Though he's not been charged with insider trading - nor has his employer - the 41-year-old hedge-fund manager at FrontPoint Partners reportedly had been warned by supervisors about trading other securities he or others on his team discussed with a network of health-care advisers, WSJournalists Jenny Strasburg and Jean Eaglesham report.  The advice wasn't heeded, and so Joseph F. "Chip" Skowron was put on leave pending the outcome of an insider-trading investigation concerning a biotechnology stock. 

Basic Facts of the Case.  Court documents filed in Manhattan by the U.S. attorney's office and the SEC allege that French doctor, Yves M. Benhamou, tipped an unnamed co-portfolio manager with confidential information about a clinical drug trial that he was helping to oversee for a biotechnology company.   These alleged tips in late 2007 and early 2008 enabled the hedge-fund firm to avoid $30 million of losses. FrontPoint and its owner, Morgan Stanley, confirmed that the health-care hedge funds referenced in the documents are FrontPoint funds.  Mr. Skowron is a co-portfolio manager of FrontPoint's health-care funds.

    How Exposed Would Your Firm Feel?   Legal and Compliance staffs did their parts, as did the supervisors who related the message, or "CEP" take-aways, to Mr. Skowron and others.  However, the helpful hints didn't go far enough, as we'll see later, and this means FrontPoint Partners has big-time exposure.  How unfortunate, because FrontPoint's owner since 2006, Morgan Stanley, is trying to spin off the $7 billion fund manager.  

Consider these "fly on the wall" topics:

• The firm permitted its analysts and managers to converse freely with industry experts - knowing the experts were employed by, and/or conducted business with, public companies which the firm covered in research reports.  

• Did FrontPoint maintain a restrict list and, if so, how was it used?  How often? 

• Did the firm track and, where practicable, review communications between firm personnel and industry experts - e.g., phone conversations, written and electronic correspondence?  Did firm track and review written and electronic documents that passed between the parties? 

• How much slack did senior people get?  Mr. Skowron is a senior portfolio manager with responsibility over several health-care funds with combined assets of more than $1 billion.  It's understood that FrontPoint's individual portfolio managers - like Mr. Skowron - have a great deal of discretion over funds' strategies and trading, reflecting the firm's decentralized structure.

    What FrontPoint Knew, or May Have Known.   Executives inside FrontPoint and elsewhere in Morgan Stanley reportedly were involved in discussions about trading and oversight of the hedge funds.  Whether they shared the SEC's concerns is another thing.  The firm learned in 2008 or earlier that the SEC was looking into FrontPoint's health-care trades - in addition to the trades in Human Genome alleged in this week's case.  However, it isn't clear when the inquiry into the Human Genome trades started or was brought to FrontPoint's attention. 

The SEC inquiries into the team's trading contributed to internal questioning of trades that involved information gleaned from a network of doctors, people familiar with the matter said, with a concern being whether managers were getting nonpublic information.  FrontPoint co-CEO Mike Kelly reportedly told Mr. Skowron to be cautious about who he was talking to and how the information factored into his trading.  [C-I Note:  I'm sorry for saying that this all seems so "after the fact."] 

Fund supervisors within FrontPoint also questioned Mr. Skowron's team about whether doctors who were invested in FrontPoint funds were among those advising the health-care managers on investments, either as consultants or informally, one person familiar with the matter said. If some doctors also were hedge-fund clients, that relationship could pose a conflict of interest in that doctors could benefit financially from gains on the trades.

For the complete story, click onto:   [ WSJournal's "Frontpoint Cautioned Manager ..., 11/5 ]