Falcone agrees to industry ban in new SEC settlement

NEW YORK Mon Aug 19, 2013 6:49pm 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

NEW YORK (Reuters) - Hedge fund manager Philip Falcone agreed to a five-year ban from the financial industry and will admit wrongdoing to settle charges by the U.S. Securities and Exchange Commission that he improperly used money from his hedge fund and unfairly favored some of his investors, the SEC announced on Monday.

The ban would put at least a temporary end to Falcone's controversial career of managing investor money, which was notable for a dramatic rise and fall during and soon after the financial crisis. But it would not prevent him from serving as a director or officer of a public company.

The new settlement agreement, which involves Falcone and his hedge fund Harbinger Capital, comes after the Commission rejected an earlier proposal because it was too lenient, lacking any admission of wrongdoing or a full industry ban. The new agreement also appeared to be the first to require a defendant to admit wrongdoing since new SEC Chairman Mary Jo White announced a much tougher policy that would require such admissions more often.

The agreement must still be approved by a federal judge.

"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."

Falcone, 51, who made a hugely successful bet against the subprime mortgage market before getting hit by steep losses from a failed wireless startup, LightSquared Inc, said in a statement he was "pleased" to reach a settlement.

"I believe putting these issues behind me now is the best course of action for me and our investors," he said.

His fund Harbinger Capital, which once boasted assets under management of $26 billion, fell to around $3 billion earlier this year. The fund's current size could not immediately be ascertained.

Falcone, whose rags-to-riches story took him from a poor upbringing in Minnesota to the trappings of wealth, including the purchase of a New York mansion once owned by former Penthouse Magazine publisher Bob Guccione, might have a tough time getting back into the industry.

"This is a more traditional SEC settlement. It's far more comprehensive than what they had before," said C. Evan Stewart, a partner at Zuckerman Spaeder in New York.

To reenter the business, Falcone would have to apply to the SEC for permission once the five years have passed.

"That's an agency that has found him not a good person to be in charge of other people's money," Stewart said. "The likelihood that that's going to a change in five years, that's not automatic. There's a pretty high barrier to getting back in."

The government asserted that, at the height of the financial crisis, when many of the fund's assets were tied up in the collapse of Lehman Brothers, Falcone let select investors get out while denying that opportunity to others.

The SEC also claimed Falcone illegally loaned himself $113 million from the fund to pay his taxes, leaving investors unable to access their money. Falcone eventually repaid the loan.

To settle the charges, Falcone will have to admit to having done what the SEC alleges he did. He will have to personally pay around $11.5 million in disgorgement and fines, while his hedge fund, Harbinger Capital, will pay $6.5 million, according to the SEC's announcement.

BAN AND ADMISSION

David Marder, a former assistant district administrator for the SEC in Boston, called Harbinger a "big deal" for lawyers seeking an indication of what cases will require admissions in the future.

The policy of allowing defendants to neither admit nor deny wrongdoing came under scrutiny after U.S. District Judge Jed Rakoff rejected a $285 million settlement with Citigroup Inc based in part on the lack of admissions.

During Falcone's five-year ban, he will be allowed to help meet redemption requests from Harbinger's investors under the supervision of an independent monitor. He will also be able to continue as chairman and chief executive of his publicly traded company, Harbinger Group Inc.

However, his securities industry ban and admission of wrongdoing will likely prevent other public companies from choosing him for their boards.

"He could still technically serve on the board of other public companies," said Mark Kornfeld, a partner at BakerHostetler. "In the short-term, most would expect companies to shy away from bringing him aboard."

BOOM AND BUST

At the height of his success, Falcone earned a 116 percent gain for Harbinger in 2007 betting against subprime mortgages.

But Falcone struggled during the financial crisis, losing 22 percent in 2008 and telling investors on Christmas Eve that they would not be able to get their money out of the fund in order to stave off a rush of redemptions.

A little more than a year ago, his hedge fund owned 96 percent of LightSquared, a venture that depended on government approval to build a high-speed, wireless network that tests eventually showed would risk interfering with the Global Positioning Systems.

When the Federal Communications Commission failed to give final approval to the venture, LightSquared was forced to file for bankruptcy, which led to heavy losses at Harbinger in 2012.

Falcone said of the settlement: "It will allow me to continue to focus on my permanent capital vehicles and maximizing the value of LightSquared for all stakeholders. I remain committed to managing Harbinger Capital's portfolio of investments for the benefit of our investors."

(Reporting By Emily Flitter; Additional reporting by Katya Wachtel and Nate Raymond in New York and Svea Herbst-Bayliss in Boston; Editing by Andre Grenon)

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Comments (15)
Harry079 wrote:
Five year ban? Really?

“As part of the agreement, Falcone will have to personally pay around $11.5 million in disgorgement and fines”

Is that like puking up money he took from investors and them nor wanting to touch it?

Aug 19, 2013 4:45pm EDT  --  Report as abuse
User21 wrote:
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this is the shadow stuff some of these guys pull in the financial markets,
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I want to know when Mark Cuban is going to get sent to jail for his flagrant insider trading,
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Aug 19, 2013 4:49pm EDT  --  Report as abuse
User21 wrote:
of course this (my previous comments) is all in my opinion.
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He has not been convicted yet, but IN MY OPINION I think he should and be sent to jail just like all the other insider trading cases we have seen in the past,

Aug 19, 2013 5:05pm EDT  --  Report as abuse
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