As was earlier announced by the SEC, another insider trading scheme has been exposed, this time involving company Human Genome Sciences, a tipper: French doctor Yves Benhamou, who was in charge of a steering committee in charge of a potential Hepatitis drug for HGSI, and a tippee, which Reuters reported to have been Morgan Stanley spin off FrontPoint Partners. In essence Benhamou, who apparently worked as a consultant to FrontPoint (we are currently trying to determine if this was via a public "expert network" such as Gerson Lehrman or on a one-off arrangement), tipped off one or more of FrontPoint's PM (Chip Skowron, Jason Bonadio, Ajay Bhalla, who incidentally had joined from SAC in 2003) that trial developments were not progressing as hoped. The result was a plunge in HGSI stock by 44% on January 23 when the news was made public... But not before Morgan Stanley had sold off all of their holdings, which amounted to 6 million shares, the day before. Altogether, a rather amateur operation. And one which a simple glance at FrontPoint's 13F holdings would have confirmed, something was shady. As the chart attached demonstrates, FrontPoint did dump all its HGSI shares held as of December 31, 2007, held nothing in Q1 2008, and then resumed accumulating stock in the next quarter. Yet what the Raj Rajuratnam scandal taught us is that when it comes to criminal activity, hedge funds typically do not act alone, and share inside information with some of their closest confidants, to "spread the risk" in a syndicated (no pun intended) club deal. Which is why we looked for comparable odd 13F "liquidations" in HGSI between Q4 2007 and Q1 2008. We found two... one of which is certainly peculiar.
First, here is the FrontPoint 13F historical holdings of HGSI (via CapIQ). What we have is the proverbial smoking gun right there.
The 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 with it.
Yet here is where we notice some very comparable action at some other hedge funds.
First: HealthCor Partners:
And secondly, and far more curiously, S.A.C. itself, the fund which served as the springboard for FrontPoint's entire healthcare team:
To be sure, we are not accusing either HealthCor or SAC of dumping their stock in Q1 2008 in advance of the January 23 release, nor that they had non-public information. They could have sold off their stock under perfectly innocent circumstances. After all, it will be very easy to confirm or deny on what precise date either fund offloaded their HGSI holdings. And it is certainly not up to us to make sure insider trading laws are enforced. All we can do is highlight entities (and this is not an exhaustive list) that may have taken advantage of "informational arbitrage." We are far more interested in finding out if Yves Benhamo was in fact a member of a Gerson Lehrman-type network, and who else may have had access to his services in late 2007 and early 2008, and thus may have been tipped off by his information. We will submit a query to all expert networks (about which we have had some choice words in the past) to confirm or deny that the good doctor was or was not among their ranks of consultants.