Trouble escalates for Iron Range native's hedge fund

  • Article by: SAIJEL KISHAN , Bloomberg News
  • Updated: December 9, 2011 - 10:23 PM

Philip Falcone's Harbinger Capital Partners may be sued by feds.

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Hedge fund manager Philip Falcone in 2008

Photo: Jason Decrow, Associated Press

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Billionaire Philip Falcone's hedge fund, Harbinger Capital Partners LLC, was told it may be sued by federal regulators for securities-law violations and said it plans to halt investor withdrawals at year-end.

Falcone, a 49-year-old native of Minnesota's Iron Range, received what is known as a Wells Notice from the staff of the U.S. Securities and Exchange Commission, as did other Harbinger employees, the firm said in a filing Friday.

A lawsuit would add to the woes of Falcone, as assets at his $5.7 billion hedge fund have slumped from a peak of $26 billion three years ago and a wireless technology venture he's backing faces regulatory and political hurdles.

Harbinger is being investigated by the SEC and the U.S. Attorney's office over a $113 million loan Falcone took from one of his funds to pay personal taxes, according to a July filing. "Harbinger went from being a well-regarded fund to one that is potentially toxic for institutional investors," said Peter Rajsingh, a managing member of Castellar Partners LLC, a New York-based firm that advises clients on investing in hedge funds. "It's unfortunate. The compounding factors here will make it an uphill battle for him."

The SEC's notices relate to alleged "violations of the federal securities laws' anti-fraud provisions in connection with matters previously disclosed and an additional matter regarding the circumstances and disclosure related to agreements with certain fund investors," the New York-based hedge fund said.

Harbinger told clients in April that the government was looking into whether it had engaged in market manipulation in its trading of the debt securities of an undisclosed firm from 2006 and 2008.

"Harbinger and its affiliates are disappointed that the staff issued Wells Notices," the firm said in today's filing. "If the SEC decides to bring an enforcement action," they "intend to vigorously defend against it."

John Nester, a spokesman for the SEC in Washington, declined to comment.

Vanity Fair reported this year that Falcone owns a 25,725-square-foot, 27-room mansion right off 5th Avenue in New York.

But Falcone was born in Chisholm, on Minnesota's Iron Range, where he was an avid hockey player.

He went on to play hockey at Harvard, and has been a minority owner and board member of Minnesota Sports and Entertainment, parent of the Minnesota Wild hockey team, since 2008.

Falcone started Harbinger in 2001. Before that, he ran distressed-debt trading at Barclays Capital.

Harbinger said it "anticipates" withdrawals from some of its hedge funds to be suspended effective Dec. 30, according to a letter sent to clients Friday.

Investor impact

Three years ago, Harbinger curbed client withdrawals from its biggest fund in the aftermath of the 2008 bankruptcy of Lehman Brothers Holdings Inc. Falcone segregated hard-to-sell assets into another fund and told clients it would take as long as two years for them to get their money back.

Instead of returning cash, Falcone paid some of his investors by giving them non-tradable shares of LightSquared Inc., his wireless telecommunications venture. The firm faces challenges from makers of global-positioning system devices who say the service will disrupt navigation by cars, boats, tractors and planes.

The government probe into alleged market manipulation by Harbinger also involved a potential violation of a rule prohibiting investors from selling short a stock within five business days of a secondary offering and then buying shares in that offering. That investigation started in January 2010.

Star Tribune staff writer Jennifer Bjorhus contributed to this report.

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