FrontPoint Partners

FrontPoint Partners was a hedge fund that became well known for its bet against subprime mortgages during the 2008 financial crisis under Steve Eisman.[1][2] It was based in Greenwich, Connecticut, with other offices in New York and London.[2][3]

FrontPoint Partners
Hedge fund
IndustryFinancial services
FoundedNovember 2000
Defunct2011 (2011)
Headquarters
Greenwich, Connecticut
,
United States
Key people
Steve Eisman (fund manager); Chip Skowron (portfolio manager)
ProductsHedge fund
AUM$7 billion (November 2010)
ParentMorgan Stanley

FrontPoint was a registered investment adviser in the United States and was wholly owned subsidiary of investment bank Morgan Stanley. After Eisman left the firm, there was an investigation around insider trading. In August 2011 Frontpoint portfolio manager Chip Skowron pleaded guilty to insider trading and obstruction of justice. The remaining fund saw a significant decline in assets under management. It shut down most of its investments in 2011.[4]

Morgan Stanley filed a civil lawsuit against Skowron in 2012, calling Skowron a “faithless servant”. In 2013 Judge Shira Scheindlin of the U.S District Court of the Southern District of New York ruled on a motion for summary judgment that Skowron must forfeit $31 million—100% of the compensation he earned from the firm between 2007 and 2010—to his employer, Morgan Stanley.

History

Frontpoint was founded in November 2000 by three principals.[3] Morgan Stanley purchased an equity position in the company in 2006, when Frontpoint had $5.5 billion in assets under management.[5][3] Frontpoint became an indirect wholly owned subsidiary of Morgan Stanley.[2]

Steve Eisman served as a fund manager for FrontPoint Partners from 2004 until 2011.[6][7] In October 2010 it was announced that Morgan Stanley, while maintaining a minority position, had handed control back to the managers of the firm.[3] In November 2010 the firm was managing $7 billion.[4]

In April 2011 the Securities and Exchange Commission filed a complaint against Frontpoint portfolio manager Chip Skowron for trading on inside information and named six Frontpoint funds as relief defendants.[8][9][3] In April 2011 Frontpoint agreed to pay the SEC more than $30 million in settlement of charges against Frontpoint.[3] In August 2011, Skowron pleaded guilty in federal court in Manhattan to conspiracy to engage in insider trading and obstruction of justice.[10] Skowron was sent to prison for five years.[11]

Morgan Stanley filed a separate civil lawsuit against Skowron in October 2012, seeking the $33 million it paid the SEC, as well as the entire $32 million it had paid Skowron in compensation from 2007 to 2010.[12] In its lawsuit, Morgan Stanley called Skowron a “faithless servant” who lied repeatedly to continue being paid by Morgan Stanley and to avoid a blow to his reputation.[13] A. Jeff Ifrah, co-author of Federal Sentencing for Business Crimes, said: "The reputation of an employer like this one can get killed by the conduct of its employee," and seeking restitution "is certainly a good strategy" to recover a company's good reputation.[14] In December 2013 Judge Shira Scheindlin of the U.S District Court of the Southern District of New York ruled on a motion for summary judgment that Skowron must forfeit $31 million—100% of the compensation he earned from the firm between 2007 and 2010—to his employer, Morgan Stanley.[15][16][17][18] The judge applied the legal doctrine of "faithless servant" to require Skowron to return his ill-gotten gains from the use of inside information to his employer, because he had engaged in insider trading, in violation of the firm's code of ethics, and failed to report his insider trading to the company.[19]

In May 2011 Frontpoint announced that it would shut down most of its funds by the end of the month.[4]

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References
  1. "Most of the 'big shorts,' who thrived during the financial crisis, have faltered since 2008". CNBC. September 17, 2018.
  2. "Joseph F. "Chip" Skowron III, et al.: Securities and Exchange Commission Litigation Complaint". Books.google.com. Retrieved 2019-11-19.
  3. Rajiv Jaitly (2016-03-21). "Practical Operational Due Diligence on Hedge Funds: Processes, Procedures, and Case Studies". Books.google.com. Retrieved 2019-11-19.
  4. Lattman, Peter (2011-05-19). "FrontPoint to Shut Most Funds After Insider Charges - The New York Times". Dealbook.nytimes.com. Retrieved 2019-11-19.
  5. "Morgan Stanley to Acquire FrontPoint Partners". Morgan Stanley. 2006-10-31. Retrieved 2019-11-19.
  6. "The Shocking Admission of This Shuttered Hedge Fund Manager", US News & World Report.
  7. Courtney Comstock (2011-01-20). "The Latest News About FrontPoint Partners Is Devastating For The Hedge Fund". Business Insider. Retrieved 2019-11-19.
  8. Max Abelson (2010-11-26). "Steve Eisman's $7 B. Hedge Fund FrontPoint On Death's Door". Observer. Retrieved 2019-11-19.
  9. "FrontPoint Partners embroiled in insider trading case". Fortune. Retrieved 2019-11-19.
  10. Bray, Chad (16 August 2011). "Ex-Fund Manager Pleads Guilty to Using Inside Tips". The Wall Street Journal.
  11. Spain, William (15 August 2011). "Skowron pleads guilty in insider trading scam". MarketWatch.
  12. Katz, Basil (9 November 2012). "Morgan Stanley sues Ex-FrontPoint manager over insider charges", Fox Business.
  13. "Harvard doctor turned hedge fund felon lured by ambition, riches". nj.com. 27 November 2012.
  14. "Morgan Stanley seeks $10.2 million from convicted former trader," GreenwichTime, 14 January 2013.
  15. Raymond, Nate (20 December 2013). "Convicted ex-FrontPoint manager ordered to repay Morgan Stanley". Reuters.
  16. "Morgan Stanley v. Skowron, 989 F. Supp. 2d 356 (S.D.N.Y. 2013)". casetext.com.
  17. "Morgan Stanley Official Was Faithless Servant Under New York Law; Must Repay $31 Million". Bloomberg. 7 January 2014.
  18. Rexrode, Christina (24 January 2014). "Morgan Stanley to ex-manager: We'll drop the charges, but you owe us $24 million". MarketWatch.
  19. Henning, Peter J. (23 December 2013). "The Huge Costs of Being a 'Faithless Servant'". The New York Times; DealBook.
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