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Philip Falcone

Jason Decrow, Associated Press

Hedge fund manger Philip Falcone to face 2-year ban, $18M fine

  • Article by: Patrick Kennedy
  • Star Tribune
  • May 9, 2013 - 7:23 PM

Philip Falcone, the Chisholm native who became a billionaire hedge fund manager with New York-based Harbinger Capital Partners Inc. and a one-third owner of the Minnesota Wild Hockey team, has reached an agreement in principle with the Securities and Exchange Commission (SEC) to settle civil fraud charges that he used fund money to pay his taxes and favored some clients over others.

According to terms of the settlement, which is subject to approval, the firm would pay penalties of approximately $18 million, $4 million of which would come from Falcone. In addition, Falcone would be banned for two years from acting as an investment adviser. The proposed settlement was disclosed in a Harbinger Group filing with the SEC Thursday.

The two-year ban does not prevent Falcone from continuing to manage the assets of Harbinger Capital and “expeditiously meet’’ redemption request from investors. To ensure that the firm meets redemptions as required, Harbinger Capital has agreed to the appointment of an independent monitor.

According a letter sent to investors Thursday, Harbinger Capital will propose five candidates for the position of independent monitor and the SEC will choose one from among those five.

Falcone can still remain as chairman and CEO of Harbinger Group, his publicly traded holding company. But would be not be allowed to perform any management functions at subsidiary companies that are investment advisers or make any recommendations “regarding the purchase or sale of securities’’ by those investment advisers.

In addition, Harbinger Group may not acquire any additional investment advisers during the duration of the ban.

The agreement must be formally approved by a majority of the SEC commissioners and also approved by the U.S. District Court in New York. The SEC had sued Falcone and Harbinger in June.

At that time, Minnesota Wild majority owner Craig Leipold issued a statement that said the accusations against Falcone “do not affect the Minnesota Wild in any way.”

In 2007, Harbinger bet against bonds that were used to finance risky subprime mortgages and posted huge gains when the bonds fell in value. But the firm began to struggle in 2008, and it tightened its rules about when and how much money investors could withdraw.

The SEC alleged in its lawsuit that from 2006 through early 2008, Falcone manipulated the market for high-yield, high-risk bonds issued by a company called Maax Holdings Inc. Using fund money, Falcone bought many of the bonds to shrink the supply on the market and drive up prices, the SEC asserted.

The SEC also said Falcone and Harbinger secretly gave some key investors in the fund the right to cash out of their holdings. In exchange, the favored investors gave Falcone and the fund permission to bar the other investors from being able to cash out, according to the SEC. It said that arrangement was hidden from Harbinger’s directors.

Last year, the SEC reached a settlement with Harbert Management Corp., a firm with ties to Harbinger. The SEC said Harbert had the power to control Falcone and Harbinger but failed to stop the bond manipulation scheme.

Harbert and two related firms agreed to pay a $1 million civil fine. They, too, neither admitted nor denied wrongdoing.

This story contains material from the Associated Press.

Patrick Kennedy • 612-673-7926

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