Philip Falcone Barred From Securities Industry For 5 Years In $18 Million Settlement

FILE - In this Thursday, Nov. 13, 2008, file photo, Senior Managing Partner of Harbinger Capital Partners Philip Falcone test
FILE - In this Thursday, Nov. 13, 2008, file photo, Senior Managing Partner of Harbinger Capital Partners Philip Falcone testifies on Capitol Hill in Washington. before the House Oversight and Government Reform Committee hearing on "Hedge Funds and the Financial Market". The Securities and Exchange Commission rejected an $18 million settlement that would have banned billionaire hedge-fund manager Philip Falcone from the securities industry for two years on Friday, July 19, 2013. (AP Photo/Kevin Wolf, photo)

The Securities and Exchange Commission has reached a settlement with hedge fund adviser Philip Falcone and Harbinger Capital Partners involving multiple allegations, including that Falcone used the fund's assets to pay his personal taxes.

The $18 million-plus settlement forces Falcone and Harbinger Capital to admit wrongdoing and bars Falcone from working in the securities industry for a minimum of 5 years, according to the SEC.

Falcone, who was worth an estimated $1.2 billion as of March, will pay around $11.5 million of the settlement, and Harbinger Capital will pay $6.5 million. From Reuters:

Falcone will be banned from associating with brokers, dealers, investment advisors and other types of financial firms for five years, after which he will be able to reapply for a license to operate. During that period he will be allowed to help with the liquidation of Harbinger under the supervision of an independent monitor, the announcement said.

The Securities and Exchange Commission rejected a settlement with Falcone in July without explanation, Reuters then reported. Though the dollar amount of that proposed settlement was also $18 million, it would have only blocked Falcone from creating a new hedge fund for roughly two years.

SEC chairwoman Mary Jo White said in June that she would push back against the SEC's past tendency to allow defendants to settle without "admitting nor denying” wrongdoing, according to The New York Times.

Here's the SEC's press release on Monday's settlement:

The Securities and Exchange Commission today announced that New York-based hedge fund adviser Philip A. Falcone and his advisory firm Harbinger Capital Partners have agreed to a settlement in which they must pay more than $18 million and admit wrongdoing. Falcone also agreed to be barred from the securities industry for at least five years.

The SEC filed enforcement actions in June 2012 alleging that Falcone improperly used $113 million in fund assets to pay his personal taxes, secretly favored certain customer redemption requests at the expense of other investors, and conducted an improper “short squeeze” in bonds issued by a Canadian manufacturing company. In the settlement papers filed in court today, Falcone and Harbinger admit to multiple acts of misconduct that harmed investors and interfered with the normal functioning of the securities markets.

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

The settlement, which must be approved by the U.S. District Court for the Southern District of New York, requires Falcone to pay $6,507,574 in disgorgement, $1,013,140 in prejudgment interest, and a $4 million penalty. The Harbinger entities are required to pay a $6.5 million penalty. Falcone has consented to the entry of a judgment barring him from association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization with a right to reapply after five years. The bar will allow him to assist with the liquidation of his hedge funds under the supervision of an independent monitor.

Among the set of facts that Falcone and Harbinger admitted to in settlement papers filed with the court:

Falcone improperly borrowed $113.2 million from the Harbinger Capital Partners Special Situations Fund (SSF) at an interest rate less than SSF was paying to borrow money, to pay his personal tax obligation, at a time when Falcone had barred other SSF investors from making redemptions, and did not disclose the loan to investors for approximately five months.

Falcone and Harbinger granted favorable redemption and liquidity terms to certain large investors in HCP Fund I, and did not disclose certain of these arrangements to the fund’s board of directors and the other fund investors.
During the summer of 2006, Falcone heard rumors that a Financial Services Firm was shorting the bonds of the Canadian manufacturer, and encouraging its customers to do the same.

In September and October 2006, Falcone retaliated against the Financial Services Firm for shorting the bonds by causing the Harbinger funds to purchase all of the remaining outstanding bonds in the open market.

Falcone and the other Defendants then demanded that the Financial Services Firm settle its outstanding transactions in the bonds and deliver the bonds that it owed. Defendants did not disclose at the time that it would be virtually impossible for the Financial Services Firm to acquire any bonds to deliver, as nearly the entire supply was locked up in the Harbinger funds’ custodial account and the Harbinger funds were not offering them for sale.

Due to Falcone’s and the other Defendants’ improper interference with the normal interplay of supply and demand in the bonds, the bonds more than doubled in price during this period.

The SEC’s investigation was conducted by Conway T. Dodge, Jr., Robert C. Besse, Ken C. Joseph, Mark Salzberg, Brian Fitzpatrick, and David Stoelting. The SEC’s litigation was handled by Mr. Stoelting, Mr. Besse, Mr. Salzberg, Kevin McGrath, David J. Gottesman, and Bridget Fitzpatrick.



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