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Originally published Saturday, December 1, 2012 at 8:01 PM

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Harvard doctor turned felon was lured by riches

Health care has become America’s sweet spot for insider traders like Joseph F. “Chip” Skowron. Since 2008, about 400 people have been sued by regulators or charged with insider trading; of those, at least 94 passed or received tips involving pharmaceutical, biotechnology or other

Bloomberg News

Who: Hedge-fund billionaire co-founded the Galleon Group.

Convicted:

Illegally used information to trade in stocks. He began serving an 11-year term in federal prison i

Who: Former Goldman Sachs director

Convicted: Leaked corporate secrets to Raj Rajaratnam and was sentenced to two years in prison. Due to begin his term in January. Remains free on bail.

Who: Former SAC Capital Advisors portfolio manager

Allegations:: Obtained illegal insider tips about a clinical trial of an Alzheimer’s disease drug to help SAC make $276 million

Who: CEO of SAC Capital Advisors

Allegations: Company benefited from the illegal tips Mathew Martoma received

Who: Harvard-trained doctor who left medicine to help found a group of health-care funds.

Convicted: Of insider trading in 2011 and is serving a five-year term in federal prison.

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Facinating read. Thank you. You have to wonder how fine the line is that separates... MORE
“It’s very hard to imagine how I became that kind of person.&rd... MORE

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From the age of 6, Joseph F. “Chip” Skowron III aspired to be a doctor. At Yale, he earned both a medical degree and a doctorate in molecular and cellular biology, then qualified for Harvard’s elite, five-year residency program.

Three years in, Skowron quit medicine for Wall Street. He and two partners started a group of health-care investment funds under the auspices of FrontPoint Partners, a hot new property in the exploding world of hedge funds.

Skowron soon was making millions of dollars a year. He built a gabled, 10,000-square-foot home on 3 acres in the nation’s hedge-fund capital, Greenwich, Conn. He fancied pricey cars. He also spent vacation time engaged in Third World humanitarian causes.

Today, Skowron, 43, is serving a five-year term for insider trading at the federal prison at Minersville, Pa. At FrontPoint, Skowron lied to his bosses and law-enforcement authorities, cost more than 35 people their jobs and stooped to slipping envelopes of cash to an accomplice. FrontPoint is gone.

Morgan Stanley, which once owned FrontPoint, is seeking more than $65 million from Skowron, whose net worth a year ago was $22 million. Until he’s a free man, his wife of 16 years will have to care for their four children and Rocky, their golden retriever, on her own.

Skowron told the judge who sentenced him in November 2011: “I was not aware of the changes that were happening in me that blurred the lines between right and wrong. They came very slowly, over many years.”

Health care has become America’s sweet spot for insider traders like Skowron. Among researchers, physicians, government officials and corporate executives, the lure of easy money in health-care insider trading has become epidemic. Since 2008, about 400 people were sued by regulators or charged with insider trading; of those, at least 94 passed or received tips involving pharmaceutical, biotechnology or other health-care stocks.

“There’s a highly regulated approval process for new drugs and devices, and that is tempting for people,” said Paul Fishman, the U.S. attorney in New Jersey. “The pace of innovations and acquisitions in health care is extraordinary. That also lends itself to these kinds of temptations.”

Last month, Fishman charged six people with insider trading of health-care stocks, including executives at Celgene, Sanofi and Stryker.

Also last month, U.S. Attorney Preet Bharara in New York and Securities and Exchange Commission Enforcement Director Robert Khuzami announced what they called the biggest insider-trading case in history, a $276 million health-care haul that has much in common with the Skowron case: a prominent doctor, a hedge fund, a firm that matches experts and investors, and tips on the results of clinical drug trials.

Mathew Martoma was charged with getting illicit health-care tips to benefit Steven A. Cohen’s SAC Capital Advisors. Martoma had studied medical ethics while at Harvard Law School.

As it happens, Skowron worked for SAC after leaving Harvard.

High achievers

Skowron grew up in Cocoa, Fla. His father was an engineering supervisor at the Kennedy Space Center before running Long John Silver’s restaurant franchises.

Skowron’s mother was a teacher who encouraged her son to be a radiologist.

In September 1990, during his senior year at Vanderbilt University, Skowron learned he’d been accepted at Yale. The same day, his mother was killed in a car crash. She was 52.

Skowron declined to be interviewed for this story.

While at Yale, Skowron met and married Cheryl Birdsall, an advertising writer. She also declined to be interviewed. In a letter to the sentencing judge, she wrote of her husband, “I fell in love with him because he sees only the good in people. To know Chip is a fun and enriching gift.”

He planned to become an orthopedic surgeon, said his childhood friend Scott Bohannon. “He said, ‘I don’t like people dying on me,’ ” Bohannon said. “‘I want to fix people. It’s very rewarding.’”

On Easter Sunday in 2001, with two years remaining in his Harvard residency, Skowron called his father to say he was leaving medicine. He was upset about not seeing his daughter wear her first Easter dress because he was working and worried that long hours might hurt his marriage, his father said.

“He said, ‘No matter how many surgeries I do in a day, it seems like there’s pressure to do more,’ ” his father said.

Bloomberg News quoted Chip Skowron in 2003 as one of many doctors who had grown disillusioned with the profession and were seeking to exploit their expertise in the investment realm.

Making big bucks

Skowron worked as a stock analyst at SAC and Millennium Partners, staying less than a year at each. In 2003, Skowron joined FrontPoint, an unusual group of hedge funds founded three years before. FrontPoint, named for a mountain-climbing technique, built a stable of portfolio managers with expertise in assets ranging from utilities to Canadian debt.

Skowron believed his Ph.D.-level knowledge would give him an edge at determining which drugs and medical devices would succeed.

“He felt he could make a difference by identifying and sponsoring life-changing pharmaceutical products,” said Don Carlson, a friend for the past 10 years.

FrontPoint thrived. By the time Morgan Stanley bought the firm for $404 million in December 2006, FrontPoint had $5.5 billion in assets. Skowron earned $13.5 million in 2007 and $7 million in 2008, according to court documents.

He paid $5 million in 2006 for a 3-acre parcel across the street from the Greenwich Country Club. He built a house with seven bedrooms, 10 bathrooms and four fireplaces.

Skowron strived to keep up in Greenwich, Carlson said. “There is certainly a constant sense of being judged and of competition in Greenwich,” he said. “It is a very status-conscious environment.”

At the same time, Carlson’s friend was “always deeply reflective and thoughtful about his values. If it were a movie, he would be that character who’s conflicted all the way through.”

Skowron often gave up vacations to work with AmeriCares, a nonprofit organization that offers humanitarian aid in troubled areas. Over the years, Skowron volunteered his surgical skills in Kosovo, Cuba, India, Guatemala and post-Katrina Louisiana.

Trading secrets

It isn’t clear that anything changed significantly for Skowron after Morgan Stanley bought FrontPoint at the end of 2006. Bohannon speculates that his friend’s need to succeed would have compelled Skowron to perform even better for the new owners. Within a few months, he had embarked on a business courtship of a French physician named Yves Benhamou.

In April 2007, Benhamou visited Skowron’s suite at the Hotel Arts Barcelona in Spain. Benhamou was an outside consultant to FrontPoint, a sideline that supplemented his income at a Paris hospital.

FrontPoint had paid an expert networking firm to arrange periodic access to Benhamou, a highly respected expert on liver disease, especially hepatitis C. Investors hire the firms to get advice from experts like Benhamou on industries in which they specialize, such as pharmaceuticals.

Some of those experts have become conduits for illegal inside information. More than a dozen people involved with the firms have been charged with insider trading during the government’s recent crackdown.

Benhamou, now 52, had come from Paris to attend a medical convention. Skowron had come to give Benhamou what he called a “present” from FrontPoint, according to court filings. He handed the doctor an envelope with 5,000 euros inside.

By that time, Skowron’s various health-care funds were accumulating a sizable stake in Human Genome Sciences, the Rockville, Md., pharmaceutical firm that has since been acquired by GlaxoSmithKline.

FrontPoint eventually would own 6.2 million shares valued at $65 million, a bit more than $10 a share. Skowron and his fellow portfolio managers thought the company was worth as much as $17 a share because of the sales potential of Albuferon, a new hepatitis-C treatment undergoing human testing. One of the doctors overseeing the clinical trial was Benhamou.

That fall, Skowron and his wife hosted AmeriCares’s annual fundraiser. Around then, two patients in the Albuferon trial fell ill. One later died.

If made public, the developments threatened to slam Human Genome’s stock price. Benhamou had sworn as part of his oversight duties to keep results secret. He told Skowron about the sick patients.

Skowron’s wooing of the doctor was beginning to pay off.

Skowron immediately ordered the sale of some of FrontPoint’s stake. Nine days later, the men talked again as the Albuferon overseers considered altering trial dosages. Skowron sold more shares. Then he emailed Benhamou and asked him to keep their conversations “confidential.” By the end of 2007, FrontPoint had dumped almost 3 million Human Genome shares at an average price of $10.65 a share.

Skowron sat on the other 3.2 million shares. In mid-January 2008, Benhamou and his fellow trial overseers decided to stop dispensing the Albuferon dosage that might have sickened the two patients. On Friday, Jan. 18, Benhamou spoke with Skowron on the phone, according to his FBI arrest complaint and an SEC lawsuit.

Moments later, Skowron ordered the sale of FrontPoint’s entire Human Genome stake. By the end of the day, FrontPoint had sold almost 700,000 shares, according to the FBI and SEC.

Human Genome prepared to issue a news release. Skowron emailed Benhamou the day before: are you around for a quick call today? Love to catch up.” Benhamou called him at 10:44 a.m. Eastern time. While they spoke, Skowron instant-messaged his trading desk, saying he thought Human Genome could fall to $7 a share, according to the FBI and SEC.

By the market close, FrontPoint had sold the last of its Human Genome shares to Deutsche Bank at no less than $9.63 a share. After Human Genome issued its Albuferon news the next morning, the stock fell to $5.62 a share — and FrontPoint started buying again. With Benhamou’s help, Skowron had saved FrontPoint and Morgan Stanley about $30 million.

SEC contacted

It didn’t go unnoticed. T. Rowe Price, which lost almost $900,000 on the stock, promptly contacted the SEC. which began to investigate.

Over the next two years, Skowron collected $11 million more in compensation at FrontPoint. He also lied to his bosses about his insider trades, according to court filings. He lied under oath to the SEC. And he got Benhamou to lie.

Both men repeatedly insisted they’d never discussed the Albuferon trial. In a hotel bar in Milan, Skowron gave Benhamou another envelope containing $10,000 and reminded the doctor to keep lying. When Benhamou no longer could afford his attorneys, Skowron offered to pick up the tab.

FBI agents arrested Benhamou in Boston in November 2010. Citing emails, phone records and other evidence, the government charged him with securities fraud and conspiracy. The complaint didn’t name Skowron; the media did. Morgan Stanley placed him on leave and then fired him.

Investors yanked almost $3 billion out of FrontPoint, which ceased business this year.

Benhamou gave authorities crucial information about the bribes and cover-up before pleading guilty. The doctor was sentenced to the 24 days he’d spent in jail. He returned to his wife and two daughters in France. He declined to be interviewed.

Skowron could have faced more than 20 years in prison on the most serious charge. He pleaded guilty to conspiracy to commit securities fraud and obstruct justice. His deal required a five-year prison sentence, the maximum by law. He agreed to forfeit $5 million and pay a $2.7 million fine.

So many relatives and friends attended his sentencing on Nov. 18, 2011 that some had to sit in the jury box.

“I had allowed myself to slip into a world of relativism, where the ends justify any means,” Skowron told the judge. “It’s very hard to imagine how I became that kind of person.”

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