Hedge fund billionaire Philip Falcone and his firm Harbinger Capital Partners is facing a securities fraud complaint from the Securities and Exchange Commission (SEC).
The Commission’s 28-page lawsuit alleged that Falcone illegally borrowed $113 million from one of his hedge funds to pay for his personal taxes despite a warning from a law firm that it was a bad idea. The SEC also claimed that his firm favored certain investors like Goldman Sachs Group, Inc. (NYSE:GS) to cash out its investments while restricting others. In addition, Falcone was also accused of manipulating the market price of particular bonds and stocks.
Robert Khuzami, director of SEC division of enforcement said, “Today’s charges read like the final exam in a graduate school course in how to operate a hedge fund unlawfully. Clients and market participants alike were victimized as Falcone unscrupulously used fund assets to pay his personal taxes, manipulated the market for certain bonds, favored some clients at the expense of others, and violated trading rules intended to prohibit manipulative short sales.”
Falcone denied all the allegations of the Commission. According to him, he did not commit any irregularity in his transactions and he vowed that he will contest the legal charges “vigorously.” Last December, the SEC issued a Wells Notice to Falcone and Harbinger Capital Partners indicating an enforcement action after failing to reach a settlement agreement with the Commission. The SEC wants to implement a multi-year ban on Harbinger within the securities industry, but the firm rejected it.
The lawsuit is a new addition to Falcone’s financial troubles. Earlier this year, Falcone’s Lightsquared filed for bankruptcy after regulators disapproved the company’s plan to build a 4G network due to concerns over interference on global positioning systems. Falcone’s investment on LighSquared resulted a 47 percent loss on Harbinger. The firm’s assets declined from $26 billion to $3 billion.
UPDATE 2:17PM EST: An earlier version of this article stated that the lawsuit was against Harbinger Group Inc (NYSE:HRG), a holding company. The article has been amended to the correct name, Harbinger Capital Partners, a privately held hedge fund.