The great nightmare of every top executive is that the misdeeds of a single employee, or a small group, could lead to huge losses -- or even to the collapse of a firm. That nightmare is one reason why ethics training and compliance is a big focus at many companies.
The recent travails of the hedge fund FrontPoint Partners shows show how swiftly things can go wrong. It is a story sure to chill any executive who hears it.
In 2008, according to news reports, a French doctor named Yves Benhamou was working for the biotech firm Human Genome Science Inc. Benhamou also wore another hat: consulting for hedge fund managers who bought and sold healthcare stocks. According to allegations, Benhamou passed on an illegal inside tip about a clinical trial at Human Genome Science to a trader at FrontPoint Partners.
Last month, two years after this tip, authorities arrested Benhamou for insider trading and FrontPoint was named in news reports. More specifically, a healthcare trader there, Joseph Skowron, was named in relation to the case. Skowron allegedly saved FrontPoint $30 million in averted losses. Skowron has not been charged with any crime and FrontPoint has a number of funds besides its healthcare fund, as well as a number of traders. It is home most famously to Steve Eisman, who correctly bet against the housing market.
The revelation couldn't have come at a worse time -- with federal authorities probing a number of hedge fund. The revelation also came near the end of the year, when investors in FrontPoint could decide whether to pull their money out of the firm.
Predictably, a flood of money left the firm. As the New York Times reported:
FrontPoint Partners, a $7 billion hedge fund under fire for allegations that a manager there benefited from insider information, has received about $3 billion in redemption requests, according to a person with knowledge of the matter.
The huge calls by investors for their money back come at a time of investor nervousness following the raid of three hedge funds, subpoenas to several others and the arrest of an expert on allegations of trading insider information this week.
The news also comes about a week after the FrontPoint decided to close its $1.2 billion health care fund, which is at the center of one of the insider trading inquiries.
The New York Observer was even more dramatic, writing: "FrontPoint Partners, one of the most important hedge funds in the country, may not live to see another Thanksgiving."
But a recent memo from FrontPoint said: "We would like to emphasize that FrontPoint remains stable operationally and financially."
The agony of FrontPoint is all the more striking because it apparently had information that Joseph Skowron was not a trustworthy person to hire.