The settlement between CEO Philip Falcone of Harbinger Capital Partners and the Securities and Exchange Commission (SEC) was made without Harbinger admitting or denying any of the SEC allegations. The settlement is subject to approval by SEC commissioners and the U.S. District Court in New York. Terms of the settlement include:
• would be banned for two years from serving as an investment adviser.
• may continue to serve as CEO and chairman of Harbinger Group, his publicly traded holding company.
• may not perform any management functions at investment advisers.
• must pay $18 million in penalties ($4 million of which will come from Falcone).
• must satisfy all received redemption requests of investors in the Harbinger Capital funds.
• may not raise new capital or make capital calls from existing investors.
• will be subject to an independent monitor.
Hometown: Chisholm, Minn.
Family: married; twin daughters
Education: Bachelor of Arts degree in economics, Harvard University, 1984
Career history: Junk-bond trader, Kidder Peabody & Co., 1985-90; president, AAB Manufacturing, 1990-95; senior high-yield debt trader, First Union Capital Markets, 1995-97; head of high-yield trading, Gleacher Natwest, 1997-98; head of high-yield trading, Barclay’s Capital, 1998-2000; co-founded Harbinger Capital Partners Master Fund in 2001; chairman and CEO Harbinger Group Inc., 2009.
Favorite quote: “I can’t guarantee that if you work hard you will be successful, but I can guarantee that if you don’t work hard, you won’t be successful.”
Philip Falcone, firm agree to pay $18 million in fraud case
- Article by: David Phelps
- Star Tribune
- May 12, 2013 - 10:24 AM
Philip Falcone, the onetime Chisholm rink rat who became a billionaire hedge fund manager, has agreed along with his firm to pay $18 million to settle a year-old fraud lawsuit accusing Falcone of using other people’s money to pay his personal taxes and giving preferential treatment to certain investors.
The settlement with the Securities and Exchange Commission (SEC) was disclosed Thursday by Falcone’s Harbinger Group Inc., the parent of Harbinger Capital Partners — a fund that once managed as much as $26 billion in 2008 but had fallen to $9 billion two years later, according to the Wall Street Journal.
The proposed settlement highlights a stunning free fall for the Iron Ranger whose picture graced the pages of Vanity Fair magazine in a 2011 profile that compared Falcone, 50, and his wife, Lisa Maria, to characters in a real-life version of “The Great Gatsby.”
Under terms of the settlement with SEC, Falcone is barred for two years from acting as an investment adviser although he can still maintain his role as CEO and chairman of Harbinger Group, his publicly traded holding company.
Through a spokesman, Falcone had no comment on the matter Thursday. In its disclosure, Harbinger Capital Partners and its affiliates said that they entered the settlement “without admitting or denying” any of the SEC allegations. The settlement still needs to be approved by SEC commissioners and the U.S. District Court in New York.
Although Falcone left Minnesota after high school to attend Harvard before entering the world of Wall Street, he has maintained a Minnesota presence in recent years as a minority owner of the Minnesota Wild professional hockey team.
Falcone told the Star Tribune in a 2008 interview that he obtained a 35 percent stake in the team on the basis that “I figured if I can’t play in the NHL, then I might as well buy a team.”
In a statement Thursday, the team said: “Today’s news does not affect the Minnesota Wild in any way.”
Falcone made a fortune on Wall Street with an investment strategy in 2006 that foresaw the collapse of the housing market. He correctly bet that subprime mortgages would default and in 2007 Falcone’s fund had grown 114 percent and his personal return was $1.5 billion.
With that newfound wealth, Falcone and his wife started making their presence known in New York’s high society circles, starting with the 2008 purchase of a 27-room mansion that once belonged to Penthouse publisher Bob Guccione for which they promptly ordered $10 million in upgrades.
The Falcones were seen everywhere. New York magazine said the couple did everything “short of grabbing the sun and shining it upon themselves” to get attention.
But Falcone’s financial luster was tarnished when a three-year, $3 billion investment in a company that aimed to create a satellite-based network for 4G wireless service crumbled. The company, called LightSquared, ran into problems with the Federal Communications Commission because its signals interfered with GPS signals. Eventually, Sprint canceled its contract with LightSquared and the company filed for bankruptcy in May 2012.
The settlement revealed Thursday was in response to a 2012 lawsuit filed by the SEC.
The commission alleged that Falcone took a loan of $113 million from client money in 2009 to pay personal taxes. At the same time, about 60 percent of the fund’s investors had redemption requests pending.
The SEC suit also alleged that Falcone favored the redemption requests of select investors.
The two-year ban does not prevent Falcone from continuing to manage the assets of Harbinger Capital and “expeditiously meet’’ redemption requests from investors. To ensure that the firm meets redemptions as required, Harbinger Capital has agreed to the appointment of an independent monitor.
Falcone can still remain as chairman and CEO of Harbinger Group, his publicly traded holding company. But he would be not be allowed to perform any management functions at subsidiary companies that are investment advisers.
Matt Boos, a Fredrikson & Byron attorney in Minneapolis who handles SEC cases, said the penalties seemed “light.”
“I imagine Mr. Falcone is pleased with this result,” Boos said. “It wouldn’t surprise me if someone went to a hearing and found these actions — preferential treatment, using investor funds to pay taxes and market manipulation — that someone would face a lifetime industry ban.”
Star Tribune Staff Writer Patrick Kennedy contributed to this story.
David Phelps • 612-673-7269
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