Billionaire Philip Falcone was banned by New York state’s top financial watchdog from being an officer or director of Fidelity & Guaranty Life for seven years for using his hedge funds’ money for his personal taxes.
Falcone, 51, is also barred from “direct or indirect control over the management, policies, operations” and investment funds of Fidelity’s New York unit, the state’s Department of Financial Services said today in a statement.
The ban also applies to employees of his hedge fund, Harbinger Capital Partners, which controls the insurance company.
The ban stems from Falcone’s accord in August with the Securities and Exchange Commission, which had sued him over the same allegations and banned him from the securities industry for five years.
In that case, Falcone admitted to improperly borrowing $113.2 million from the fund and giving preferential treatment to some clients when returning their money.
“It is vital to ensure that those who operate insurance companies will always put retirees and policyholders first and act with the utmost integrity,” DFS Superintendent Benjamin Lawsky, who regulates banks and insurers operating in New York, said in the statement.
Falcone, who became a billionaire by betting against the U.S. housing market in 2006, was approached by Lawsky’s office following his settlement with the SEC, Matthew Anderson, a spokesman for the DFS, said in a phone interview today.
Harbinger Capital’s general counsel, Robin Roger, and its chief financial officer, Keith Hladek, resigned from Fidelity’s board in anticipation of the ban, said two people familiar with the matter, who weren’t authorized to discuss the moves publicly.
Employees of Harbinger Group Inc., the hedge fund’s parent company, aren’t affected by the ban, and some of its employees are still on the board, the people said.
Hladek declined to comment when reached by phone today. Roger didn’t immediately return a call for comment.
Following negotiations, Falcone, Harbinger and Baltimore- based Fidelity all agreed to the seven-year ban against Falcone and the deal’s reach beyond New York, where the regulator has authority, Anderson said.
Falcone’s absence isn’t a major concern because his Harbinger Group has other executives that can oversee the insurance unit, Kevin Cassidy, an analyst at Moody’s Investors Service, said by phone. Fidelity & Guaranty is run by Chief Executive Officer Lee Launer, a former executive at MetLife Inc., the largest U.S. life insurer.
“Phil is not involved in the day to day,” Cassidy said. “Some of the operators at Harbinger Group that are involved in the insurance side are not caught up in this issue.”
The New York ban comes as Fidelity is seeking a valuation of at least $1 billion in its initial public offering, according to two people involved in the planning. Harbinger Group Inc. bought Fidelity & Guaranty, the U.S. life and annuity unit of London-based Old Mutual Plc, for $350 million in 2011.
Falcone’s hedge funds last month sold $158 million of Harbinger Group shares, a stake of about 13 percent, to Leucadia National Corp. as the money manager meets redemption requests after the SEC settlement.
Eric Goldstein, a lawyer representing Harbinger Capital, didn’t immediately return a call for comment on the DFS ban.
The wrongdoing exposes “serious issues related to Mr. Falcone’s fitness to control the management, operations, and policyholder funds of a New York insurance company,” Lawsky said in the statement. The statement didn’t say what specific role, if any, Falcone had at Fidelity.
Fidelity’s New York unit agreed to put in place new policyholder protections under today’s agreement, including setting aside $18.5 million in a trust account to replenish its risk-based capital levels to protect consumers from unexpected losses, Lawsky said.
The guidelines are modeled on internal rules adopted by other insurance companies owned by private equity firms and investment companies at the financial regulator’s request, according to today’s statement.
U.S. money manager Guggenheim Partners and Apollo Global Management agreed this year to similar policyholder protections, according to the statement.