Restitution for Corporate Victims of Insider Trading: Review of the Skowron Case, By Pablo Quiñones and Jennifer L. Achilles

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Pablo Quiñones is a partner and Jennifer L. Achilles is a senior associate at Reed Smith LLP in New York. Both are members of the firm’s global government investigations and white collar criminal defense practice group. Quiñones previously served as a federal prosecutor in the Securities and Commodities Fraud Task Force of the U.S. Attorney’s Office for the Southern District of New York and as the lead prosecutor in the criminal investigations and prosecutions of Yves Benhamou and Joseph F. Skowron III. The matters discussed in this article are taken from the public record and are solely the views of the authors. The authors’ views do not necessarily represent the views of the U.S. Attorney’s Office for the Southern District of New York.  

On March 20, Judge Denise L. Cote, of the United States District Court for the Southern District of New York,ordered Joseph F. Skowron III to pay $10 million in restitution to Morgan Stanley as a corporate victim of Skowron’s insider trading and obstruction of justice schemes. Cote’s decision provides a useful roadmap for evaluating potential avenues for restitution to corporations that fall victim to insider trading schemes by their employees.1

The path leading to Skowron’s criminal conviction and obligation to pay restitution to the victims of his crimes is well documented in court filings. Shortly after earning his medical and doctorate degrees from Yale University, Skowron abandoned his medical career to seek “the pot of gold at the end of the hedge fund rainbow.”2 Skowron eventually became a prominent portfolio manager for FrontPoint Partners LLC , a multibillion dollar hedge fund that was acquired by Morgan Stanley in 2006.3


While working for Morgan Stanley at FrontPoint, Skowron used his personal relationship with a well-regarded medical doctor, Yves Benhamou, to gain secret inside information about Human Genome Science Inc.’s (HGSI) clinical drug trials of Albuferon.4 In late 2007 and early 2008, Benhamou tipped Skowron about serious adverse results in the clinical trials and, before HGSI publicly disclosed the negative results, Skowron caused the healthcare portfolios he managed to sell millions of shares of HGSI to unsuspecting buyers.5 Skowron avoided approximately $30 million in losses for Morgan Stanley and FrontPoint.6

Following those trades, the Securities and Exchange Commission initiated an investigation and Morgan Stanley began an internal investigation. In the months that followed, Skowron repeatedly lied to Morgan Stanley and the SEC about his dealings with Benhamou and the discussions they had about the HGSI clinical trials of Albuferon.7Skowron also persuaded Benhamou to lie about their misconduct to Morgan Stanley and the government.8Skowron’s lies began to come to light when the FBI arrested Benhamou on Nov. 1, 2010.9


Skowron pleaded guilty in August 2011 to a one-count criminal information charging him with conspiracy to commit securities fraud and obstruct justice.10

At sentencing, several corporate victims sought restitution from Skowron. The Mandatory Victim Restitution Act provides for mandatory restitution in all sentencing proceedings for convictions of certain offenses against property in which an identifiable victim has suffered a pecuniary loss.11 Restitution is required for offenses committed by fraud or deceit when the victim has suffered a financial loss.12

Prior to Skowron’s sentencing hearing, Morgan Stanley, FrontPoint, HGSI, and the counterparties to the illegal trades—Deutsche Bank Securities, Galleon Group, The D.E. Shaw Group, T. Rowe Price, and First New York Securities—all submitted victim impact statements requesting restitution for losses incurred as a result of Skowron’s conduct.

Skowron was sentenced Nov. 18 to five years in prison and three years of supervised release.13 The court also ordered Skowron to pay a $150,000 fine, $5 million in forfeiture, and nearly $6 million in restitution. This initial restitution order benefited the five corporate victims who were counterparties to illegal bulk trades caused by Skowron shortly before HGSI publicly disclosed the adverse events in the clinical drug trials. In particular, Cote awarded approximately $2.4 million to Deutsche Bank; $1.5 million to Galleon; $1 million to D.E. Shaw; $877,000 to T. Rowe Price; and $107,000 to First New York Securities.14 The court also permitted Morgan Stanley and others to file their claims for restitution after the sentencing hearing.


Morgan Stanley Dec. 14 asked the Court to award it approximately $44.8 million in restitution from Skowron, which included:

• approximately $33 million in connection with the disgorgement amount Morgan Stanley paid to the SEC;

• $3.8 million in legal fees and costs Morgan Stanley paid during the investigation and prosecution of Skowron; and

• $8 million representing a percentage of the compensation Morgan Stanley paid Skowron during the time he participated in the offense of conviction.

FrontPoint assigned its claims to Morgan Stanley.

Skowron opposed Morgan Stanley’s claim for restitution. He claimed the global financial services firm was not a “victim” under the MVRA. He further argued that the firm had significantly overstated its losses.15

Skowron claimed Morgan Stanley was not a victim because its losses were not proximately caused by Skowron’s criminal conduct but rather by “a chain of intervening events.” These events included “the public disclosure and dissemination of the allegations” against Skowron and “the legally permitted decision of third parties to withdraw their investments from FrontPoint.”16

Cote rejected Skowron’s argument, concluding that Skowron’s offense of conviction “directly and proximately harmed Morgan Stanley” because “FrontPoint, a Morgan Stanley entity, was the vehicle or ‘mechanism’ through which Skowron committed his crimes.”17

Cote’s reasoning followed a line of Second Circuit decisions from 2011 that defined the contours of the causal nexus required to claim status as a “victim” under the MVRA.18 Having concluded that Morgan Stanley was a “victim” within the meaning of the MVRA, the court next analyzed whether Morgan Stanley was entitled to recover the three types of restitution it had requested.


The court rejected the claim for approximately $33 million the company had disgorged to the SEC. Although it was clearly Skowron’s conduct that caused Morgan Stanley to disgorge the $33 million to the SEC, Skowron’s illegal insider trading also allowed Morgan Stanley to avoid losing the funds in the first instance. Accordingly, the court found that this money represented “ill-gotten gains,” which Morgan Stanley was not entitled by law to retain.19


The court’s decision that Morgan Stanley should recover $3.8 million in legal fees and costs from Skowron was also fairly straightforward. Morgan Stanley sought to recover the legal fees and costs it paid to:

• interact with the SEC and Justice Department during the parallel investigations of Skowron;

•  conduct its own internal investigation;

• retain counsel for FrontPoint’s portfolio managers and employees during the investigation; and

• retain counsel to represent Skowron during the time he falsely claimed to be innocent.20

Skowron argued that Morgan Stanley should be limited to $788,561.07—the amount it paid in attorneys’ fees in connection with the government’s criminal investigation. According to Skowron, the legal fees Morgan Stanley incurred in connection with the SEC investigation should be excluded because they were not tied to the investigation and prosecution of the criminal case.21

Cote disposed of Skowron’s argument by distinguishing United States v. Levis, a case in which the court denied the employer’s request for restitution of legal costs related to an SEC investigation and the employer’s own internal investigation.22 The fees were not recoverable in Levis as restitution because “the investigations arose out of circumstances essentially independent of the conduct underlying the defendant’s conviction.”23

In contrast, the court found that the criminal prosecution of Skowron for securities fraud rested on essentially the same conduct as the SEC’s civil case. Moreover, the court held that Morgan Stanley’s ability to pursue the legal fees it paid through other means could not “forestall operation of the MVRA’s mandatory restitution provisions.”24


The most significant victory for Morgan Stanley was the court’s finding that Morgan Stanley could recover 20 percent of the compensation it paid to Skowron, which totaled more than $6.4 million. Skowron argued that no portion of his $32.1 million in compensation was recoverable as restitution because his compensation was not caused by his criminal conduct but was acquired through his employment agreement.

However, the court noted that Skowron actively deceived Morgan Stanley during its internal investigation and its attempts to cooperate with the SEC. This deception prolonged his employment and his sizeable compensation.25

Skowron also argued that his case was distinguishable from cases awarding employers a portion of a defendant’s compensation because those cases involved honest-services fraud.26 According to Skowron, his case was different because his crimes were directed at investors and the SEC—not Morgan Stanley.

The court disagreed. It focused on whether Skowron’s conduct resulted in a direct loss to Morgan Stanley’s property—namely, deprivation of money to which it was entitled. The court held that Skowron’s compensation fell within the restitution available under the MVRA because “Skowron’s insider trading and obstruction schemes deprived Morgan Stanley of honest services for which it paid.”27 Accordingly, the court found that restitution of 20 percent of Skowron’s total compensation approximated “the difference in value between the honest services for which Morgan Stanley paid and what it received as a result of Skowron’s offense.”28

Skowron has indicated he will appeal the decision.29 Skowron has also asked the court for a stay pending appeal of the decision requiring the immediate payment of approximately $10 million in restitution.30


Cote’s decision in Skowron is a significant victory for corporate victims of insider trading schemes. Going forward, companies embroiled in securities fraud investigations caused by a rogue employee should carefully consider their ability to recover restitution under the MVRA. Courts have been, and continue to be, willing to award restitution to fraud victims—both individual and corporate victims alike.


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