SEC To Sue Harbinger, Falcone For Fraud

Jun 27 2012 | 12:34pm ET

The Securities and Exchange Commission will file civil fraud charges against Harbinger Capital Management, founder Philip Falcone and two others, including allegations that the hedge fund gave an investor preferential treatment and that it manipulated markets.
The SEC voted to authorize its Enforcement Division to bring the lawsuit after settlement talks failed to produce an agreement. The charges aren't exactly a surprise—the SEC sent Harbinger, Falcone, Omar Asali and Robin Roger Wells notices last year, indicating an enforcement action was likely—but it adds to a growing list of headaches faced by the hedge fund and its founder.
The SEC lawsuit, which could come as soon as this week, will hit Harbinger and Falcone on three separate points. First, it will allege that a 2009 $113 million loan that Falcone took from the hedge fund to pay a tax bill was improper. Second, it will allege that it gave investor Goldman Sachs preferential redemption treatment in the same year. Finally, it will accuse Harbinger of manipulating the market for MAAX Holdings bonds.

The vote on the Harbinger charges was taken at a closed session of the SEC. It is unclear if any of its five members dissented from the decision.

Harbinger and the SEC have been discussing a settlement since last year. Falcone rejected a deal that would have included a multi-year ban from the securities industry; it is unclear what terms were on the table when talks collapsed.

Falcone and his lawyer said he will fight any lawsuit filed by the SEC.

Falcone notified investors of the loan—which he has since repaid with interest—but it came at a time when redemptions were suspended. So, the SEC alleges, did the Goldman redemption. As for the MAAX manipulation allegations, they stem from a probe into Harbinger's debt trading from 2006 through 2008.

The impending lawsuit is just the latest trouble to rock Harbinger, which again suspended redemptions after the receipt of the Wells notices last year. The firm's assets have dwindled from $26 billion to $3 billion, thanks in no small part to difficulties faced by its largest investment, wireless Internet venture LightSquared. Falcone put that company into bankruptcy protection to avoid defaulting on loans; earlier this year, the Federal Communications Commission all but pulled the plug on LightSqaured's planned network due to concerns about interference with global positioning systems. The troubles at LightSquared have cost Harbinger dearly, contributing to its 47% loss last year and 30% loss this year.

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