Bloomberg News

Ex-FrontPoint Manager Skowron Calls Morgan Stanley No Victim

January 31, 2012

(Updates with Morgan Stanley’s claims beginning in fourth paragraph.)

Jan. 31 (Bloomberg) -- Former FrontPoint Partners LLC fund manager Joseph F. “Chip” Skowron, sentenced to five years in prison for an insider-trading scheme, says that Morgan Stanley isn’t a victim of his crimes and doesn’t deserve restitution.

Skowron, 42, who began serving his term at the Federal Correctional Institution Schuylkill in Pennsylvania earlier this month, said that Morgan Stanley shouldn’t collect any funds under the Mandatory Victims Restitution Act.

He pleaded guilty to getting illegal tips from a former adviser for Human Genome Sciences Inc. that trials of the company’s hepatitis C drug were being halted. FrontPoint sold its stock before the announcement was made public, avoiding $30 million in losses, the U.S. said.

Morgan Stanley, which acquired FrontPoint in 2006 and spun it off in February, has submitted the largest restitution request to the court, saying it should be paid $37.4 million after sustaining “very substantial damages” as a result of Skowron’s conduct.

Morgan Stanley said he collected his salary while “acting as the classic faithless servant, engaging in and concealing his crime.” The funds sought include at least $32 million the New York-based bank holding company paid Skowron during the four- years he committed his crimes, it said.

Skowron’s lawyer, Joshua Epstein, disputed Morgan Stanley’s assertion yesterday in a court filing.

‘Not a Victim’

“Morgan Stanley is not a victim,” he said, “because its purported losses were not directly and proximately caused by the conduct underlying the offense of conviction.”

“Neither Dr. Skowron’s employment by FrontPoint nor his receipt of compensation was an ‘integral part of the single scheme’ that he ‘devised’ in contrast to the facts giving rise to the restitution orders” in other federal criminal cases, Epstein said.

Skowron’s “offense was not a fraud against Morgan Stanley and the object of that offense of conviction was not to wrongfully obtain compensation from Morgan Stanley,” he said.

U.S. District Judge Deborah Batts in New York, presiding over a U.S. Securities and Exchange Commission suit against Skowron, ordered him to pay $38.2 million, which includes disgorgement, interest and civil penalties. She signed the order on Nov. 16, the SEC said.

Another federal judge in Manhattan, Denise Cote, who is presiding over the criminal case, said in November that she would rule later on how much restitution Skowron must pay his victims.

Galleon Connection

Galleon Group LLC, the defunct hedge fund at the center of the biggest insider-trading scheme in U.S. history, was among Skowron’s five investor victims that won court approval for restitution in November.

Cote ruled that four other investors who purchased HGSI stock in block trades, including Deutsche Bank AG, Germany’s biggest lender, were victims of Skowron’s crimes and entitled to collect restitution.

FrontPoint notified the court in November that it assigned restitution claims against Skowron to Morgan Stanley.

Matt Burkhard, a spokesman for Morgan Stanley, declined to comment on the filing. Peter White, a lawyer for FrontPoint, didn’t return a call seeking comment.

The case is U.S. v. Skowron, 11-cr-699, U.S. District Court, Southern District of New York (Manhattan).

--Charles Carter, John Pickering

To contact the reporter on this story: Patricia Hurtado in New York at pathurtado@bloomberg.net.

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net.


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