Harbinger's Falcone gives details on SEC probes

BOSTON/NEW YORK Thu Apr 28, 2011 4:21pm EDT

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BOSTON/NEW YORK (Reuters) - Billionaire hedge fund manager Philip Falcone recently gave investors more information about three U.S. government investigations into his Harbinger Capital Partners fund firm.

In a year-end financial statement, Falcone also disclosed for the first time that his $6 billion firm paid $60 million to settle a lawsuit with NACCO Industries.

Falcone said the Securities and Exchange Commission is investigating whether his firm violated a short-selling rule involving three stocks and whether it engaged in market manipulation in unnamed debt securities, according to the statement sent to investors.

Reuters obtained a copy of the filing, which is private.

A spokesman for Harbinger declined to comment.

Rule 105 of Regulation M prohibits investors from participating in public offerings after having shorted the same securities.

Falcone said the probes are "informal" and that no criminal or enforcement charges have been brought against the firm. He also said the firm is "cooperating with these investigations."

Securities regulators are devoting fresh resources to patrolling the financial markets and looking back years for possible violations. At Harbinger they are reviewing whether the short-sale rule was violated in 2008 and whether improper trading in debt securities happened between 2006 and 2008.

The trader who was involved in the short-sale is no longer with Harbinger, a person familiar with the matter said.

That person said the firm believes that the investigation into market manipulation is "immaterial," but said it was revealed to investors in an effort to be more transparent.

The probe began in 2008 and is considered to be fairly far along. Harbinger has provided documents and produced witnesses for testimony to regulators, said the person, who was not allowed to speak about the matter publicly.

In the same document, Falcone also said that regulators are still reviewing facts surrounding a $113 million personal loan that he took from the hedge fund in 2009 and repaid in full late last year.

Securities regulators are cracking down more vigorously on Rule 105 short sale violations.

A year ago, David Tepper's Appaloosa Management hedge fund, for instance, paid a $1.3 million penalty to settle a short-sale investigation involving an offering of shares by Wells Fargo & Co.

The investigation into potential market manipulation of bonds was first disclosed by Harbinger last year in a regulatory filing for Harbinger Group Inc, the tiny publicly traded company that the hedge fund firm all but controls.

A person close to Harbinger said the market manipulation inquiry was unrelated to the settlement with Nacco.

In the filing, Falcone also provided more information about its big telecom bet. About half of the fund's assets are now committed to LightSquared, and Harbinger controls roughly 80 percent of the wireless telecom company's shares.

The filing also says that Harbinger has a $250 million unfunded commitment to LightSquared, which has been telling Wall Street that it may file for an initial public offering later this year.

(Reporting by Svea Herbst-Bayliss and Matthew Goldstein. Editing by Robert MacMillan)

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