OLD Media Moves

Falcone reaches SEC agreement in inside baseball story

May 10, 2013

Posted by Liz Hester

In a made for New York-only story, hedge fund manger Phillip Falcone is settling with the Securities and Exchange Commission.

It’ll only cost him two years of his career. Here are some of the details from the Bloomberg story:

Philip Falcone, the billionaire hedge-fund manager sued by U.S. regulators over claims he improperly used client money to pay taxes, agreed to be barred from acting as an investment adviser in a proposed settlement.

In addition to the two-year ban, Falcone’s hedge fund Harbinger Capital Partners LLC would pay about $18 million in disgorgement, interest and penalties to resolve Securities and Exchange Commission claims filed in June, Harbinger Group Inc. (HRG) said today in a public filing. The agreement is subject to approval by SEC commissioners and a U.S. court.

The proposed settlement doesn’t bar Falcone, 50, from serving as an officer or director of a company, which means he can continue as chief executive officer and chairman of Harbinger, according to the filing. Still, during the two-year bar from the securities industry, Falcone can’t perform any management functions of Harbinger’s subsidiary advisers or make any recommendations about the purchase or sale of securities.

The Wall Street Journal added this bit of context to what his next role might entail:

The settlement marks a reversal of Mr. Falcone’s previous stance on the case. The hedge-fund manager had fought the charges and in February his lawyers argued in court for their dismissal, saying the SEC failed to show Mr. Falcone or his firm committed any illegal actions. Settlement talks started again in March, soon after the hearing of that motion to dismiss.

Although Mr. Falcone may after two years seek the SEC’s consent to have the ban lifted, the ban raises the hurdles he would face in resuming his career as a hedge-fund manager. Already, his investment firm is dealing with client redemptions that it has been having difficulty meeting, with billions of dollars tied up in a bankrupt wireless venture. He now faces two years of limitations on his ability to manage the hedge funds, along with additional constraints on his ability to oversee acquisitions by his publicly traded firm.

What’s more, investors in Harbinger funds are pushing for it to be wound down and their money returned to them, although they expect the process to drag on as Harbinger grapples with hard-to-sell assets, according to people involved in discussions with investors Thursday.

Mr. Falcone, meanwhile, has said he likes the idea of investing with a permanent pool of money that isn’t subject to requests for withdrawals by investors, as hedge funds are. Recently, he has been transitioning to more of a private-equity style of investment with acquisitions such as LightSquared Inc., the wireless-networking venture that has filed for bankruptcy.

Also as part of the settlement, the hedge-fund firm, Harbinger Capital, agreed to be overseen by a monitor, who will supervise the firm and ensure Harbinger is complying with the agreement, which includes provisions that his hedge-fund firm not raise capital or draw on certain capital commitments from existing investors.

The New York Times offered this description of his sins:

In one case, it accused Mr. Falcone of carrying out an illegal “short squeeze,” in effect, cornering the market in a particular category of bonds. Mr. Falcone, the S.E.C. said, “hijacked the market for the bonds and illegally manipulated their price and availability.”

In a separate action, the S.E.C. accused Mr. Falcone of allowing three unnamed banks and investment firms – Goldman SachsHSBC and Pamco, according to people close to the case – to withdraw funds from his hedge fund when others could not. In exchange for the special treatment, and in what the S.E.C. called a quid pro quo, the investors voted to allow Mr. Falcone to suspend other redemptions.

The S.E.C. also took aim at Mr. Falcone for taking a $113.2 million loan from his fund to pay his own tax bill in 2009. He borrowed the money, the S.E.C. said, at a time when the fund had blocked investor redemptions, and then kept the deal secret for five months.

Mr. Falcone’s lawyer, Matthew S. Dontzin, has argued that Mr. Falcone took the loan only after a prominent law firm signed off on the arrangement. The S.E.C. claimed, however, that Mr. Falcone hired the firm “to give the appearance of legality,” but kept the lawyers in the dark about some information.

Now I realize that Falcone is a huge name in finance and that this is a particularly juicy story for these national outlets. What I don’t understand is why all the ink being devoted to it since no one outside of high finance or major cities cares. It’s an inside baseball story, one that likely isn’t winning any readers for these publications.

It is interesting to note that the SEC seems to be continuing its enforcement actions under the new leadership, something many people outside New York are likely to applaud.

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