By Emily Flitter and Sarah N. Lynch
July 19 The U.S. Securities and Exchange
Commission voted to reject a deal its enforcement division had
struck with once high-flying hedge fund manager Philip Falcone
and his hedge fund Harbinger Capital Partners, according to a
The SEC has not released any public explanation of the
decision, which was disclosed on Friday by Falcone's publicly
traded company Harbinger Group Inc.
But a person familiar with the matter said commissioners
voted 3-1 to reject the proposed settlement during a closed-door
meeting on Thursday due to concerns it was too weak.
Voting against it were SEC Chair Mary Jo White, an
independent, and Democrats Luis Aguilar and Elisse Walter, the
Among the concerns were the fact that the proposed
settlement did not seek to bar Falcone from serving as an
officer or director of a public company.
The SEC last year charged Falcone with market manipulation
and other violations.
Republican Commissioner Troy Paredes voted for the
settlement, while Daniel Gallagher, the other Republican
commissioner, did not participate in the closed-door meeting.
The rejection of the settlement comes as White has said she
intends to be more aggressive in dealing with settlements and to
take more cases to trial.
On Friday the SEC initiated a blockbuster case against hedge
fund mogul Steven A. Cohen by charging him with failing to
supervise two employees who are accused of insider trading. [ID:
C. Evan Stewart, a partner at Zuckerman Spaeder who is not
connected to the case, said it appeared the proposed Falcone
settlement would have been effective in some regards but would
have allowed Falcone to maintain control over investor funds.
"That mixed message really is why I thought it would not be
well-received several months ago. It appears that consideration
carried the day," Stewart said.
Falcone announced in May he would pay $18 million to settle
two SEC lawsuits accusing him of market manipulation, giving
preferential treatment to certain investors and borrowing cash
from his own fund to pay his personal taxes.
The lawsuits were not filed against Harbinger Group Inc, the
publicly traded investment company where Falcone is chairman and
chief executive officer. Instead, they targeted his hedge fund
Harbinger Capital Partners and other related funds.
Falcone manages roughly $3.1 billion in assets. He notified
his hedge fund investors on Friday of the SEC's rejection in an
email but did not provide any details beyond what was in
Harbinger Group's regulatory filing, according to an investor in
the fund who did not want to be identified due to fear of a
reprimand from Falcone.
While the dollar amount of the settlement was relatively
small, the deal would have required Falcone to return money to
his hedge fund investors and would have effectively prohibited
him from starting a new hedge fund for the next two years.
It would, however, have permitted Falcone to remain CEO of
the Harbinger Group, a rare instance of leniency; such
settlements usually include lifetime bans on being either a
director or officer in a public company, according to legal
"Historically it's uncommon for the commissioners to reject
settlements," said Ron Geffner, a partner at Sadis & Goldberg
who is not connected to the case. He said the commission could
begin to reject deals more frequently.
"Since Madoff, and since the 2008 recession, Congress, other
members of the government and the public have scrutinized the
SEC's behavior and in terms of settlements or the outcome of
certain lawsuits more than ever," he said.
Falcone's lawyer Matthew Dontzin did not immediately respond
to a request for comment. Falcone did not respond to email and
phone messages seeking comment.
The government had asserted that Falcone manipulated the
price of some bonds his fund had invested in and at the height
of the financial crisis, he let select investors get out while
denying that same opportunity to others.
The SEC also said Falcone illegally loaned himself $113
million from the fund to pay his taxes, leaving investors unable
to access their own money. Falcone eventually repaid the loan.
In March, Forbes listed Falcone as having $1.2 billion in
The SEC's vote took place a week after Harbinger Capital's
bankrupt wireless communications firm LightSquared Inc announced
plans to go to trial with its lenders over whether Dish Network
Chairman Charlie Ergen's acquisition of big chunks of
its loan debt violated an agreement pertaining to how
LightSquared can restructure.