Is The SEC's Insider Trading Case Implicating FrontPoint A Sting Operation Aimed At S.A.C. Capital?
When we first read Matt Goldstein's narrative of a rabbi named Milton Balkany, whose attempt to extort Steve Cohen's SAC for $4 million landed him in jail, we thought little of it and dismissed the story more or less as one in which an individual had gotten access to information that had been first perceived as damaging, yet ended up being simply innocuous. However, Goldstein's follow up to the very curious saga of Balkany, which also includes recently alleged insider trading in company Human Genome Sciences by one Joseph "Chip" Skowron, most recently of Morgan Stanley spin off FrontPoint (and previously of S.A.C.) caught our attention, and after doing some additional research, we may have uncovered some circumstantial facts that could indicate that the connection between Chip Skowron, the insider trading scandal, and SAC may be more substantial, that the rabbi may have indeed been on to something, and that there may be far more here than meets the eye.
Rabbi Milton Balkany's sad story is, fundamentally, one motivated by greed. In February of this year, Balkany was charged with an attempt to extort $4 million from S.A.C., and specifically from Steve Cohen, by threatening to tell authorities about alleged insider
trading at the fund. Specifically, at the time, as Reuters reported then, the rabbi had been aware of "six stocks" in which SAC had presumably committed insider trading. Little additional was known. The case (10-cr-00441 Southern District of New York) is still ongoing. Yet what Matt Goldstein caught as a potential smoking gun has to do with a series of transcripts released in the docket of that case on October 25, nearly a week before the news of the Chip Skowron case was made public. But first: another tangent - even while Balkany was allegedly attempting to extort S.A.C., he was trying to arrange a deal with the U.S. Attorney's office in which he was hoping to use the very same information to get better prison terms for one of his associates, one Hayim Regensberg, who several years earlier had been arrested on charges of running an IPO ponzi scheme, and who was represented, incorrectly, by Balkany as an SAC portfolio manager.
As part of a series of recorded conversations with US Attorney Robert Manchak, in which Balkany essentially handed out all the information that he knew about SAC's alleged insider trading, Balkany disclosed not only the names of 6 biotech companies in which SAC was supposed to have traded on insider information, but far more curiously, the name of one Chip Skowron, the name of FrontPoint, and predicted precisely the method in which, a week later, the SEC would implicitly allege that Skowron (who oddly enough still has not been charged) had extracted information from members of the FDA and from clinical trial doctors, and use that information to trade ahead of a critical milestone announcement by a given biotech company.
Now as all people who have traded biotech stocks know all too well, for a biotech company, a successful Phase I, II, or III will usually immediately result in a pop in the stock price by a material amount, which can be as high as thousands of percent. And the inverse: should a company not meet its clinical end goals, or should it not receive a favorable ruling by the FDA, the stock will almost inevitably plummet. This is precisely what the SEC claims FrontPoint did with inside information on Human Genome Sciences (HGSI) provided by a respected French doctor Yves Benhamou affiliated with a HGSI clinical trial, who told Skowron in advance that the news that would come out on January 23 2008 would be devastating, and any shares should be sold. In a very amateurish fashion, the day before FrontPoint sold all its shares.
When we first looked at the HGSI news, we pored through CapIQ data of who else may have dumped the stock in advance of the clinical trial. Two other names stuck out: HealthCor and... SAC. This is all before we knew about the existence of the Balkany transcripts. In "Were There Other Hedge Funds Involved In The Human Genome Sciences Insider Trading Scandal Besides FrontPoint?" we presented the following 13F derived data:
First, here is the FrontPoint 13F historical holdings of HGSI (via
CapIQ). What we have is the proverbial smoking gun right there.
shift away from HGSI stock (and then back into it) is so blatantly
obvious, one can forgive Morgan Stanley for hoping they would get away
Yet here is where we notice some very comparable action at some other hedge funds.
First: HealthCor Partners:
secondly, and far more curiously, S.A.C. itself, the fund which served
as the springboard for FrontPoint's entire healthcare team:
Of course, if SAC sold off their nearly 2 million shares which they held three short weeks earlier (13F as of December 31) after January 23 2008, there is no case. Furthermore, if SAC sold the stock before January 23 simply due to a change in the initial thesis, that could also explain the sell off. Then again, as the SEC discloses that FrontPoint commenced dumping its HGSI holdings in HGSI at 9:58am on January 18, 2008, and proceeded to sell the remainder on January 22, the Tuesday after the Martin Luther King holiday, just before the public announcement would hit on January 23, it would be relatively easy to pinpoint whether this was some form of club effort between FrontPoint and SAC, or anyone else for that matter. Once again, courtesy of the SEC, we know that selling 2 million shares of HGSI ended up being an almost inhuman task, with a lot of it having to be internalized by "Investment Bank 2" (undisclosed). As an aside, as the bank's trader knew all too well FrontPoint was selling to it a massive block of stock at a below market price, presumably in a dark pool, after seeing the HGSI press release the next day, he should have been immediately cautious and reported the FrontPoint sale to compliance: the unwillingness to do so was a breach of fiduciary responsibility to Investment Bank 2's shareholders, and was merely an attempt to curry favor with FrontPoint, with his bonus, and shareholders, eating the losses.
The point here is that HGSI trading was rather illiquid in the open market, and that large block trades would have happened in dark pools. Even so, it should be very easy to confirm or deny when and under what circumstances SAC also decided to dump their nearly 2 million shares.
A Smoking Gun?
All of the above is nothing but a pattern emerging from pure speculation, and contains no allegations of any wrongdoing whatsoever. Nonetheless, with Skowron having worked for SAC, having subsequently traded at least once with what appears to be inside information while at FrontPoint, and putting a suspicious liquidation event by both funds in or around a major adverse clinical trial announcement, is a little curious to say the least.
Where things get very curious, is when we go back to the same rabbi Balcany we started this whole story with.
As we noted earlier, as part of his transcribed attempt to curry favor with the State AG, Balcany provided some very surprising information to the government in his attempt to build a credible case.
We present what could be potential smoking gun A: government exhibit 130-T, which is a 16 page transcript of a phone conversation between Balkany and Manchak, that took place at 10:12 AM, on January 21, 2010, long before anyone outside of finance had heard of Chip Skowron.
...There were, like, tens of millions of dollars made. They first told them that it was under consideration, uh, and they were warned that it's going to be declined. So they sold-sold short, it was like 30-something dollars, the stock. And when the announcement was made that the FDA was not giving any approval, it went down to 14. Then they were called back, like to or three months later, that it was going to be approved. So they bought it again, and it sent up to 45.
Now when, when you say "they"-"they sold short" and "they were called back"-who, who're the "they?"
Well, there-the-one of the key guys is a medical doctor. His name is S-K-O-W-R-O-N. Um, his first initial is J. I don't have his first name, but he was referred to as Chip, C-H-I-P. And this, this doctor-and he's an MD, he's a docor-and this doctor Skowron, um, worked by SAC. Today is he still-he has his own hedge fund called the Front Point Partner, Front-Point-Partners...
Now he, now he's still actively doing this. I mean, he's been doing it for many years.
Now there certainly are inconsistencies: the rabbi makes the case that the Regensberg fellow who at this point was in jail for a 101 month sentence, had worked at SAC. It turns out this was not true. Yet somehow, Balkany knew all about Skowron, all about FrontPoint, and all about the M.O. of Skowron when it came to alleged trading on insider data in biotech names.
What else did Balkany know, either through Regensberg or otherwise?
Here is where things get even more interesting.
As part of the same transcript, the rabbi lists a series of other companies, in which he alleges it was none other than S.A.C. itself that was trading on inside information. The companies in question are:
- Cyberonics (CYBX)
- Respironics (since acquired by Philips)
- Allos Therapeutics (ALTH)
- Myriad Genetics (MYGN)
- Intermune (ITMN)
- Renovis (since acquired by Evotec)
Cyberonics is the first company mentioned in the brief narrative above, one which allegedly SAC first shorted, then went long, at some time going all the way back to 2004-5.
A quick glance at the CYBX stock price over the mid 2004-2005 period, together with SAC's disclosed holdings in CYBX, reveals an interesting pattern on the long side (obviously companies don't have to disclosed their short positions in 13F filings).
CYBX P/V chart:
SAC holdings in CYBX:
What is interesting is that not only does the CYBX chart demonstrate that the rabbi was spot on with his stock price recollection, but that SAC may have well acquired a million shares of the company ahead of its February 3 2005 announcement which sent the stock surging from $24 to the mid $40s. As to whether SAC may have shorted CYBX in advance of the August 12, 2004 adverse 8K which cut the stock price in half, that alas, can not be determined by 13F filings. What is obvious is that once the catalytic upside event occurred and SAC made about $20 million on its 1MM shares (assuming of course it bought the CYBX shares in advance of the favorable 8K) SAC never again expressed an interest in CYBX (and in fact its interest in the name had been dwindling over the several prior quarters as can be seen in the chart above).
The plot thickens when we take a comparable look at Intermune.
AS the chart below shows, ITMN is insider trader's dream: two massive moves in the stock - the first one tripling it from $15 to $45, the next one plunging from $45 to $10.
What we do know, again courtesy of SAC's 13F filings, is that the firm which previously had rarely had a concentrated position in ITMN, suddenly went from zero as of December 31, 2010, to almost 2 million shares by the end of Q1... A quarter in which conveniently the stock tripled. Had SAC bought the stock ahead of the favorable press release from March 9 (InterMune's fortunes soared along with its stock to as high as $48 a share after a U.S. Food and Drug Administration advisory panel voted to recommend pirfenidone's approval), it would have made $60 million virtually overnight. Yet SAC's holding were back down to zero by the end of Q2, a quarter in which on May 4, the stock plunged by almost 80% on this adverse piece of news (The agency refused not only refused to go along with the advisory panel vote but told InterMune that another clinical trial would be required before the agency reconsidered the pirfenidone approval decision).
Third, looking at Myriad Genetics once again reveals a peculiar trading pattern by SAC. While the transaction in question in MYGN occured after the particular conversation by the rabbi, readers should keep in mind that as noted earlier odd patterns would only emerge in long holding positions: SAC had no obligation to disclosed short bets. And a long term chart of MYGN indicates that the firm sure has had its share of let downs in the past. Yet even just looking at the long side begs a question: as can be seen on the chart below MYGN, announced a cut in guidance on May 5, which led to a trouncing of the stock.
Yet as the 13F summary shows, as of the end of the quarter in which the beating was administered, SAC owned no shares, after owning 700k the quarter just prior...
... and increasing its holdings to 1mm in the quarter after once the stock had not only stabilized but had once again jumped on favorable news.
Alas, our budgetary constraints prevent us from performing a comparable analysis on acquired Respironics and Renovis, although we wouldn't be surprised if the rabbi was on to something there as well.
Have you heard the one about the rabbi, the hedge fund, and the case(s) of potential insider trading. We have prepared the data above based on information presented by Balkany, who even we had initially taken for a crackpot, yet who knew precisely the high profile FrontPoint hedge fund manager who was about to be implicated in a major insider trading scandal. Far from attempting to provide a definitive answer, we have merely sought to bring some clarity to an otherwise very convoluted situation. If anything, however, all this has left us even more confused. Yet we would be far more certain if SAC were to be so kind as to provide the following information:
- Did SAC short CYBX in the days immediately preceding the adverse CYBX statement from August 12, 2004. And did it subsequently go long ahead of the favorable 8K from February 3, 2005. If so, what was the investment thesis/catalyst for such decision. Did SAC consult with an expert network or an outside consultant on any of the trades?
- Did SAC go long ITMN in the days immediately preceding the favorable ITMN statement from March 9, 2010. And did it subsequently sell all of its holdings in advance of the adverse news from May 4, 2010.
If so, what was the investment thesis/catalyst for such decision. Did
SAC consult with an expert network or an outside consultant on any of
- Did SAC sell its 700,000 shares in advance of the adverse MYGN news release from May 4, 2010.
And did it subsequently sell all of its holdings in advance of the
adverse news from May 5, 2010.
If so, what was the investment thesis/catalyst for such a decision. Did
SAC consult with an expert network or an outside consultant on any of
the trades? Furthermore, what catalyzed the decision to reenter the stock.
We also have some broadly rhetorical questions: how is it that a rabbi who as he himself admits, has never traded a stock in his whole life, knew ahead of everyone, certainly the SEC, that Skowron had (allegedly) traded on inside information. More to the point, why was Jeff Skowron not named as a defendant in this action: based on the SEC complaint, which in itself is worth an entire read, the agency has more than enough information to indict him as a co-conspirator in the case. Why is FrontPoint also not named? And why is it that we get the feeling that the SEC got all of its information on the Benhamou/FrontPoint case courtesy of the US attorney general, who had forwarded the Balkany information over to them. If that is the case, what else is the SEC currently investigating? Are all biotech consultants working for 'expert networks' currently under SEC surveillance and being bugged by various law enforcement administrations ala Raj Rajuratnam? And, most importantly, is the ongoing official anonymity of Skowron indicative that the SEC is merely using him to build a much greater "sting" case against his former, and oh so very elusive, employer?
Hopefully we will find out soon. After all, as is disclosed rather bluntly by Robert Manchak, the abovementioned US attorney, on transcript page 7 of 8, in Government Exhibit 131-T:
I can say, quite honestly, that he was correct in that SAC is-it's a hedge fund that's well-known to the government, if you-if you will. If you understand what I'm saying.
Yes, Robert, we do.