After the Raj Rajatnaram trial ended in the largest inside trading probe in history, as some of you may know it, last summer regulators went after Harbinger Capital operator Phil Falcone for breaching his "fiduciary duty" by borrowing $113.2 million from a Harbinger fund to pay his personal taxes in 2009. (Falcone repaid the loan in 2011 after the SEC investigated the deal.)
In case you've missed it, Phil Falcone made Business Insider's Wall Street Biggest Party Animals list last year.
“These charges read like the final exam in a graduate school course in how to operate a hedge fund unlawfully,” said Robert Khuzami, Director of the SEC’s Division of Enforcement in June. “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.”
The SEC alleges Falcone and Harbinger never sought or obtained consent from investors prior to using the fund's assets while at the same time prohibiting redemptions from Fund investors.
SEC filed civil charges accusing Mr. Falcone of putting his own interests, including maintaining a “lavish lifestyle,” ahead of those of Harbinger’s investors. In Sept. his wife Lisa Marie made headlines in a Hamptons car crash.
Attorneys for Mr. Falcone, said the loan was sanctioned by a national law firm and was disclosed to investors, who he said were repaid with interest -accordingly, at a highly favorable rate to himself of 3.66%-.
Harbinger did also an illegal short-squeeze with MAAX bonds in 2006, at one time owning 113% of the bonds ever issued. [Charges settled since]
"Finally there’s a series of garden-variety Rule 105 violations, in which (1) a company announced that it would be selling stock, (2) Harbinger shorted shares of that company’s stock, and (3) Harbinger got allocated shares in the company’s offering that it then used to cover its short, essentially front-running the company’s stock sale and making an instant profit on its allocation." [Dealbreaker]
Lawyers for Mr. Falcone's assets said his assets were illiquid, and Mr. Falcone believed there were a lack of financing alternatives. They had argued that no quid pro quo arrangement existed, adding that fund documents allowed special treatment of large or strategic investors [WSJ]
- How defensible are these charges ?
- Will they stick ?
Even if investors are not suing, it seems the SEC has taken the lead against this HF operator.
Meanwhile, Mr. Falcone's 4G-LTE wireless communications network Lightquared is in bankruptcy [the FTC earlier this year said there was no way to mitigate Lightsquared GPS interference problem]
*Post courtesy of Wall Street Oasis.
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