Bloomberg News

Falcone Agrees to SEC Securities Ban, Admits Wrongdoing

August 19, 2013

Billionaire hedge-fund manager Philip Falcone agreed to a tougher settlement with U.S. regulators that includes a longer ban from the securities industry and an admission of wrongdoing.

Falcone will be barred from the industry for at least five years, up from two years under a proposed deal that was rejected by the U.S. Securities and Exchange Commission in July, the regulator said today. The earlier settlement didn’t require him or Harbinger Capital Partners LLC, his $3 billion firm, to admit any wrongdoing.

The SEC accused Falcone, who became a billionaire by betting against the U.S. housing market in 2006, of improperly borrowing money from his fund to pay his personal taxes and said he gave preferential treatment to some of his investors in returning their money. The regulator also accused Falcone of engaging in a short squeeze of bonds held by a Canadian manufacturer.

“Falcone and Harbinger engaged in serious misconduct that harmed investors, and their admissions leave no doubt that they violated the federal securities laws,” Andrew Ceresney, co-director of the SEC’s enforcement division, said in the statement. “Falcone must now pay a heavy price for his misconduct by surrendering millions of dollars and being barred from the hedge-fund industry.”

The bar from the securities industry will allow Falcone to liquidate his hedge funds under the supervision of an independent monitor, the SEC said. He and his firm will pay an $18 million fine, the same amount as called for in the original settlement.

Earlier Proposal

That deal, proposed in May, was rejected two months later by the commission because it was too lenient, two people with knowledge of the matter said at the time.

In June, two months after being sworn in as SEC chairman, Mary Jo White said the agency would depart from a decades-old practice of settling cases without requiring defendants to admit to wrongdoing. The decision to seek admissions of wrongdoing would “turn on how much harm has been done to investors, how egregious is the fraud,” she said.

“I am pleased that we were able to reach a settlement to resolve these matters with the SEC,” Falcone said today in an e-mailed statement. “I believe putting these issues behind me now is the best course of action for me and our investors. It will allow me to continue to focus on my permanent capital vehicles and maximizing the value of LightSquared for all stakeholders.”

The settlement is pending approval by the U.S. District Court for the Southern District of New York.

CEO Role

Falcone, 51, will continue his role (HRG:US) as chief executive officer of Harbinger Group Inc. (HRG:US), a $1.28 billion public holding company he controls.

The SEC said Falcone misappropriated investor assets when he took a $113 million loan in October 2009 from one of his funds to pay personal taxes. At that time, he had restricted his clients from pulling their money from that fund. While he knew in April 2009 that he would have a tax bill in the tens of millions of dollars, he continued to spend money on renovations of his $49 million Manhattan townhouse.

The same year that Falcone took out the loan, he let some large investors pull their money from his funds in return for their vote to approve a plan to restrict client redemptions from a different fund. Harbinger concealed these deals from the independent directors and fund investors, according to the SEC.

Bond Squeeze

The agency also accused Falcone and two of his funds of engaging in a short squeeze of MAAX Holdings Inc. bonds, a transaction in which a buyer limits the supply of a security to drive up prices and cause losses for investors betting against the security.

Falcone has said that he planned to move away from hedge-fund investing, where clients can pull out their money at regular intervals, and instead use Harbinger Group to finance long-term investments.

Harbinger Group shares gained 2.9 percent today to $8.95. They have gained 16 percent this year.

Falcone has invested clients’ money in a wireless phone company, LightSquared Inc., which last year filed for bankruptcy.

To contact the reporters on this story: Saijel Kishan in New York at skishan@bloomberg.net; Dave Michaels in Washington at dmichaels5@bloomberg.net

To contact the editor responsible for this story: Larry Edelman at ledelman3@bloomberg.net


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Companies Mentioned

  • HRG
    (Harbinger Group Inc)
    • $13.05 USD
    • -0.11
    • -0.84%
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