In June 2012, the SEC filed a lawsuit against hedge fund adviser Philip Falcone and his advisory firm, Harbinger Capital Partners LLC, for alleged misappropriation of client assets, market manipulation, and betraying clients. Among other things, the SEC alleged that Falcone used hedge fund assets to pay his own taxes, conducted an illegal “short squeeze” to manipulate bond prices, secretly favored certain customers at the expense of others, and unlawfully bought equity securities in a public offering after having sold short the same security during a restricted period. The Enforcement Director at that time, Robert Khuzami, commented that the SEC's charges "read like the final exam in a graduate school course in how to operate a hedge fund unlawfully.”

According to a Form 10-Q that Harbinger Group filed yesterday, Falcone and several of the Harbinger entities involved in the lawsuit reached a settlement with the SEC last month. Most notably, the settlement bars Falcone for a period of two years "from acting as or being an associated person of any 'broker,' 'dealer,' 'investment adviser,' 'municipal securities dealer,' 'municipal adviser,' 'transfer agent,' or 'nationally recognized statistical rating organization.'" After two years, Falcone may ask the SEC to have the bar and injunction lifted. The settlement must still be approved by the Commission and by the federal court handling the case.

The terms of the settlement still permit Falcone to own and control Harbinger Group and serve as its CEO and Chairman of the board. In addition, the Harbinger entities neither admit nor deny any of the SEC's allegations under the agreement. However, under the settlement Harbinger Capital Partners:

must "expeditiously" satisfy all received redemption requests of investors in the Harbinger Capital funds;

may not raise new capital or make capital calls from existing investors for the duration of the bar;

must pay disgorgement, prejudgment interest, and civil penalties totaling approximately $18 million; and

must agree to oversight by an independent monitor for the duration of the bar.

DealBook reports that Falcone will personally pay $4 million of the $18 million penalty.

Topics