Bloomberg News

Falcone’s Harbinger to Halt Withdrawals as SEC May Sue Fund

December 13, 2011

(Adds decline in assets in third paragraph.)

Dec. 9 (Bloomberg) -- Billionaire Philip Falcone’s hedge fund, Harbinger Capital Partners LLC, was told it may be sued by federal regulators for securities-law violations and said it plans to halt investor withdrawals at year-end.

Falcone, 49, and other Harbinger employees, including Omar Asali and Robin Roger, the general counsel, also received Wells Notices from the staff of the U.S. Securities and Exchange Commission, Harbinger said in a filing today.

A lawsuit would add to the woes of Falcone as assets at his $5.7 billion hedge fund have slumped from a peak of $26 billion three years ago and a wireless technology venture he’s backing faces regulatory and political hurdles. Harbinger is being investigated by the SEC and the U.S. Attorney’s office over a $113 million loan Falcone took from one of his funds to pay personal taxes, according to a July filing.

“Harbinger went from being a well-regarded fund to one that is potentially toxic for institutional investors,” said Peter Rajsingh, a managing member of Castellar Partners LLC, a New York-based firm that advises clients on investing in hedge funds. “Its unfortunate. The compounding factors here will make it an uphill battle for him.”

The SEC’s notices relate to alleged “violations of the federal securities laws’ anti-fraud provisions in connection with matters previously disclosed and an additional matter regarding the circumstances and disclosure related to agreements with certain fund investors,” the New York-based hedge fund said.

Halting Withdrawals

Harbinger told clients in April that the government was also looking into whether it had engaged in market manipulation in its trading of the debt securities of an undisclosed firm from 2006 and 2008.

“Harbinger and its affiliates are disappointed that the staff issued Wells Notices,” the firm said in today’s filing. “If the SEC decides to bring an enforcement action,” they “intend to vigorously defend against it.”

John Nester, a spokesman for the SEC in Washington, declined to comment.

Harbinger said it “anticipates” withdrawals from some of its hedge funds to be suspended effective Dec. 30, according to a letter sent to clients today. Harbinger “believes that the decision to temporarily suspend withdrawals is necessary when balancing the preservation of value for all Feeder Fund investors,” the firm said.

LightSquared Inc.

Three years ago, Harbinger curbed client withdrawals from its biggest fund in the aftermath of the 2008 bankruptcy of Lehman Brothers Holdings Inc. Falcone segregated hard-to-sell assets into another fund and told clients it would take as long as two years for them to get their money back.

Instead of returning cash, Falcone paid some of his investors by giving them non-tradable shares of LightSquared Inc., his wireless telecommunications venture. The firm faces challenges from makers of global-positioning system devices who say the service will disrupt navigation by cars, boats, tractors and planes. The service caused interference to 75 percent of GPS receivers examined in a U.S. government test, according to a draft summary of results released today.

The government probe into alleged market manipulation by Harbinger also involved a potential violation of a rule prohibiting investors from selling short a stock within five business days of a secondary offering and then buying shares in that offering. That investigation started in January 2010.

Short Sellers

The SEC has previously filed complaints alleging that other hedge-fund managers have violated Rule 105, including Carlson Capital LP, Moon Capital Management LP and Amaranth Advisors LLC.

All three firms agreed to settle the SEC allegations without admitting or denying guilt, according to SEC press releases issued when the cases were filed between 2007 and 2010.

Short-sellers bet on a decline in price, borrowing and selling shares with the aim of buying them back later for less to pocket the difference.

The Wells Notices “do not constitute a determination” that the firm has violated any laws, Harbinger said in today’s letter. Rather, the notices reflect “the current views” of the SEC enforcement staff.

The second investigation focused on a loan that Falcone had taken from the Harbinger Capital Partners Special Situations Fund in October 2009, Harbinger Group Inc., the publicly traded holding company controlled by Falcone, said in July.

Falcone’s Loans

Regulators were examining both the circumstances and the disclosures pertaining to the loan, which was repaid in full. Falcone disclosed the loan in the Special Situation Fund’s March 2010 financial statements.

Falcone said in November 2010 that the loan was documented and audited by outside accountants and legal advisers, and was done in accordance with the firm’s contracts. He said any claim of preferential treatment for certain clients was “completely and utterly untrue.”

Harbinger executive Asali joined the firm in 2009 to oversee global portfolio strategy and portfolio analytics, as well as assume certain risk management duties, according to a letter to clients. He was previously co-head of Goldman Sachs Hedge Fund Strategies.

Asali is also vice chairman of Spectrum Brands Holdings Inc. Harbinger said the Wells Notices were not addressed to Harbinger Group or any of its subsidiaries, including Spectrum, and did not affect the hedge fund’s investment in LightSquared.

Falcone, a 1984 graduate of Harvard University in Cambridge, Massachusetts, started Harbinger in 2001. Before that, he ran distressed-debt trading at Barclays Capital, the investment-banking unit of London-based Barclays Plc.

--With assistance from Miles Weiss, Joshua Gallu and Todd Shields in Washington. Editors: Christian Baumgaertel, Steven Crabill, Josh Friedman

To contact the reporter on this story: Saijel Kishan in New York at skishan@bloomberg.net

To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net


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