Harbinger Capital and Hedge Fund Adviser Philip Falcone To Settle SEC Fraud Charges by Paying Over $18M and Admitting Wrongdoing

The SEC says that Philip A. Falcone and his Harbinger Capital Partners will pay over $18 million and admit wrongdoing related to its securities fraud case alleging the improper use of $113 million in fund assets to cover the hedge fund advisor’s personal taxes. The Commission also is accusing them of secretly placing a preference over specific customer redemption requests at cost to other investors and performing an improper “short squeeze” involving bonds that were put out by a Canadian manufacturer.

Not only are Harbinger and Falcone admitting wrongdoing but also they are acknowledging that they committed numerous acts of misconduct that hurt investors and got in the way of the securities market’s proper functioning.

Admissions by Falcone and Harbinger, as set out by papers submitted to the court:
• The improper borrowing of $113.2 million by Falcone from the Harbinger Capital Partners Special Situations Fund (SSF) at an interest rate below what the fund was paying to borrow money. Investors weren’t told about the loan for months.

• The bestowing of federal redemption and liquidity terms to specific investors in HCP Fund I without disclosing all arrangements to other investors and the fund’s board.

• Falcone suggested that customers short the Canadian manufacturer’s bonds in 2006 after discovering that a Financial Services Firm was doing so.

• Getting back at that firm later that year for shorting the bonds by getting Harbinger’s funds to buy all of the outstanding bonds left in the open market.

• Demanding that the firm settle outstanding bond transactions and deliver what bonds were owed while failing to reveal that the company likely wouldn’t be able to get any bonds to deliver because all almost all of them were tied up in the custodial account of the Harbinger funds, which were not making them available for sale.

Because of the way that the defendants improperly dealt with the interplay of bond demand and supply, the bonds’ price went up by over double.

The U.S. District Court for the Southern District of New York has to approve the hedge fund fraud settlement. Per the terms of the agreement, Falcone must pay disgorgement of $6,507,574 and prejudgment interest of $1,013,140 plus a penalty of $4 million. He also has agreed to a judgment entry that prevents him from associating with any dealer, broker, municipal securities dealer, investment adviser, transfer agent, municipal advisor, or statistical rating organization that is nationally recognized but can apply again in five years. However, during the bar, Falcone has permission to liquidate his hedge funds while an independent monitor supervises. Also, he isn’t precluded from taking on the role of director or office at a public company. The agreement also doesn’t come with an injunction against future securities law violations.

The Harbinger entities have to pay a penalty of $6.5 million.

This is the first time that the SEC has employed its new policy to obtain admissions of fault in certain securities cases.

Philip Falcone and Harbinger Capital Agree to Settlement, SEC, August 19, 2013

Read the proposed final judgment (PDF)

Read the Consent doc. (PDF)

More Blog Posts:
Harbinger Capital Partners LLC and Hedge Fund Adviser Philip A. Falcone Face SEC Securities Charges Over Client Asset Misappropriation and Market Manipulation Allegations, Institutional Investor Securities Blog, June 29, 2012

SEC Votes to Turn Down Would-Be Securities Settlement With Hedge Fund Manager Philip Falcone, Stockbroker Fraud Blog, July 31, 2013

AIG Sued by Nuveen Funds For Securities Fraud, Institutional Investor Securities Blog, August 12, 2013