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Were There Other Hedge Funds Involved In The Human Genome Sciences Insider Trading Scandal Besides FrontPoint?

Tyler Durden's picture




 

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.

 

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Tue, 11/02/2010 - 18:12 | 694440 buzzsaw99
buzzsaw99's picture

Too bad they weren't as big as the squid-bp shenanigans. Too big to jail works.

Tue, 11/02/2010 - 19:46 | 694589 NoBull1994
NoBull1994's picture

These charts could show that they exited just in time, or they could show that they exited after losing their ass after the announcement.  Impossible to tell.

Tue, 11/02/2010 - 18:33 | 694456 AR
AR's picture

Tyler & Staff:  This indeed is very good disclosure and work on your part.  Keep it up. As a footnote though, we are always amazed that certain well educated managers can be so stupid when selling or dumping their shares in the face of such obvious non-disclosed and negative information.  What do people think?  Their selling would somehow go unnoticed.  DUMB.  Stupid is, as stupid does we presume. Even the SEC will have a hard time not screwing up this prosecution.

Tue, 11/02/2010 - 18:35 | 694471 Xibalba
Xibalba's picture
"Were There Other Hedge Funds Involved In The Human Genome Sciences Insider Trading Scandal Besides FrontPoint?"

 

 

Is the Pope Catholic?

Tue, 11/02/2010 - 18:42 | 694476 Bigger Dickus
Bigger Dickus's picture

We should send all financial criminals to Detroit.

Tue, 11/02/2010 - 19:04 | 694508 hbjork1
hbjork1's picture

BD

Send them along. We have a good situation for them.

Tue, 11/02/2010 - 18:49 | 694487 Ivar Kreuger
Ivar Kreuger's picture

What is worth another look is who was buying at 50 cents last year.

I made an absolute killing on this stock--a once in a lifetime trade--and I am  sure some other big boys did too.

But they did it with inside information, I did it by watching insider and institutional buying.

Take a look at the chart it is absolutely insane 1$ to 30$ in just over a year.

Watch this thing go down hard in the next year or two, under 7$ by 2012.

Disclosure: I am holding long dated puts on this fraud.

Also, where the fuck are the handcuffs?

Tue, 11/02/2010 - 18:57 | 694497 cossack55
cossack55's picture

The handcuffs are in the SEC file drawers. They get them out when they act out the kinky scenes from their most recent porn downloads.

Tue, 11/02/2010 - 19:20 | 694538 McMia
McMia's picture

Why wouldn't they be blatent about it? They realize they can make billions on the insider trading and even if caught will eventually settle with the US government for a few million and no admission of guilt. There really is no downside for them.

Tue, 11/02/2010 - 20:02 | 694631 Bearster
Bearster's picture

At the risk of ZH'ers telling me I would make a great part of the gov't of Bernanke and Bush, I don't think we should outlaw trading based on what you know.

 

Tue, 11/02/2010 - 21:30 | 694853 defender
defender's picture

I agree with you that people should be allowed to trade off of what they know.  The only thing that I have a problem with is people trading off of what no one else has the possibility of knowing.

Tue, 11/02/2010 - 22:54 | 695008 prophet
prophet's picture

The people that did not buy until after the news made out much better and the forensics on their trading is a bit more difficult.  A ten month round trip of down ninety percent and up twelve hundred percent (4 to 0.30 and back to 4) is not all that common and then for it to continue on to be a one hundred bagger from bottom.  Geez.  Informania.  Did they decode the 'tard gene or what?   

Wed, 11/03/2010 - 00:09 | 695113 lolmaster
lolmaster's picture

hummm insider trading in biotech ... ya thunk??

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