Harbinger In SEC's Sights Over Alleged Market Manipulation

Dec 9 2011 | 12:18pm ET

The Securities and Exchange Commission may bring fraud charges against Harbinger Capital Management founder Philip Falcone and two other executives at the hedge fund.

Falcone, Omar Asali and Robin Roger have received Wells notices from the SEC, Harbinger said today. The regulator sends such notices when it is considering an enforcement action.

In Harbinger's case, the SEC is probing several matters, among them possible manipulative debt trading from 2006 through 2008, when Harbinger made a mint betting against subprime mortgages. The New York-based hedge fund had disclosed the investigation in April, but gave no indication a lawsuit was possible.

Much of Harbinger's debt trading at the time was in deals structured by Deutsche Bank. Harbinger gave no indication which trades might have it in trouble.

The SEC is also looking at a controversial $113 million loan Falcone took from his hedge funds to pay a tax bill. Falcone has since repaid that loan—earning his hedge funds a profit, he said.

Harbinger, which manages $5.7 billion, offered little in its statement, merely saying that the SEC is "alleging violations of the federal securities laws’ anti-fraud provisions in connection with matters previously disclosed and an additional matter regarding the circumstances and disclosure related to agreements with certain fund investors" and that it is "disappointed" by the Wells notices.

"If the SEC decides to bring an enforcement action, HCP and its affiliates intend to vigorously defend against it," the firm said.

The Wells notices could not have come at a worse time for Harbinger, which is battling for approval of its LightSquared wireless Internet venture. The hedge fund has poured some $3 billion into the company, which has run into opposition from global positioning system users and from congressional Republicans, who believe LightSquared may have received preferential treatment from the White House.

They also culminate a difficult few years for Falcone. In addition to the controversial loan two years ago, he's taken two other high-profile loans, a $22.5 million mortgage on his Manhattan mansion and another in which he pledged part of his impressive art collection as collateral. In September, he and his wife were rapped for failing to pay their city real-estate tax bill. On the professional front, Falcone has also dealt with uproars over redemption restrictions and his creation of a permanent capital vehicle.

This week, Harbinger announced it would suspend redemptions from its Credit Distressed BlueLine Fund, which will be liquidated next year.

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