By Emily Flitter
NEW YORK Aug 19 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
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
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
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
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 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
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."