SEC Rejects Settlement With Fund Manager Phil Falcone

by
The U.S. Securities and Exchange Commission voted to reject a deal its enforcement division had struck with once high-flying hedge fund manager Philip Falcone and his hedge fund Harbinger Capital Partners, according to a regulatory filing on Friday by Falcone's publicly traded company Harbinger Group Inc.

SEC Rejects Settlement With Fund Manager Phil Falcone

The U.S. Securities and Exchange Commission voted to reject a deal its enforcement division had struck with once high-flying hedge fund manager Philip Falcone and his hedge fund Harbinger Capital Partners, according to a regulatory filing on Friday by Falcone's publicly traded company Harbinger Group Inc.

The SEC has not released any public explanation of the decision, which the commission made in a closed-door meeting on Thursday. SEC spokesman Kevin Callahan did not respond to a request for comment.

But legal experts said the commission may have seen the settlement deal as showing Falcone too much leniency. The rejection of the settlement comes as SEC Chair Mary Jo White has said she intends to be more aggressive in dealing with settlements and to take more cases to trial.

"Consistent with Mary Jo White's approach to reorienting the commission's way of dealing with these matters, this was a settlement that in some ways was effective but in other ways would have allowed Mr. Falcone to have continued on with control over investor funds," said C. Evan Stewart, a partner at Zuckerman Spaeder who is not connected to the case.

"That mixed message really is why I thought it would not be well-received several months ago. It appears that consideration carried the day."

Falcone announced in May he would pay $18 million to settle two SEC lawsuits accusing him of market manipulation, giving preferential treatment to certain investors and borrowing cash from his own fund to pay his personal taxes.

The lawsuits were not filed against Harbinger Group Inc, the publicly traded investment company where Falcone is chairman and chief executive officer. They targeted his hedge fund Harbinger Capital Partners and other related funds.

Falcone manages roughly $3.1 billion in assets. He notified his hedge fund investors on Friday of the SEC's rejection in an email but did not provide any details beyond what was in Harbinger Group's regulatory filing, according to an investor in the fund who did not want to be identified due to fear of a reprimand from Falcone.

While the dollar amount of the settlement was relatively small, the deal would have required Falcone to return money to his hedge fund investors and would have effectively prohibited him from starting a new hedge fund for the next two years.

It would, however, have permitted Falcone to remain CEO of the Harbinger Group, a rare instance of leniency; such settlements usually include lifetime bans on being either a director or officer in a public company, according to legal experts.

"Historically it's uncommon for the commissioners to reject settlements," said Ron Geffner, a partner at Sadis & Goldberg who is not connected to the case. He said the commission could begin to reject deals more frequently.

"Since Madoff, and since the 2008 recession, Congress, other members of the government and the public have scrutinized the SEC's behavior and in terms of settlements or the outcome of certain lawsuits more than ever," he said.

Falcone's lawyer Matthew Dontzin did not immediately respond to a request for comment. Falcone did not respond to email and phone messages seeking comment.

In March, Forbes listed Falcone as having $1.2 billion in personal wealth.

The SEC's vote took place a week after Harbinger Capital's bankrupt wireless communications firm LightSquared Inc announced plans to go to trial with its lenders over whether Dish Network Chairman Charles Ergen's acquisition of big chunks of its loan debt violated an agreement pertaining to how LightSquared can restructure.

View Comments

Recommended For You