SEC charges Falcone, Harbinger with fraud

BOSTON/WASHINGTON Wed Jun 27, 2012 4:47pm EDT

Philip Falcone, chief executive officer and chief investment officer for Harbinger Capital Partners, participates in a panel discussion during the Skybridge Alternatives (SALT) Conference in Las Vegas, Nevada May, 9, 2012. REUTERS/Steve Marcus

Philip Falcone, chief executive officer and chief investment officer for Harbinger Capital Partners, participates in a panel discussion during the Skybridge Alternatives (SALT) Conference in Las Vegas, Nevada May, 9, 2012.

Credit: Reuters/Steve Marcus

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BOSTON/WASHINGTON (Reuters) - The bad news keeps coming for Philip Falcone, once one of the hedge fund industry's most successful fund managers.

The U.S. Securities and Exchange Commission filed a lawsuit in federal court on Wednesday charging Falcone with market manipulation, giving preferential treatment to several big investors who wanted to get their money out and borrowing cash from his hedge fund to pay personal expenses.

The filing of the charges comes roughly two months after LightSquared, a wireless telecommunications upstart backed by Falcone's Harbinger Capital Partners filed for bankruptcy.

The one-two punch of the LightSquared bankruptcy and the SEC civil charges raise serious questions about Falcone's future in the $2 trillion hedge fund industry. Much of the $3 billion in money managed by his Harbinger fund is tied to LightSquared.

While Falcone and his lawyers say he will fight the charges, the suit raises questions about how he can still manage money.

"It is clearly a challenge to spend your time defending charges on the one hand and managing a fund on the other. It is like having two full-time jobs, at the same time," said Richard Heller, a partner at law firm Thompson Hine.

The SEC charges were not a surprise. The manager told his investors late last year that regulators might be preparing a case against him and the SEC filed its case after months of settlement talks proved fruitless.

Regulators were seeking to bar Falcone, 49, from operating as an officer of a public company.

Falcone, once oversaw $26 billion and ranked among the world's most successful hedge fund managers. But his fortunes faltered earlier this year after a critical waiver LightSquared needed to operate its wireless network was thrown into jeopardy.

The SEC case against him underscores how U.S. financial regulators have been working relentlessly to root out improper trading in the $2 trillion hedge fund industry at a time when many public pension funds are relying on these funds to boost the retirement savings of average Americans.

Among the charges are that Falcone and others manipulated the markets with a series of distressed high-yield bonds between 2006 and 2008.

Regulators also charged that Falcone treated his investors unfairly during the height of the financial crisis, when many of the fund's assets were tied up in the collapse of Lehman Brothers. He allegedly let out two big clients, even though he told others on Christmas Eve in 2008 that they would not be allowed to get their money back for quite some time.

And to top things off, the government said Falcone illegally gave himself a $113 million loan from the fund to pay for his personal taxes, something that made investors especially angry because they could not access their own money. But Falcone contends that lawyers signed off on his loan, which sources close to Falcone said he has repaid.

Separately, the Securities and Exchange Commission also charged Peter Jenson, Harbinger's former chief operating officer, with aiding and abetting the misappropriations scheme.

In addition to those charges, Harbinger also settled a separate SEC action alleging unlawful trading by agreeing to pay a $428,975 fine, plus $857,950 in disgorgement and $91,838 in prejudgment interest. A spokesman for Harbert Management, which had a big stake in Falcone, was not immediately available for comment.

(Additional reporting by Katya Wachtel; editing by Matthew Goldstein, Gerald E. McCormick and Andre Grenon)

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