SEC Charges New York-based Hedge Fund Adviser Philip A. Falcone With Securities Fraud

SEC v. Harbinger Capital Partners LLC; Philip A. Falcone; and Peter A. Jenson, Case No. 12-CV-5028 (S.D.N.Y.); SEC v. Philip A. Falcone; Harbinger Capital Partners Offshore Manager, LLC; and Harbinger Capital Partners Special Situations GP, LLC, Case No. 12-CV-5027 (S.D.N.Y.); SEC v. Harbert Management Corporation; HMC-New York, Inc.; and HMC Investors, LLC, Case No. 12-CV-5029 (SDNY); SEC v. Harbinger Capital Partners LLC, Admin. Proc. No. 34-67279.  On June 28, 2012, the SEC filed fraud charges against New York-based hedge fund adviser Philip A. Falcone and his firm, Harbinger Capital Partners LLC.  According to the SEC, Falcone used fund assets to pay his taxes, conducted an illegal “short squeeze” to manipulate bond prices, and secretly favored certain customers over others.  In addition, Harbinger unlawfully bought equity securities in a public offering. 

In 2009 Falcone owed federal and state authorizes $113.2 million in taxes.  Instead of pledging his personal assets as collateral for a bank loan, Falcone took a loan from the Harbinger Capital Partners Special Situation Fund, L.P. – the same fund from which Harbinger had earlier suspended investors from redeeming.  The transfer was authorized by Falcone himself and structured by Jensen.  Consent from investors prior to using the fund’s assets was never sought.

In a separate civil action, the SEC alleges that from 2006 to 2008 Falcone and two Harbinger investment management entities manipulated the market by constricting the supply of a security, through large purchases of other means, with the intent of forcing settlement from short sellers. Harbinger purchased a large amount of high-yield bonds issued by MAAX Holdings Inc. during April and June 2006.  After rumors of a Wall Street financial service shorting the MAAX bonds, Falcone directed the Harbinger-managed funds to buy every available bond in the market, which allowed Falcone to raise the funds’ stake to approximately 13 percent more than the available supply of the MAAX bonds.  Once in control of the MAAX bonds, Falcone forced the Wall Street firm and its customers to settle their outstanding MAAX short sales.  The bonds quickly doubled in price due to the Wall Street firm’s bids.  Falcone then participated in a series of transactions with certain short sellers at arbitrary, inflated prices, meanwhile valuing the funds’ holdings on his books at a small fraction of the prices he charged.

Falcone and Harbinger also engaged in unlawful preferential redemptions in order to benefit certain investors.  In 2009, Falcone and Harbinger secretly exempted certain “strategically important” investors from soon-to-be imposed liquidity restrictions – if those investors voted to approve restrictions.  Pursuant to the “vote buying” agreements, those investors were allowed to withdraw a total of approximately $169 million.  Harbinger concealed these arrangements from the independent directors and fund investors.

In yet another separate proceeding, the SEC found that Harbinger violated Rule 105 of Regulation M of the Securities Exchange Act of 9134, which is an anti-manipulation rule that prohibits short selling securities during a restricted period and then purchasing the same securities in a public offering.  Due to this violation, Harbinger is censured and required to cease and desist from committing or causing future violations.  Harbinger will disgorge $857,950, $91,838 in prejudgment interest, and pay a civil monetary penalty of $428,975.  Harbinger consented to the issuance of the Order with admitting or denying the allegations.

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