Worst trades in history… $30m that cost 200 jobs

Joseph “Chip” Skowron III was born in Cocoa, Florida, in 1968, and graduated with a medical degree from Vanderbilt University before doing a doctorate at Yale Medical School. Following a residency at Beth Israel Deaconess Medical Centre, where he published several papers, he left medicine to go into finance, working as a healthcare analyst for hedge funds SAC Capital Management and Millennium Partners. In 2003 he was hired by FrontPoint Partners to help build their healthcare funds. When Morgan Stanley took it over in 2006, Skowron became managing director.

What was the trade?

By 2006 Skowron was managing or co-managing six healthcare funds. That year he met Yves Benhamou, a consultant overseeing a clinical trial for Human Genome Science, one of the companies that FrontPoint held in its portfolio, through a networking company. Beginning in April 2007, Skowron agreed to give Benhamou cash and cover his hotel bills in exchange for confidential information about an experimental hepatitis drug. In late 2007 Benhamou revealed that trials of the drug were running into problems. Realising that this would hit HGS’s share price, Skowron began selling shares in December 2007 and January 2008.

What happened?

A few days after Skowron had sold, HGSI confirmed the negative trial results, causing its shares to fall 44%. By selling the shares early Skowron had saved FrontPoint an estimated $30m. However, the timing of the trades alerted the US Securities and Exchange Commission, who almost immediately launched a probe. Benhamou and Skowron initially lied to the SEC about the insider trading, but were eventually charged and pleaded guilty. Skowron was sentenced to five years.

Lessons for investors

Skowron ended up paying $7.7m in fines to regulators, as well as $31m after a court ruled that he had to repay all the money he was paid while working for Morgan Stanley. Morgan Stanley was arguably the biggest loser from the whole affair, however, as it was forced to shut FrontPoint after investors pulled $3bn in funds as a result of the scandal, with the loss of 200 jobs. The case highlights that insider trading, which is acting on material non-public information, is a crime, taken seriously by the authorities, and the potential consequences vastly outweigh any gains.