Rather than borrowing against assets — like his $39 million St. Barts villa—Falcone admitted he arranged an improper loan to pay his personal taxes. (PatrickMcMullan)
Well, this is a first for Wall Street: a hedge fund honcho admits he wronged his investors.
Billionaire Phil Falcone, the head of Harbinger Capital Partners, agreed to admit to wrongdoing under a landmark settlement with the Securities and Exchange Commission.
The agreement is the first to require such an admission since SEC chief Mary Jo White announced that the agency would no longer allow some defendants to cop out of cases “without admitting nor denying” wrongdoing, legal experts said.
The settlement, which must still be approved by a federal court judge, comes after White and other SEC commissioners rejected an earlier deal that they felt amounted to a wrist slap for Falcone.
Falcone will also be barred from the securities industry for at least five years — up from just two years under the earlier deal — and pay $18 million to settle allegations of improper dealings.
The SEC sued Falcone in June 2012 for putting his “lavish lifestyle,” including a $39 million estate in St. Bart’s, ahead of the interests of his investors.
The Wall Street watchdog said he wrongfully borrowed $113 million to pay his taxes while barring investors from making withdrawals. He also improperly gave certain large investors favorable withdrawal terms over other investors, the SEC said.
“I believe putting these issues behind me now is the best course of action for me and our investors,” Falcone said in a statement.
The fallen hedgie said the deal will allow him to focus on his publicly traded entity, Harbinger Group, and his wireless venture LightSquared, which is struggling to emerge from bankruptcy.
The Harbinger hedge fund, which once boasted $26 billion in capital, will be unwound with the help of an independent monitor. Falcone will assist with the funds’ liquidation, which is tethered in part to a $3 billion investment in LightSquared.
“The public wants people to admit their guilt,” said John Coffee, a securities law professor at Columbia University.
The SEC’s deal with Falcone suggests that the SEC is finally recognizing “what the public really wants” from regulators, Coffee said.
White’s decision to require at least some defendants to admit wrongdoing follows a recent uprising against her predecessors’ policy of allowing defendants to “neither admit nor deny” wrongdoing when settling cases.
The revolt was kicked off in 2011 by outspoken Manhattan federal judge Jed Rakoff. He rejected the SEC’s $285 million settlement with Citigoup, saying the public had a right to know the truth of the SEC’s allegations against Citi.
“We are going to, in certain cases, be seeking admissions going forward,” White told an audience at a conference in June. “Public accountability in particular kinds of cases can be quite important, and if we don’t get them, then we litigate them.”
Falcone, a hockey player at Harvard who rose to hedge-fund fame betting against subprime mortgages ahead of the housing meltdown, also admitted to orchestrating a short squeeze in 2006 by buying up all the bonds of a Canadian company that he knew was a target of short sellers.