Falcone Agrees to Five-Year Ban in Stiffer Deal With SECSaijel Kishan and Dave Michaels
For Philip Falcone, the price of hanging on to his dream of building a wireless broadband network is a new, tougher settlement with U.S. regulators that requires him to admit wrongdoing and bans him from the hedge-fund industry that made him a billionaire.
Falcone will be barred from the industry for at least five years, up from two years under a proposed deal rejected by the U.S. Securities and Exchange Commission in July, the regulator said yesterday. The earlier settlement didn’t force him or Harbinger Capital Partners LLC, his $3 billion firm, to admit any wrongdoing. In return, the agency is allowing him to continue running Harbinger Group Inc., a publicly traded company, as well as LightSquared Inc., a venture that is seeking to build a wireless broadband network.
The SEC accused Falcone, who rose to fame after betting against the U.S. housing market in 2006, of improperly borrowing money from his fund to pay his personal taxes and said he gave preferential treatment to some of his investors in returning their capital. The regulator also accused Falcone of engaging in a short squeeze of bonds held by a Canadian manufacturer.
“Falcone and Harbinger engaged in serious misconduct that harmed investors, and their admissions leave no doubt that they violated the federal securities laws,” Andrew Ceresney, co-director of the SEC’s enforcement division, said in yesterday’s statement. “Falcone must now pay a heavy price for his misconduct by surrendering millions of dollars and being barred from the hedge-fund industry.”
The bar from the securities industry will allow Falcone to liquidate his hedge funds under the supervision of an independent monitor, the SEC said. He and his New York-based firm will pay an $18 million fine, the same amount as called for in the original settlement.
That deal, proposed in May, was rejected two months later by the commission because it was too lenient, two people with knowledge of the matter said at the time.
In June, two months after being sworn in as SEC chairman, Mary Jo White said the agency would depart from a decades-old practice of settling cases without requiring defendants to admit to wrongdoing. The decision to seek such admissions would “turn on how much harm has been done to investors, how egregious is the fraud,” she said.
“I am pleased that we were able to reach a settlement to resolve these matters with the SEC,” Falcone said yesterday in an e-mailed statement. “I believe putting these issues behind me now is the best course of action for me and our investors. It will allow me to continue to focus on my permanent capital vehicles and maximizing the value of LightSquared for all stakeholders.”
Falcone has invested clients’ money in Reston, Virginia-based LightSquared, which last year filed for bankruptcy.
The settlement, in which the SEC described Falcone and his funds as acting “recklessly,” is pending approval by the U.S. District Court for the Southern District of New York.
The settlement marks the first use of the new policy under White to seek admissions of fault in some cases. At the same time, it doesn’t bar Falcone from working as an officer or director of a public company, and doesn’t include an injunction barring him from future violations of securities laws.
Ceresney said in May the SEC would better tailor injunctions to the misconduct observed in specific cases.
“So it’s possible there was more than the usual horse-trading in this settlement, where the SEC gave up some of its usual relief in exchange for setting the precedent for admissions of wrongdoing,” said Russell G. Ryan, a former SEC enforcement attorney and now a partner in Washington at King & Spalding LLP.
The agreement is a “step in the right direction” because it shows the SEC can carry out White’s policy, said James Cox, a professor at Duke University School of Law in Durham, North Carolina, who specializes in securities law. Banning Falcone from the industry for five years, instead of simply fining him, constitutes “real repercussions.”
“Where we are more likely to see cases like this are in the investment-adviser and broker-dealer, market-professional areas, where the damages are more confined and contained, and the fear of mega-liability and private suits is more limited,” Cox said.
The SEC said Falcone, 51, misappropriated investor assets when he took a $113 million loan in October 2009 from one of his funds to pay personal taxes. At that time, he had restricted his clients from pulling their money from that fund. 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 his $49 million Manhattan townhouse.
The same year that Falcone took out the loan, he let some large investors pull their money from his funds 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 fund investors, according to the SEC.
The agency 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 will continue his role as chief executive officer of Harbinger Group, the $1.28 billion public holding company he controls.
White and two Democratic commissioners last month voted against the proposed settlement because they were concerned the deal didn’t include a public-company ban, two people with knowledge of the matter said at the time, asking not to be named because the deliberations weren’t public.
The SEC agreed to settle the case without extracting that penalty because Falcone’s misconduct stemmed from his work as a registered investment adviser and not as a public-company director, another person familiar with the matter said yesterday.
Regulators also decided the bar from serving as a director wasn’t necessary because Falcone admitted to conduct that may serve as a warning to investors in his companies, the person said. Under the agreement, Falcone can assist with the liquidation of Harbinger’s hedge funds but can’t raise any new money.
Falcone has said 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.
Harbinger Group shares gained 2.9 percent yesterday to $8.95. They have gained 16 percent this year.
LightSquared filed for bankruptcy in May 2012, listing assets of $4.48 billion and debt of $2.29 billion. It sought bankruptcy protection to reorganize while seeking regulatory approval of its wireless spectrum. U.S. regulators blocked the service in 2012 after GPS-device makers and users -- including the U.S. military and commercial airlines -- said signals from LightSquared’s service would confound navigation gear.