Philip Falcone, the billionaire hedge-fund manager who founded Harbinger Capital Partners, LLC, has been sued by the U.S. Securities and Exchange Commission. It was contended that Falcone misappropriated client assets, favored certain investors over others, and illegally manipulated bond prices. The SEC is seeking disgorgement of ill-gotten gains, unspecified financial penalties, and a bar prohibiting Falcone from serving as an officer or director of any public company, according to a statement by the agency. The SEC has settled with Harbert Management Corp., a Birmingham investment firm, which was formerly affiliated with Falcone. SEC Enforcement Director Robert Khuzami said in a statement:
Today’s charges read like the final exam in a graduate course in how to operate a hedge fund unlawfully. Clients and market participants alike were victimized as Falcone unscrupulously used fund assets to pay his personal taxes, manipulated the market for certain bonds, favored some clients at the expense of others, and violated trading rules intended to prohibit manipulative short sales.
The SEC action is the second blow in less than two months for Falcone, who built a $26 billion hedge fund by 2008 with a successful bet against subprime mortgages. Having suffered $23 billion in losses and withdrawals from the peak, Falcone is now in a battle, fighting to keep control of his empire. LightSquared Inc., Harbinger Capital’s biggest investment, filed for bankruptcy in May. Falcone in 2009 took out a $113 million loan from his Special Situations fund to pay personal taxes. The loan was disclosed in the fund’s annual financial statement the following March.
At the time Falcone borrowed the money, clients were barred from pulling money from the fund. Falcone subsequently repaid the loan with interest. That same year, with client capital locked up, Harbinger, according to reports, allowed Goldman Sachs Group, Inc., which at the end of 2008 had $1 billion invested in two Harbinger funds, to redeem some money from the firm. In April 2011, Harbinger told clients that the government was looking into whether it had engaged in market manipulation in its trading of the debt securities of an undisclosed company from 2006 to 2008. The company whose debt Harbinger traded was said to be MAAX Holdings, a Canadian maker of bathroom fixtures.
Source: The Birmingham News
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