Falcone SEC Settlement Said Rejected by White as Too WeakJoshua Gallu, Zachary Tracer and Katherine Burton
The future of billionaire hedge-fund manager Philip Falcone was up in the air after a proposed $18 million settlement with the U.S. Securities and Exchange Commission was rejected by Chairman Mary Jo White as too lenient, according to two people with knowledge of the matter.
White, a former Wall Street defense lawyer, and Democrats Luis A. Aguilar and Elisse B. Walter, in a 3-to-1 vote, were concerned that Falcone wasn’t barred from serving as officer or director of a public company, said the people, asking not to be named because the deliberations aren’t public. The SEC informed Falcone’s Harbinger Capital Partners LLC of the decision yesterday, according to a filing from Harbinger Group Inc.
Under the agreement, Falcone would have been barred for two years from investing client money to settle claims that he improperly borrowed money from his fund to pay personal taxes. It would have allowed Falcone to remain chief executive officer of Harbinger Group, a company he modeled on Warren Buffett’s Berkshire Hathaway Inc. Harbinger disclosed the terms of the agreement on May 9, before the commission had voted on it and about one month after White was sworn in as SEC chairman, pledging to run a “bold and unrelenting” enforcement program.
“It is very unusual for the commission to reject the staff’s recommendation to settle a matter,” said Bradley Bondi, a former counsel to two SEC commissioners who is now a partner at law firm Cadwalader, Wickersham & Taft LLP. “The aggressive move may signal that the commission thinks more of its chances than the staff actually does, or that the proposed settlement is somehow insufficient to the commission, or some combination of both.”
White also questioned why the proposed settlement lacked an injunction, or an order not to violate securities laws, which is characteristic of most SEC settlements and can be used as a basis for future sanctions should the person not comply with the agreement, one of the people said.
SEC spokesman Kevin Callahan declined to comment.
Falcone’s Harbinger Capital hedge fund would have paid about $18 million in disgorgement, interest and penalties to resolve the SEC claims. The agreement wouldn’t have required Falcone to admit or deny the SEC’s allegations, according to the May filing.
The settlement would have ended, at least temporarily, a 12-year career as hedge-fund manager for Falcone, who made billions for investors and himself by betting against subprime mortgages in 2006, only to tie up much of clients’ money in a wireless phone company, LightSquared Inc., that last year filed for bankruptcy.
The SEC attorneys and Falcone can still reach an alternative agreement addressing the commissioners’ concerns. Any settlement agreed to by the commission would still need to be approved by the court.
“The SEC is showing more backbone than its staff, and that is a welcome reversal,” said Erik Gordon, a business and law professor at the University of Michigan in Ann Arbor. “If not for Falcone, at least for his investors, and all investors.”
Falcone, 51, said previously that he planned to move away from hedge-fund investing, where clients can pull out their money at regular intervals, and instead use Harbinger Group to finance long-term investments.
Falcone didn’t immediately return an e-mail and phone call seeking a comment.
None of the SEC’s actions were brought against Harbinger Group or its subsidiaries, according to the filing.