SEC rejects $18m Falcone settlement

Move is sign of a more aggressive approach to enforcing securities laws

The Securities and Exchange Commission has thrown out a proposed deal to resolve allegations that Philip Falcone and his hedge fund Harbinger Capital Partners misused customer funds to pay taxes, manipulated markets and unfairly favoured certain clients.

Rejection of the $18m settlement is a further setback for the flamboyant Mr Falcone, a regular on the New York social circuit with his wife Lisa Marie, and a sign of a new and more aggressive approach to enforcement of securities laws by the SEC under its new chairman, Mary Jo White.

Once one of the world’s most powerful investors – having attempted to upend the broadband industry with a new satellite communications network – Mr Falcone has seen investors flee his funds and creditors circle his LightSquared satellite venture in bankruptcy court.

Mr Falcone said in May that he had reached agreement with staff in the SEC’s enforcement division to pay $18m to settle two civil actions without admitting or denying wrongdoing.

The investor also agreed to a two-year bar from acting as an investment adviser, raising new funds or making capital calls on existing investors, but was allowed to continue serving as chairman and chief executive of the listed Harbinger Group.

However, the deal required approval by a majority of the SEC’s five commissioners, and Mr Falcone disclosed in a regulatory filing on Friday that the SEC “voted not to approve the previously disclosed agreement”.

Harbinger and the SEC declined to comment.

The no vote is the first public rejection of a staff recommendation under Ms White, a former federal prosecutor who for the past decade has also defended financial institutions as an attorney in private practice.

Since she was sworn in this year, Ms White has vowed to be tough on financial crimes.

The SEC’s enforcement directors last month said that they would consider altering a decades-long policy to require some defendants to admit wrongdoing when they had engaged in “egregious misconduct”.

Once the manager of more than $25bn in client assets, Mr Falcone suffered heavy losses in the financial crisis, which also forced him to restrict client withdrawals.

Assets under management dwindled to $3bn in a handful of illiquid legacy assets, mainly related to the now bankrupt LightSquared.

The SEC alleged that Mr Falcone conducted an improper “short squeeze” to manipulate the prices of distressed high-yield bonds. Market participants use short squeezes to push up the price of a security, forcing investors who have bet that a security will fall to close out their short positions.

Regulators also alleged that Mr Falcone gave certain “strategically important investors” preferential treatment on redemptions in return for their support in backing tougher redemption restrictions for investors in a second fund.

They further accused him of improperly taking a $113.2m loan from his Special Situations fund to cover personal tax obligations at a time when he had barred investors from cashing out of the fund.

Mr Falcone has maintained he repaid the loan with interest.

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A victory for common sense in the Falcone case

The admission of wrongdoing by Philip Falcone, pictured left, and his hedge fund Harbinger Capital Partners, along with a five-year ban from the securities industry, is a step in the right direction for the Securities and Exchange Commission.

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