Commission chairwoman White said the terms of the deal were too lenient.
Philip A. Falcone, senior managing director of Harbinger Capital Partners, testifies during a House Committee on Oversight and Government Reform hearing on Capitol Hill in Washington, D.C., U.S., on Thursday, Nov. 13, 2008. Hedge-fund managers, in a rare appearance before Congress, defended their industry's practices and profits while splitting over whether the U.S. should impose stricter regulations.
The future of billionaire hedge-fund manager Philip Falcone was up in the air after a proposed $18 million settlement with the Securities and Exchange Commission was rejected by its chairwoman, Mary Jo White, as too lenient, according to two people with knowledge of the matter.
White, a former Wall Street defense lawyer, and Democrats Luis Aguilar and Elisse Walter, in a 3-1 vote, were concerned that Falcone wasn’t barred from serving as officer or director of a public company, said the sources, asking not to be named because the deliberations aren’t public. The SEC informed Falcone’s Harbinger Capital Partners of the decision Thursday, according to a filing from Harbinger Group Inc.
Under the agreement, Falcone would have been barred for two years from investing client money to settle claims that he improperly borrowed money from his fund to pay personal taxes. It would have allowed Falcone to remain chief executive officer of Harbinger Group, a company he modeled on Warren Buffett’s Berkshire Hathaway Inc.
Falcone grew up in Chisholm, Minn., where hockey was a way of life, and his prowess on the ice landed him at Harvard University, where he skated on the varsity squad and majored in economics.
His Iron Range roots were never far away from Falcone as he maintained his association with hockey as a minority owner of the Minnesota Wild.
But Falcone also thrived in the New York limelight as he made a fortune predicting the collapse of the subprime mortgage market and subsequently made headlines for a bounteous lifestyle.
On May 9, Harbinger disclosed the terms of the agreement before the commission had voted on it and about one month after White was sworn in as SEC chairwoman, pledging to run a “bold and unrelenting” enforcement program.
“It is very unusual for the commission to reject the staff’s recommendation to settle a matter,” said Bradley Bondi, a former counsel to two SEC commissioners who is now a partner at law firm Cadwalader, Wickersham & Taft. “The aggressive move may signal that the commission thinks more of its chances than the staff actually does, or that the proposed settlement is somehow insufficient to the commission, or some combination of both.”
White also questioned why the proposed settlement lacked an injunction, or an order not to violate securities laws, which is characteristic of most SEC settlements and can be used as a basis for future sanctions should the person not comply with the agreement, one of the sources said.
SEC spokesman Kevin Callahan declined to comment.
Falcone’s Harbinger Capital hedge fund would have paid about $18 million in disgorgement, interest and penalties to resolve the SEC claims. The agreement wouldn’t have required Falcone to admit or deny the SEC’s allegations, according to the May filing.
The settlement would have ended, at least temporarily, a 12-year career as hedge-fund manager for Falcone, who made billions for investors and himself by betting against subprime mortgages in 2006, only to tie up much of his clients’ money in a wireless phone company, LightSquared Inc., that last year filed for bankruptcy.
The SEC attorneys and Falcone can still reach an alternative agreement addressing the commissioners’ concerns. Any settlement agreed to by the commission would still need to be approved by the court.
“The SEC is showing more backbone than its staff, and that is a welcome reversal,” said Erik Gordon, a business and law professor at the University of Michigan. “If not for Falcone, at least for his investors, and all investors.”
Falcone, 51, said previously that he planned to move away from hedge-fund investing, where clients can pull out their money at regular intervals, and instead use Harbinger Group to finance long-term investments.