Philip A Falcone and his advisory firm Harbinger Capital Partners have agreed to pay USD18 million in disgorgement and penalties after admitting wrongdoing in a case brought by the US SEC.
The final judgement handed down by the Honourable Paul A Crotty, United States District Court Judge for the Southern District of New York, also bars Falcone from the securities industry for a minimum of five years.
The SEC filed enforcement actions in June 2012 alleging that Falcone improperly used USD113 million in fund assets to pay his personal taxes, secretly favoured certain customer redemption requests at the expense of other investors, and conducted an improper "short squeeze" in bonds issued by a Canadian manufacturing company. In the settlement papers filed with the court, Falcone and Harbinger admit to multiple acts of misconduct that harmed investors and interfered with the normal functioning of the securities markets.
On August 19, 2013, Falcone agreed to a settlement which requires him to pay USD6,507,574 in disgorgement, USD1,013,140 in prejudgment interest, and a USD4 million penalty. The Harbinger entities are required to pay a USD6.5 million penalty. Falcone also consented to the entry of a judgment barring him from association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognised statistical rating organisation with a right to reapply after five years. The bar will allow him to assist with the expeditious satisfaction of investor redemption requests under the supervision of an independent monitor.
Among the set of facts that Falcone and Harbinger admitted to in settlement papers filed with the court:
• Falcone improperly borrowed USD113.2 million from the Harbinger Capital Partners Special Situations Fund (SSF) at an interest rate less than SSF was paying to borrow money, to pay his personal tax obligation, at a time when Falcone had barred other SSF investors from making redemptions, and did not disclose the loan to investors for approximately five months.
• 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.
• 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 Financial Services Firm settle its outstanding transactions in the bonds and deliver the bonds that it owed. Defendants did not disclose at the time that it would be virtually impossible for the Financial Services 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 Falcone's and the other Defendants' improper interference with the normal interplay of supply and demand in the bonds, the bonds more than doubled in price during this period.