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Falcone's fund faces scrutiny over trading

NEW YORK/BOSTON (Reuters) - Billionaire money manager Philip Falcone, whose borrowings from his hedge fund have drawn regulatory scrutiny, is also cooperating with “informal investigations” into trading at his Harbinger Capital Partners and related entities, according to a recent regulatory filing.

The informal investigation was disclosed earlier this month in the third-quarter financial report for Harbinger Group Inc, a small publicly traded company where Falcone is chairman and chief executive.

Falcone’s $7 billion hedge fund firm provides investment advice to Harbinger Group and owns a little over 50 percent of its shares. The hedge fund manager is currently in the process of completing a transaction that will give it a 94 percent equity stake in Harbinger Group.

A spokesman for Falcone declined to comment on the regulatory filing by Harbinger Group or elaborate on the disclosure. Falcone did not respond to an email seeking comment.

The filing said the investigations concerned “particular investments and trading in securities of particular issuers.” It did not say which government entities were conducting the investigations, nor did it provide any details on the securities at issue.

The filing said the “Harbinger parties and their affiliates or investment funds are not currently parties to any litigation or formal enforcement proceeding brought by any governmental or regulatory authority.”

It is not clear whether the trading investigation is related to an informal inquiry the Securities and Exchange Commission and federal prosecutors are conducting into a $113 million personal loan that Falcone took from one of his funds last year.

The loan, disclosed to hedge fund investors five months after Falcone borrowed the money to pay federal and state taxes, has angered some investors because they were prohibited from pulling money out of the funds at that time. Falcone has said the loan was proper and was approved by his lawyers.

The Harbinger Group filing may keep the spotlight on the once high-flying manager at a time when his flagship fund is nursing double-digit losses, prominent investors are exiting the fund, and investors are fuming about how they have been kept in the dark about certain things.

“With regard to any potential regulatory issue by any manager or their related businesses, there will always be a concern to investors, particularly those investors that are fiduciaries to others such as funds of funds,” said Ron Geffner, who works with hedge funds as a partner at law firm Sadis & Goldberg. “Often those investors will submit redemptions first and ask questions later.”

Meanwhile, Falcone appears to be in the process of converting Harbinger Group, a company formerly known as Zapata Inc, into a mini-version of his hedge fund. He is completing a transaction in which his hedge funds would swap some 27.8 million shares of Spectrum Brands Holdings Inc for 120 million newly issued shares of Harbinger Group.

The stock swap, if approved, would boost the hedge fund’s ownership stake in Harbinger Group from 51.6 percent to 94 percent. Spectrum Brands, one of the large stock holdings in the Harbinger funds, sells everything from pet care products to small appliances like the George Foreman grill.

Harbinger Group shares currently trade under $5. The company, which Falcone renamed last December, has a little over $100 million in cash on its balance sheet, but currently does not have much of an operating business. It recently sold $350 million of high-yield bonds to help finance the Spectrum Brands stock swap with the hedge funds.

When it was known as Zapata, the company was a processor of fish oils. It is nominally based in Rochester, New York. But it is effectively run out an office in the same midtown Manhattan building where Harbinger Capital Partners is housed -- albeit three floors below the hedge fund.

(Reported by Matthew Goldstein and Svea Herbst-Bayliss; editing by John Wallace)

matthew.goldstein@thomsonreuters.com; 1-646-223-5773

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