Wednesday, 30 July 2014
Last updated 5 hours ago
Jun 28 2012 | 4:04am ET
The Securities and Exchange Commission yesterday accused Harbinger Capital Management and founder Philip Falcone of fraud—not once, but four times.
In a civil fraud lawsuit in the making since at least last year, the regulator accused Falcone of taking an improper loan from Harbinger to pay his taxes, of granting Goldman Sachs preferential redemption treatment and of market manipulation. The lawsuit also names the hedge fund and Peter Jenson, Harbinger's former chief operating officer.
The SEC also announced a settlement with Harbinger for "shorting into the deal," participating in three public offerings after having sold shares short during a restricted period." The regulator also said that it had settled with former Harbinger parent Harbert Management Corp. and two affiliates in the market-making case.
"Today's charges read like the final exam in a graduate school course in how to operate a hedge fund unlawfully," SEC enforcement chief Robert Khuzami said. "Clients and market participants alike were victimized as Falcone unscrupulously used fund assets to pay his personal taxes, manipulated the market for certain bonds, favored some clients at the expense of others, and violated trading rules intended to prohibit manipulative short sales."
Bruce Karpati, head of the SEC's asset management enforcement unit, added that Falcone was guilty of "raiding a fund for personal benefit" and then "lied to investors about what he had done."
Falcone did notify investors about the 2009 loan of $113.2 million, which came during a period when Harbinger had suspended redemptions, and which he has since repaid with interest. According to the SEC, Falcone declined to pursue other financing options and never sought investor consent for the deal, which Jenson helped structure. And he allegedly lied about his need for the loan and his hedge fund's ability to furnish it, among other things, including legal advice. While Falcone said his lawyers OKed, the deal, at least one consulted by the firm said it "will never be a good idea."
The SEC also accused Falcone of running an illegal short-squeeze on MAAX Holdings bonds from 2006 through 2008, to get "revenge" on one of his prime brokers, who was shorting the medical and veterinary device maker's debt. After buying up some 113% of an issue, he repaid his margin loan and then called in his prime broker's borrowed shares.
"After he took control of an entire issue of high-yield bonds, Falcone kept buying with an eye toward rigging the market and punishing short sellers to settle a score," Gerald Hodgkins of the SEC's enforcement division said. "In the process, Falcone hijacked the market for the bonds and illegally manipulated their price and availability."
"Falcone stated that he knew that the short position in the MAAX zips had created a 'long' position in excess of the issue size," the lawsuit alleges. "When the senior officer [of the prime broker] asked how he could possibly know this, Falcone stated that he was working the position himself and that he (i.e., Harbinger) had acquired approximately 190 million bonds. The senior officer and the other Wall Street firm personnel were stunned."
Finally, the SEC alleges that Harbinger allowed "certain favored investors"—reportedly Goldman—exemptions from its soon-to-be-imposed redemption restrictions in 2009. Those investors were able to pull $169 million from the firm in exchange for agreeing to back the redemption restrictions.
The SEC said it would seek disgorgement and fines against Falcone and Harbinger. It also wants Falcone barred from serving as an officer or director of a public company—as he does at wireless Internet venture LightSquared, Harbinger's largest holding. As part of its settlement of the Regulation M violations, Harbinger agreed to pay almost $1.4 million but did not admit or deny wrongdoing. Harbert and its affiliates agreed to pay $1 million.
Falcone, Harbinger and the SEC had been discussing a settlement of the other three charges since at least late last year, when the regulator sent Wells notices to the firm, Falcone and two employees who were not charged yesterday, indicating that an enforcement action was likely. But Falcone rejected a deal that would have included a multi-year ban from the securities industry.
Falcone and his lawyer said he will fight the SEC lawsuit. His lawyer, Matthew Dontzin, called the allegations "without merit."
The 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 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.
Jul 8 2014 | 10:48am ET
The surge in derivatives regulation is among the most complex challenges facing the financial services industry today. Northern Trust’s Joshua Satten recently spoke with FINalternatives to share insights into the challenges presented by new regulation and explore how the industry is responding. Read more…