Falcone said to face SEC lawsuit

Philip Falcone, the billionaire founder of Harbinger Capital Partners, faces a lawsuit from U.S. regulators as soon as this week over claims he improperly borrowed client money from his hedge fund to pay his taxes, according to two people familiar with the matter.

Falcone, 49, a native of Chisholm, Minn., may also face claims that he gave preferential treatment to Goldman Sachs Group Inc., an investor in his fund, and manipulated markets when trading bonds of MAAX Holdings Inc., said the people, who asked not to be identified. The Securities and Exchange Commission voted to authorize enforcement staff to file the case, the people said. A spokeswoman for the SEC declined to comment.

"Any allegations by the SEC of improprieties by Mr. Falcone or Harbinger are neither supported by the facts or the law," said Matthew Dontzin, an attorney for Falcone.

The SEC action is the second blow in less than two months for Falcone, who built a $26 billion hedge fund by 2008 with a successful bet against subprime mortgages. Having suffered $23 billion in losses and withdrawals from the peak, Falcone is now fighting to keep control of his empire. LightSquared Inc., Harbinger Capital's biggest investment, filed for bankruptcy in May.

The SEC is set to sue after Falcone in 2009 took out a $113 million loan from his Special Situations fund to pay personal taxes. The loan was disclosed in the fund's annual financial statement the following March. At the time he borrowed the money, clients were barred from pulling money from the fund. Falcone later repaid the loan with interest.

That same year, with client capital locked up, Harbinger allowed Goldman Sachs, which at the end of 2008 had $1 billion invested in two Harbinger funds, to redeem some money from the firm, said one of the people with knowledge of the SEC's plan.

"He's in a very tough spot," said Ronen Schwartzman, founder of Ten Capital Advisors, a New York firm that advises clients on investing in hedge funds. "It's going to be difficult for him to raise money from investors ever again."