Falcone’s Harbinger to Halt Withdrawals as SEC May Sue Fund

Philip Falcone of Harbinger Capital Partners LLC
Falcone testifies at a House Oversight hearing in Washington. LightSquared is backed by Falcone’s Harbinger Capital Partners LLC hedge fund. Photographer: Brendan Smialowski/Bloomberg

Billionaire Philip Falcone’s hedge fund, Harbinger Capital Partners LLC, was told it may be sued by federal regulators for securities-law violations and said it plans to halt investor withdrawals at year-end.

Falcone, 49, as well as fund executives Omar Asali and Robin Roger, the general counsel, also received Wells Notices from the staff of the U.S. Securities and Exchange Commission, Harbinger said in a client letter today.

The threat of a lawsuit adds to woes for Falcone as assets at his $5.7 billion hedge fund have slumped from a peak of $26 billion three years ago and a wireless technology venture he’s backing faces regulatory hurdles. Harbinger is being probed by the SEC and the U.S. Attorney’s office over a $113 million loan Falcone took from one of his funds. The investigation also looked into possible preferential treatment of some investors, two people with knowledge of the probe said last year.

“Harbinger went from being a well-regarded fund to one that is potentially toxic for institutional investors,” said Peter Rajsingh, a managing member of Castellar Partners LLC, a New York-based firm that advises clients on investing in hedge funds. “It’s unfortunate; the compounding factors here will make it an uphill battle” for Falcone, he said.

The SEC’s notices relate to alleged “violations of the federal securities laws’ anti-fraud provisions in connection with matters previously disclosed and an additional matter regarding the circumstances and disclosure related to agreements with certain fund investors,” the New York-based hedge fund said.

Halting Withdrawals

Harbinger said it “anticipates” withdrawals from its main hedge fund will be suspended effective Dec. 30, according to a letter sent to clients today.

Harbinger “believes that the decision to temporarily suspend withdrawals is necessary when balancing the preservation of value for all Feeder Fund investors,” the firm said.

Harbinger three years ago curbed client withdrawals from its biggest fund in the aftermath of the 2008 bankruptcy of Lehman Brothers Holdings Inc. Falcone segregated hard-to-sell assets into another fund and told clients it would take as long as two years for them to get their money back.

Goldman’s Investment

The Wells Notices relate to an SEC investigation into whether Harbinger allowed some clients, including Goldman Sachs Group Inc., to withdraw money while barring others, the Wall Street Journal reported today, citing unidentified people familiar with the matter.

Goldman Sachs had $1 billion invested for clients in two Harbinger funds at the end of 2008, three people briefed on the matter said last year.

Asali, who joined the firm in 2009 to oversee global portfolio strategy and portfolio analytics, as well as assume certain risk management duties, was previously co-head of Goldman Sachs Hedge Fund Strategies. He is also vice chairman of Spectrum Brands Holdings Inc.

Andrea Raphael, a spokeswoman for New York-based Goldman Sachs, and Lew Phelps, a spokesman for Harbinger, declined to comment.

Falcone has said in the past that allegations of preferential treatment of some clients were “completely and utterly untrue.” He disclosed the loan, which was used to pay personal taxes, in the Special Situation Fund’s March 2010 financial statements.

Paying in Shares

Instead of returning cash to investors, Falcone paid investors by giving them non-tradable shares of LightSquared Inc., his wireless telecommunications venture.

The company faces challenges from makers of global-positioning system devices who say the service will disrupt navigation by cars, boats, tractors and planes. The service caused interference to 75 percent of GPS receivers examined in a U.S. government test, according to a draft summary of results released today.

“Harbinger and its affiliates are disappointed that the staff issued Wells Notices,” the firm said in today’s filing. “If the SEC decides to bring an enforcement action,” they “intend to vigorously defend against it.”

John Nester, a spokesman for the SEC in Washington, declined to comment.

Harbinger told clients in April that the government was looking into whether it had engaged in market manipulation in its trading of the debt securities of an undisclosed firm from 2006 and 2008. Investigators were also examining a potential violation of a rule prohibiting investors from selling short a stock within five business days of a secondary offering and then buying shares in that offering, the firm said then.

Harvard Graduate

Short-sellers bet on a decline in price, borrowing and selling shares with the aim of buying them back later for less to pocket the difference.

The Wells Notices “do not constitute a determination” that the firm has violated any laws, Harbinger said in today’s letter. Rather, the notices reflect “the current views” of the SEC enforcement staff.

Harbinger said the Wells Notices were not addressed to Harbinger Group Inc., the publicly traded holding company controlled by Falcone, or any of its subsidiaries, including Spectrum, and did not affect the hedge fund’s investment in LightSquared.

Falcone, a 1984 graduate of Harvard University in Cambridge, Massachusetts, started Harbinger in 2001. Before that, he ran distressed-debt trading at Barclays Capital, the investment-banking unit of London-based Barclays Plc.