The Securities and Exchange Commission has filed fraud charges against New York-based hedge fund adviser Philip A Falcone (pictured) and his advisory firm, Harbinger Capital Partners LLC for illicit conduct that included misappropriation of client assets, market manipulation, and betraying clients.
The SEC also charged Peter A Jenson, Harbinger’s former Chief Operating Officer, for aiding and abetting the misappropriation scheme. Additionally, the SEC reached a settlement with Harbinger for unlawful trading.
In a separate, settled action, the SEC charged Harbert Management Corporation, whose affiliates served as the managing members of two Harbinger-related entities, as a controlling person in the market manipulation.
The SEC alleges that Falcone used fund assets to pay his taxes, conducted an illegal “short squeeze” to manipulate bond prices, secretly favoured certain customers at the expense of others, and that Harbinger unlawfully bought equity securities in a public offering, after having sold short the same security during a restricted period.
“Today’s charges read like the final exam in a graduate school course in how to operate a hedge fund unlawfully,” says Robert Khuzami, Director of the SEC’s Division of Enforcement. “Clients and market participants alike were victimised as Falcone unscrupulously used fund assets to pay his personal taxes, manipulated the market for certain bonds, favoured some clients at the expense of others, and violated trading rules intended to prohibit manipulative short sales.”
The SEC filed actions in US District Court for the Southern District of New York against Falcone, Jenson, and Harbinger, and, in connection with the illegal trading scheme, separately instituted and settled administrative and cease-and-desist proceedings against Harbinger.
In particular, the SEC alleges that:
Falcone fraudulently obtained USD113.2 million from a hedge fund that he advised and misappropriated the proceeds to pay his personal taxes;
Falcone and two Harbinger investment managers through which Falcone operated manipulated the price and availability of a series of distressed high-yield bonds by engaging in an illegal “short squeeze;”
Falcone and Harbinger secretly offered and granted favourable redemption and liquidity rights to certain strategically-important investors in exchange for those investors’ consent to restrict redemption rights of other fund investors, and concealed the arrangement from the fund’s directors and investors; and
Harbinger engaged in illegal trades in connection with the purchase of common stock in three public offerings after having sold the same securities short during a restricted period.
“Not only are hedge fund managers expected to be savvy investors, they are supposed to serve the interests of their clients. Here, in addition to raiding a fund for personal benefit and cutting secret deals with favored investors, Falcone then lied to investors about what he had done,” says Bruce Karpati, Chief of the Asset Management Unit in the SEC’s Division of Enforcement.
Describing the illegal short squeeze, Gerald W Hodgkins, Associate Director of the SEC’s Division of Enforcement, says: “After he took control of an entire issue of high-yield bonds, Falcone kept buying with an eye toward rigging the market and punishing short sellers to settle a score. In the process, Falcone hijacked the market for the bonds and illegally manipulated their price and availability. The Division will continue to police the bond market to make sure it operates as an efficient market, free of the corrosive effects of manipulators such as Falcone.”