Published November 20, 2014
Federal regulators are suing hedge fund manager Philip Falcone and his firm, accusing him of civil fraud for using fund money to pay his taxes and favoring some fund customers at the expense of others.
The Securities and Exchange Commission announced the lawsuit Wednesday against Falcone and Harbinger Capital Partners, the firm he founded. The SEC also said that Falcone manipulated bond prices.
The SEC is seeking to ban Falcone from serving as an officer or director of any public company, along with unspecified penalties and restitution.
The lawsuit, which was filed in federal court in Manhattan, was expected.
Matthew Dontzin, a lawyer representing Falcone, said the allegations are without merit and that Falcone would challenge them in court.
The agency said that from 2006 through early 2008, Falcone manipulated the market for high-yield, high-risk bonds issued by a company named Maax Holdings Inc. Using two of Harbinger's funds, he bought up large amounts of the bonds to shrink the supply on the market and drive up prices, the suit alleges.
The SEC also said that Falcone and Harbinger secretly gave "certain strategically important investors" in the fund the right to cash out of their holdings. In exchange, the favored investors gave Falcone and the fund permission to bar the other investors from being able to cash out, according to the SEC. It said that arrangement was hidden from Harbinger's directors.
"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" that prohibit manipulation, SEC Enforcement Director Robert Khuzami said in a statement.
In a separate action, the SEC said it reached a settlement with Harbert Management Corp., a firm that had ties to Harbinger. The SEC said Harbert had the power to control Falcone and Harbinger but failed to stop the bond manipulation scheme. Harbert and two related firms agreed to pay a $1 million civil fine. They neither admitted nor denied wrongdoing.