Falcone Down: Hedge-Fund Titan Settles With SEC, Faces Wall Street Ban

The settlement requires Falcone to admit wrongdoing and pay $18 million

  • Share
  • Read Later
Steve Marcus / REUTERS

Philip Falcone, chief executive officer and chief investment officer for Harbinger Capital Partners, participates in a panel discussion during the Skybridge Alternatives Conference in Las Vegas on May 9, 2012

Billionaire hedge-fund manager Phil Falcone has admitted to “multiple acts of misconduct” that harmed investors and has agreed to pay more than $18 million as part of a deal to settle U.S. Securities and Exchange Commission charges. Falcone, a colorful figure on Wall Street who once managed $26 billion and personally made $1.7 billion in 2007, has also agreed to be barred from the hedge-fund industry for five years.

The settlement was announced by the SEC on Monday and must be approved by a federal judge. It represents a dramatic fall for a once powerful financial titan who made billions betting against subprime mortgages in the years prior to the financial meltdown, and was known on Wall Street for his lavish lifestyle. In recent years, Falcone has poured billions of dollars into a troubled telecommunications project called LightSquared, which last year filed for bankruptcy.

The settlement announced on Monday is noteworthy because it requires Falcone and his hedge fund, Harbinger Capital Partners, to admit wrongdoing. In the past, the SEC has faced criticism for striking deals in which the targets of federal investigations are allowed to settle without admitting or denying guilt.

In June, Mary Jo White, the new SEC chairwoman, made clear that public accountability often requires an admission of guilt. Earlier this year, the SEC rejected a proposed settlement with Falcone and Harbinger as being too lenient. The new settlement appears to be the first to require an SEC target to admit wrongdoing since White announced the SEC’s tougher stance, according to Reuters. In a statement, the SEC said the Wall Street ban would allow Falcone “to assist with the liquidation of his hedge funds under the supervision of an independent monitor.”

“Falcone and Harbinger engaged in serious misconduct that harmed investors, and their admissions leave no doubt that they violated the federal securities laws,” said Andrew Ceresney, co-director of the SEC’s Division of Enforcement. “Falcone must now pay a heavy price for his misconduct by surrendering millions of dollars and being barred from the hedge-fund industry.” According to the new settlement, Falcone is personally on the hook for $11.5 million in disgorgement and fines; Harbinger Capital will cough up $6.5 million.

Last year, the SEC filed civil charges alleging that Falcone fraudulently used $113 million in Harbinger assets to pay his personal taxes. The feds also alleged that Falcone secretly favored certain Harbinger customers who were seeking to withdraw their money from the fund, and did not disclose those arrangements to the fund’s board of directors and the other fund investors.

The feds further alleged that Falcone conducted an illegal “short squeeze” in order to manipulate the price of bonds issued by a Canadian manufacturing company. In a short squeeze, powerful market players bid up the price of a security in order to force investors who believe the asset’s price will fall to cover their short positions. “Due to Falcone’s and the other defendants’ improper interference with the normal interplay of supply and demand in the bonds, the bonds more than doubled in price during this period,” the SEC said in a statement.

In a statement e-mailed to TIME, Falcone said he was “pleased that we were able to reach a settlement to resolve these matters with the SEC. I believe putting these issues behind me now is the best course of action for me and our investors.” Falcone said the settlement would allow him “to continue to focus on my permanent capital vehicles and maximizing the value of LightSquared for all stakeholders.”

The Falcone settlement underscores the transition occurring at the SEC under White as she seeks to distinguish herself from her predecessor Mary Schapiro, according to Bill Singer, a partner at New York–based securities-law firm Herskovits and a veteran Wall Street defense attorney. Singer points out that White, unlike Schapiro, has a background as a U.S. federal prosecutor working high-profile criminal cases, which may help explain the new assertiveness at the SEC.

“Mary Jo White is very, very tough,” says Singer. In many civil settlements, it’s important that prosecutors retain the ability to strike deals without extracting an admission of liability, he said. “The wheels of justice would grind to a halt because no one would settle if they all had to admit liability.” But in the Falcone case, White is laying down a marker for Wall Street saying there will be real consequences for financial fraud, Singer said. “Mary Jo White is sending a warning shot saying: ‘This is not how we’re going to continue to do business.’”

For Falcone, the true penalty from the settlement isn’t financial — after all, $18 million is chump change for the billionaire. It’s about being forced to admit liability and take accountability in public for his misconduct. As for the five-year Wall Street ban, it’s also worth noting that Falcone’s Wall Street privileges will not be automatically reinstated in five years. He’ll have to ask the SEC for permission to work in the industry again.

7 comments
OracleInvesting
OracleInvesting

Everyone should own up to their actions, including hedge fund managers. It seems they are getting off lightly even with the renewed effort to bring accountability into the hedge fund space.

GeorgeAdamrovich
GeorgeAdamrovich

so if you can make the deal and pay millions in fines I would guess you ain't going to jail for breaking the law!!!!!!!

nedley
nedley

Hey, he had to admit guilt and he can't get back in the business for 5 years. And he had to pay $18 million, or a penny in his world. How else is Mary Jo going to get a nice private sector job when her term expires?

All the other crooks must be shaking in their boots. 

WildbillfromnycP
WildbillfromnycP

Why do these crooks get little or no punishment? we might as well let out all the prisons,,,,,we do not have criminals in them,,,we have the same person here and he goes free,,,,,they went to jail,,,,,,,only Murders should be jailed and the rest released......Mary JO   White is a SEC political appointee......get a salary for doing nothing.......I hope there is another 

Wall Street Failure,,,,,we all need to start over,,,,,we need another  American Revolution

DeweySayenoff
DeweySayenoff

Sadly, the U.S. Justice Department never got involved in this.  The "charges" were civil - which can't include jail time and only ever result in fines and/or suspensions of privileges.  Since this was the SEC doing this, this guy was never going to go to jail.  In fact, the "charges" aren't even considered criminal  They're civil violations of rules or standards.

And since the SEC is pretty much made of of more owners of the country, there's almost no chance they're going to do a damn thing (unless, of course, one owner takes more than their share from other owners since they're only supposed to do that to us little folk) to actually stop this.

If someone can be sent to prison for life for stealing three loaves of bread (three strikes law, once loaf each time), I'd think that stealing billions through fraud ONCE merits criminal prosecution and jail time of everyone in his family for the next ten thousand years.  He made 1.7 billion and was fined two orders of magnitude LESS than what he made.  A pretty great deal for him.  Not so good for the rest of us.

No wonder they don't even bother to look guilty.  They know they'll never suffer any real consequences for their crimes.

SmailBuzzby
SmailBuzzby

Another rich creep is fined a tiny fraction of what he stole and given no real punishment.  Normal person steals anything and gets thrown in jail.  Rich creep steals who knows how much and gets a nuisance fine...with liberty and justice for the wealthy.

DeweySayenoff
DeweySayenoff

@SmailBuzzby He's one of the owners of the country.  OF COURSE he's going to get off all but scot-free.  18 million is chump-change to him.

How about minimum mandatory sentences for convictions of financial fraud in excess of a million dollars - say 25 to life?