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Business News/ Companies / People/ Falcone agrees to 2-year bar in proposed SEC settlement

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Falcone agrees to 2-year bar in proposed SEC settlement

3 min read 09 May 2013, 10:33 PM IST

Harbinger Capital Partners LLC would pay about $18 million in disgorgement, interest

A file photo of Philip Falcone, chairman and CEO of Harbinger Group Inc. Photo: Jacob Kepler/Bloomberg (Jacob Kepler/Bloomberg) — A file photo of Philip Falcone, chairman and CEO of Harbinger Group Inc. Photo: Jacob Kepler/Bloomberg (Jacob Kepler/Bloomberg)

Washington: Philip Falcone , the billionaire hedge- fund manager sued by US 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. said on Thursday in a public filing. The agreement is subject to approval by SEC commissioners and a US 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.

Mr. Falcone’s and Harbinger Capital’s reputation and access to acquisition candidates is important to the execution of our business strategy, the company said in the filing. While we expect that Mr. Falcone will devote a portion of his time to our business, he is not required to commit his full time to our affairs and will allocate his time between our operations and his other commitments at his discretion.

Falcone, reached by e-mail on Thursday, declined to comment, as did Robin Roger, general counsel for Harbinger Capital Partners. John Nester , an SEC spokesman, also declined to comment.

Independent monitors

Harbinger will recommend five people to be independent monitors of the fund and the SEC will choose one candidate, according to a letter sent to investors on Thursday obtained by Bloomberg News. Harbinger has about $3 billion in assets under management, according to a person familiar with the matter.

The SEC accused Falcone of misappropriating client assets after he took a $113 million loan from his special situations fund to pay personal taxes when about 60% of the fund’s investors had unfulfilled redemption requests. While he knew in April 2009 that he would have a tax bill in the tens of millions of dollars, he continued to spend money on renovations of a $49 million townhouse once owned by Penthouse magazine publisher Bob Guccione.

Under the terms of the loan, Falcone was supposed to pay interest equal to the cost of capital for the fund. At that time, the fund was paying interest of 7% on an outstanding loan. Falcone paid 3.66%, the SEC said. The existence of the loans was first reported by Bloomberg News in September 2010

The same year that Falcone took out the loan, he let some large investors withdraw $169 million in return for their vote to approve a plan to restrict client redemptions from a different fund. Harbinger concealed these deals from the independent directors and from fund investors, the SEC said in the lawsuit.

The regulator also accused Falcone and two of his funds of engaging in a short squeeze of MAAX Holdings Inc . bonds, a transaction in which a buyer limits the supply of a security to drive up prices and cause losses for investors betting against the security.

Falcone, who had bought a large position in the bonds in April and June of 2006, was trying to retaliate against a Wall Street firm that was betting against MAAX bonds and encouraged clients to do the same, the SEC said.

Redemption requests

The Harbinger funds named in the SEC’s actions must take all actions reasonably necessary to satisfy all redemption requests from investors, the company said. During the two-year bar, certain funds may not raise new capital or make capital calls from existing investors.

The investigations have been a huge distraction for Falcone, so it’s probably a good move to put it behind him, said Larry Chiarello , a partner at SkyView Investment Advisors LLC in Shrewsbury, New Jersey, which places money with hedge funds. He said his firm doesn’t currently have investments with Falcone but has invested with him in the past.

You can almost always come back if you are a well-known guy like Phil, Chiarello said. He will always have a cadre of loyal investors. The worst-case scenario is that he just manages his own money. BLOOMBERG

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Published: 09 May 2013, 10:33 PM IST

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