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From Securities Regulation Daily, August 19, 2013

Falcone and Harbinger Capital settle SEC enforcement action with admission of misconduct, court approval pending

By Jim Hamilton, J.D., LL.M.

Hedge fund adviser Philip Falcone and his advisory firm Harbinger Capital Partners have agreed to settle an SEC enforcement action and admit to multiple acts of misconduct that harmed investors and interfered with the normal functioning of the securities markets. Under the settlement, they must pay more than $18 million, and the hedge fund adviser agreed to be barred from the securities industry for at least five years. The bar will allow him to assist with the liquidation of his hedge funds under the supervision of an independent monitor. The settlement, which must be approved by the U.S. District Court for the Southern District of New York, requires Falcone to pay $6,507,574 in disgorgement, $1,013,140 in prejudgment interest, and a $4 million penalty (SEC v. Falcone, August 16, 2013,

Falcone and Harbinger engaged in serious misconduct that harmed investors, and their admissions leave no doubt that they violated the federal securities laws, said Andrew Ceresney, Co-Director of the Division of Enforcement. The SEC official emphasized that Falcone must now pay a heavy price for his misconduct by surrendering millions of dollars and being barred from the hedge fund industry.

Background. The SEC filed enforcement actions in June 2012 alleging that Falcone improperly used $113 million in fund assets to pay his personal taxes, secretly favored certain customer redemption requests at the expense of other investors, and conducted an improper short squeeze in bonds issued by a Canadian manufacturing company.

Admissions of improper conduct. Among the set of facts that Falcone and Harbinger admitted to in settlement papers filed with the court were that he improperly borrowed $113.2 million from the Harbinger Capital Partners Special Situations Fund, at an interest rate less than the fund was paying to borrow money, to pay his personal tax obligation, at a time when he had barred other fund investors from making redemptions and that he did not disclose the loan to investors for approximately five months. Also admitted was the fact that Falcone and Harbinger granted favorable redemption and liquidity terms to certain large investors in HCP Fund I and did not disclose certain of these arrangements to the fund’s board of directors and the other fund investors.

It was also admitted that, during the summer of 2006, Falcone heard rumors that a financial services firm was shorting the bonds of the Canadian manufacturer and encouraging its customers to do the same. In September and October 2006, Falcone retaliated against the financial services firm for shorting the bonds by causing the Harbinger funds to purchase all of the remaining outstanding bonds in the open market.

Falcone and the other defendants then demanded that the firm settle its outstanding transactions in the bonds and deliver the bonds that it owed without disclosing at the time that it would be virtually impossible for the firm to acquire any bonds to deliver, as nearly the entire supply was locked up in the Harbinger funds’ custodial account and the Harbinger funds were not offering them for sale. Due to this improper interference with the normal interplay of supply and demand in the bonds, the bonds more than doubled in price during this period.

Earlier filing. According to a Form 8-K filed on July 19, 2013, by Harbinger Group Inc., the SEC voted to reject an agreement in principle between its own enforcement staff, the Harbinger Capital Partners LLC (HCP) hedge fund and Falcone regarding the settlement of two civil actions filed by the SEC. The filing said the Commission’s vote to reject the settlement took place on July 18, 2013.

The case is 12 Civ. 5028 (PAC).

Attorneys: Bridget M. Fitzpatrick for SEC. David A. Fleissig (Dontzin Nagy & Fleissig LLP) for Philip A. Falcone. Eric S. Goldstein (Paul, Weiss, Rifkind, Wharton & Garrison LLP) for Harbinger Capital Partners Offshore Manager, LLC and Harbinger Capital Partners Special Situations GP, LLC.

Companies: Harbinger Capital Partners Offshore Manager, LLC; Harbinger Capital Partners Special Situations GP, LLC

MainStory: TopStory Enforcement FraudManipulation NewYorkNews

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