to New York to face charges there, according to Boal’s clerk, Donald LaRoche.

A lawyer for Benhamou, Joseph Zwicker, didn’t immediately return a voice-mail message left at his office yesterday.

The U.S. charged that from November 2007 through January 2008 the co-conspirator worked for the hedge fund as a portfolio manager for health-care with the authority to have the fund to sell 6 million of its shares of Human Genome.

On multiple occasions, Benhamou, because he was a member of Human Genome’s steering committee, had access to non-public information about “serious adverse effects” that occurred during the Albuferon trials, the U.S. said.

Prosecutors said that in 2007, from Feb. 1 to Dec. 3, the hedge fund bought about 6.2 million shares of Human Genome for about $64 million at an average price of about $10.32 a share.

Third Stage

By late November 2007, Human Genome learned that during the third stage of the Albuferon trial a participant died and another developed a lung disease as a possible side-effect from the drug.

Benhamou and other members of the Human Genome steering committee were discussing how to proceed with the trials by early December 2007, the U.S. said. On Dec. 5, Human Genome sent an e-mail to the steering committee indicating that the trial’s independent safety committee members believed these adverse effects required further examination.

By Dec. 7, the unidentified co-conspirator sent an instant message to a trader at the hedge fund, also unidentified in the complaint, directing the trader to sell Human Genome shares.

Prosecutors said on or about the same day, the independent safety committee members “had become more alarmed” and were considering whether to stop part of the trial. On Dec. 9, Human Genome held a conference call with steering committee members, which was scheduled in part, to allow Benhamou to participate while he was at a hepatitis conference in Hawaii.

Benhamou and the co-conspirator exchanged e-mails that day, prosecutors said, including a message in which the doctor said, “I’m at a hep” conference “in Hawaii, when can we talk?”

The co-conspirator responded, “Now?”

Phone Records

Prosecutors said cellular phone records show the co- conspirator’s mobile phone was in contact with Benhamou’s cellular phone for about five minutes that day. At the same time, the co-conspirator’s land line was in contact with two managers at the fund and instant messages were exchanged.

As a result, from Dec. 7, 2007, through Dec. 18, 2007, the hedge fund sold about 2.9 million, or about 47 percent, of its Human Genome shares at an average price of $10.65.

On Dec. 12, Human Genome’s independent safety committee agreed to permit the trial to continue. The panel also said it would meet again to halt part of trial if more adverse events were reported.

By Jan. 17, Human Genome recommended that a part of the Albuferon trial be stopped. A day later, on Jan. 18, Human Genome sent Benhamou an e-mail describing the independent safety committee’s recommendation and asking for his advice on how to convey that in a news release.

Minutes Later

Minutes later, Benhamou is charged with e-mailing the co- conspirator, “When can I call you?”

On Jan. 22, 2008, the hedge fund sold about 600,000 shares of Human Genome at an average price of $10.37, the U.S. said.

On Jan. 23, 2008, Human Genome issued a press release about its independent safety committee recommendation to stop a part of the Albuferon trial. That day, the stock dropped to $5.62 a share from its opening price of about $10.02, a 44 percent plunge.

The case is U.S. v. Benhamou, 10-MAG-2424, U.S. District Court, Southern District of New York (Manhattan). The SEC case is SEC v. Benhamou, 10-CV-8266, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporters on this story: Patricia Hurtado in New York at pathurtado@bloomberg.net; Saijel Kishan in New York at skishan@bloomberg.net; Katherine Burton in New York at kburton@bloomberg.net.

To contact the editor responsible for this story: David E. Rovella at drovella@bloomberg.net; Christian Baumgaertel at cbaumgaertel@bloomberg.net.