FrontPoint Partners embroiled in insider trading case

November 3, 2010: 11:03 AM ET

The latest insider trading investigation involves an employee at FrontPoint Partners, a hedge fund currently in the process of being spun off by Morgan Stanley (MS).

Civil and criminal cases brought by the SEC and the U.S. attorney's office in New York allege that a French doctor shared confidential information with a hedge fund manager about clinical drug trials. The Wall Street Journal has confirmed that FrontPoint -- which is not named in the complaint -- is the hedge fund at the center of the case. According to a statement from FrontPoint, its portfolio manager Chip Skowron, who oversees some of the firm's health-care investments, has been placed on leave.

Dr. Yves Benhamou, the French doctor who has been charged, allegedly told a fund manager about clinical trials that had negative implications for the drug Albuferon, which was being developed by Human Genome Sciences, Inc. (HGSI).  "The portfolio manager knew or should have known that Benhamou… owed a duty of confidentiality to HGSI, but, nonetheless, he immediately took action to sell the hedge funds' holdings of HGSI common stock," says the complaint.

A FrontPoint portfolio manager sold HGSI ahead of negative news and avoided $30 million in losses, according to the complaint. "We are cooperating fully with this investigation," FrontPoint said in a statement.

FrontPoint's Steve Eisman is also at the center of a different controversy related to his short position on the stocks of for-profit education companies. Eisman has been named as a co-conspirator, but not a defendant, in a lawsuit filed by the Florida for-profit school Keiser University that alleges a "false and misleading campaign" about it by a host of parties. The for-profit industry is calling for an investigation into a meeting Eisman had with the Department of Education before it issued new regulations for the industry.

Eisman and FrontPoint gained a modicum of fame after being featured in Michael Lewis' The Big Short. In that book, Eisman is featured as one of the few Wall Street players to understand that the subprime mortgage market was going to collapse. He profited by betting against the industry before its collapse.

This isn't the first time a company plagued by a short-seller has sparked an investigation into the investor's activities. Hedge fund manager Bill Ackman was investigated by the SEC and then-Attorney General Eliot Spitzer for manipulative trading practices after he warned the market that bond insurer MBIA was a disaster waiting to happen. Similarly, Greenpoint Capital's David Einhorn was investigated by the SEC after he tried to get the regulators to investigate Allied Capital, a company he was shorting.

Ackman made his investors more than $1 billion when the bond insurance industry collapsed, just as he predicted. The investigations were eventually dropped. Similarly, probes into Einhorn's investments were also dropped, and he went on to write a book about the ordeal, called Fooling Some of the People All of the Time.

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Katie Benner
Katie Benner
Writer, Fortune

Katie Benner joined Fortune in October 2006. As a writer for the magazine and the website, she focuses on Wall Street and the economy. Prior to joining Fortune, Benner worked at TheStreet.com, CNNMoney, and as a freelancer in Beijing for China International Business, the South China Morning Post, and as a columnist for Beijing Review. She has a B.A. in English from Bowdoin College.

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