Philip A. Falcone and Harbinger Charged With Securities Fraud - Full Release

Tyler Durden's picture

Game Over for the once high flying hedge fund manager: "“Today’s 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."

From the SEC

The Securities and Exchange Commission today filed fraud charges against New York-based hedge fund adviser Philip A. Falcone and his advisory firm, Harbinger Capital Partners LLC for illicit conduct that included misappropriation of client assets, market manipulation, and betraying clients. The SEC also charged Peter A. Jenson, Harbinger’s former Chief Operating Officer, for aiding and abetting the misappropriation scheme. Additionally, the SEC reached a settlement with Harbinger for unlawful trading.

In a separate, settled action, the SEC charged Harbert Management Corporation, whose affiliates served as the managing members of two Harbinger-related entities, as a controlling person in the market manipulation.

The SEC alleges that Falcone used fund assets to pay his taxes, conducted an illegal “short squeeze” to manipulate bond prices, secretly favored certain customers at the expense of others, and that Harbinger unlawfully bought equity securities in a public offering, after having sold short the same security during a restricted period.

Today’s 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.  “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 filed actions in U.S. District Court for the Southern District of New York against Falcone, Jenson, and Harbinger, and, in connection with the illegal trading scheme, separately instituted and settled administrative and cease-and-desist proceedings against Harbinger.

In particular, the SEC alleges that:

  • Falcone fraudulently obtained $113.2 million from a hedge fund that he advised and misappropriated the proceeds to pay his personal taxes;
  • Falcone and two Harbinger investment managers through which Falcone operated manipulated the price and availability of a series of distressed high-yield bonds by engaging in an illegal “short squeeze;”
  • Falcone and Harbinger secretly offered and granted favorable redemption and liquidity rights to certain strategically-important investors in exchange for those investors’ consent to restrict redemption rights of other fund investors, and concealed the arrangement from the fund’s directors and investors; and
  • Harbinger engaged in illegal trades in connection with the purchase of common stock in three public offerings after having sold the same securities short during a restricted period.

“Not only are hedge fund managers expected to be savvy investors, they are supposed to serve the interests of their clients. Here, in addition to raiding a fund for personal benefit and cutting secret deals with favored investors, Falcone then lied to investors about what he had done,” said Bruce Karpati, Chief of the Asset Management Unit in the SEC’s Division of Enforcement.

Describing the illegal short squeeze, Gerald W. Hodgkins, Associate Director of the SEC’s Division of Enforcement said, “After he took control of an entire issue of high-yield bonds, Falcone kept buying with an eye toward rigging the market and punishing short sellers to settle a score. In the process, Falcone hijacked the market for the bonds and illegally manipulated their price and availability. The Division will continue to police the bond market to make sure it operates as an efficient market, free of the corrosive effects of manipulators such as Falcone.”

Misappropriation Scheme

In the misappropriation scheme, the SEC alleges that Falcone unlawfully used fund assets to pay his personal taxes. In 2009 Falcone owed federal and state authorities $113.2 million in taxes. Declining to pursue other financing options, such as pledging his personal assets as collateral for a bank loan, Falcone elected instead to take a $113.2 million loan from the Harbinger Capital Partners Special Situations Fund, L.P. – the same fund from which Harbinger had earlier suspended investors from redeeming.

Falcone authorized the transfer of fund assets to himself in a transaction that Jenson helped structure. Falcone and Harbinger never sought or obtained consent from investors prior to using the fund's assets to benefit Falcone.

As part of the misappropriation scheme, the SEC alleges that Falcone and Harbinger, aided by Jenson, made several material misrepresentations and omissions in seeking legal advice regarding the loan and in subsequent communications with investors, including, among other things:

  • the financing alternatives available to Falcone;
  • the circumstances that led to Falcone’s need for the loan;
  • the ability of the Special Situations Fund to furnish the loan, without disadvantaging investors;
  • the terms and conditions of the loan, including the interest rate charged and the amount of collateral posted by Falcone; and
  • the role of Harbinger’s outside legal counsel in vetting the transaction.

The SEC also alleges that Falcone and Harbinger delayed disclosing the loan for approximately five months because of their concern that disclosure of Falcone’s financial condition might have a negative impact on investor withdrawals and on Falcone’s ability to attract more investments for other Harbinger funds. Falcone repaid the loan in 2011, after the Commission commenced its investigation.

Market Manipulation / Illegal Short Squeeze

In a separate civil action, the SEC alleges that from 2006 through early 2008 Falcone and two Harbinger investment management entities manipulated the market in a series of distressed high-yield bonds issued by MAAX Holdings Inc. In this fraudulent scheme, Falcone and the Harbinger entities allegedly orchestrated an illegal “short squeeze” – a market manipulation scheme in which an investor constricts the supply of a security, through large purchases or other means, with the intent of forcing settlement from short sellers at arbitrary and inflated prices.

The SEC’s complaint alleges that at Falcone’s direction, Harbinger purchased a large position in the MAAX bonds during April and June of 2006. After hearing rumors that a Wall Street financial services firm was shorting the MAAX bonds and also encouraging its customers to do the same, Falcone decided to seek revenge. In September 2006, Falcone directed the Harbinger-managed funds to buy every available bond in the market, often purchasing the bonds from short sellers. Ultimately, Falcone raised the funds’ stake to approximately 13 percent more than the available supply of the MAAX bonds.

At one point, Harbinger had purchased 22 million more bonds than MAAX had ever issued. Contemporaneously with these purchases, Falcone locked up the MAAX bonds the Harbinger funds had purchased in a custodial account at a bank in Georgia to prevent his brokers from lending out the bonds to sellers seeking to deliver the bonds to purchasers after short sales.

Having seized control of the supply of the MAAX bonds, Falcone then demanded that the Wall Street firm and its customers settle their outstanding MAAX short sales, not disclosing that it would be virtually impossible to find bonds available for delivery. The Wall Street firm bid daily for the bonds, which quickly doubled in price. Then, Falcone engaged in a series of transactions with certain short sellers at arbitrary, inflated prices, while at the same time valuing the funds’ holdings on his books at a small fraction of the prices he charged the covering short sellers.

Preferential Redemption Scheme

In its action alleging misappropriation, the SEC also alleges that in a further breach of Falcone and Harbinger’s fiduciary duties to their clients, Falcone and Harbinger engaged in unlawful preferential redemptions for the benefit of certain favored investors.

In 2009, while soliciting required investor approval to restrict withdrawals from another Harbinger fund, Falcone and Harbinger secretly exempted certain large investors that Falcone deemed to be strategically important from soon-to-be imposed liquidity restrictions – provided those investors voted to approve restrictions that would temporarily stabilize the decline in Harbinger’s assets under management.

Ultimately, pursuant to these ‘vote buying’ agreements, Falcone and Harbinger allegedly permitted these investors who were connected to certain favored institutional investors to withdraw a total of approximately $169 million. Harbinger concealed these quid pro quo arrangements from the independent directors and from fund investors.

Other Illegal Trading by Harbinger

In a separate administrative and cease-and-desist proceeding, the SEC found that between April and June 2009, Harbinger violated Rule 105 of Regulation M of the Securities Exchange Act of 1934 (Exchange Act). Rule 105 is an anti-manipulation rule that prohibits short selling securities during a restricted period and then purchasing the same securities in a public offering.

The Commission’s Order censures Harbinger and requires the firm to cease and desist from committing or causing any violations of Rule 105 now or in the future. Harbinger will pay disgorgement in the amount of $857,950, prejudgment interest in the amount of $91,838, and a civil monetary penalty in the amount of $428,975. Harbinger consented to the issuance of the Order without admitting or denying any of the Commission’s findings.

Settlement with Harbert Management Company

In a separate complaint also filed in U.S. District Court for the Southern District of New York, the SEC filed a settled civil action against Harbert and two related investment entities – HMC-New York Inc. and HMC Investors, LLC – for their role in the illegal short squeeze described above.

The SEC alleges in its complaint against Harbert that during the entire period of the short squeeze, Defendants Harbert, HMC-NY and HMC Investors, directly or indirectly, possessed the power to control Falcone and the investment managers through which he operated. HMC-NY and HMC Investors, two entities controlled by Harbert, served as the managing members of two limited liability companies that acted as the general partners of the funds advised by Falcone.

Harbert and its affiliates also provided hedge fund administrative, legal, compliance, risk assessment and other services to the funds. In these capacities, Harbert, HMC-NY and HMC Investors knew of Falcone’s trades in the MAAX bonds, but failed to take appropriate steps to address Falcone’s manipulative conduct. The SEC charged the Harbert defendants as controlling persons pursuant to Section 20(a) of the Exchange Act, alleging that they are jointly and severally liable for Falcone’s and the Harbinger investment managers’ violations of the antifraud provisions of the Exchange Act.

Without admitting or denying the allegations of the complaint, Defendants Harbert, HMC-NY and HMC Investors have agreed to pay a civil penalty in the amount of $1 million. The Harbert defendants also have consented to the entry of a judgment enjoining them from violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. The proposed settlement with Harbert is subject to approval by the court.

In the pending federal court actions concerning the first three fraudulent schemes described above, the Commission seeks a variety of sanctions and relief including injunctions against Falcone and Harbinger from violations of the anti-fraud provisions of the Securities Act of 1933, the Exchange Act, and the Investment Advisers Act of 1940.

In addition, the Commission seeks to enjoin Harbinger and Falcone from controlling any person who violates the anti-fraud provisions of the Exchange Act. As for monetary relief, the Commission seeks disgorgement of ill-gotten gains, prejudgment interest, and civil money penalties from Falcone and Harbinger. The Commission further seeks to prohibit Falcone from serving as an officer and director of any public company. Against Jenson, the Commission seeks to enjoin Jenson from aiding and abetting future violations of the anti-fraud provisions of the Exchange Act and Advisers Act and seeks to obtain monetary penalties.

The SEC’s investigation was a coordinated effort between teams from the SEC’s headquarters and the New York Regional Office, including Conway T. Dodge, Jr., Robert C. Besse, Ken C. Joseph, Mark Salzberg, Brian Fitzpatrick, and David Stoelting. Messrs. Joseph, Salzberg, and Fitzpatrick are members of the Enforcement Division’s Asset Management Unit. Mr. Stoelting and David Gottesman will lead the SEC’s litigation team.

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battle axe's picture

The guy is a scumbag....

greased up deaf guy's picture

“Today’s charges read like the final exam in a graduate school course in how to operate a hedge fund unlawfully..."

so there's a course for that? too bad there's no course for surfing the web for transvestite porn.

Xibalba's picture

And Corzine is free?  

Bam_Man's picture

Corzine is "TCTJ".

(Too Connected To Jail)

nope-1004's picture

Is that Phil?  Or John Lennon?  LOL. 

The Big Ching-aso's picture



'The Smallcheese Falcone'.

The Sequel.   A novel of Wall Street mafiaesque intrigue, by Dashiell Hammett Jr.

Paul Atreides's picture

The SEC doesn't do shit against criminals these days unless it is politically motivated take Egan Jones and Jon Corzine as pretext. I am skeptical of the web site The White Hat Reports but if you read the reports it chimes in as to why TPTB are attacking the Falcone family through the SEC in an attempt to discredit and ruin them.

You can view some of the files in the Ed Falcone case here, here and here.

phyuckyiu's picture

A $1 million dollar fine against two companies worth a billion each. I'm sure they had their day ruined with that one. Good Work! Where's the Intrade bet on whether Falcone does time? I'll bet everything on NO. You should pile on that one before it becomes obvious that's the outcome.

12ToothAssassin's picture

Was his Hedge Fund successful or not? I dont see the issue here, isnt this how the game is played now?

malikai's picture

Falcone should have been a good bundler.

mr_T's picture

What did he do different than JPM GS ?

I thought jail was only for Sri Lankan hedge fund managers.

A generous campaign contribution with his clients money could clean up this snafu.

Floordawg's picture

Exactly. Fuck the privately run, inept SEC that claims to:

"protect investors, maintain market integrity and facilitate capital formation."

Fail, fail and fail miserably on all three counts. Not that I condone anything dishonest that ANY hedge fund manager has perpetrated, but the SEC deserves ZERO credit for anything "decent" it may do... it has far too much catch-up to do in the area of prosecution to be considered relevant.

Anyway, makes me wonder who this douche pissed off enough to foster the SEC's attention away from their online porn?

luckylogger's picture

Looks to me that he corzined the Corzine's.

Guess that was his crime.

Stackers's picture

SEC "civil" case here.

Think we'll see a DOJ "criminal" case ? Probably not.

Freddie's picture

Falcone is a good friend of Obama like Corzine.  Scumbags.

icanhasbailout's picture

Obviously Falcone didn't pay the right people - or didn't pay them enough.

bdc63's picture

Alas, he broke the only hard and fast rule on Wall Street ... Don't get caught ...

Freddie's picture

Falcone is not a tribe member. Nor was Raj and Rajit.

scaleindependent's picture

Asness is next, unless he is TBTF, or too connected.

Buck Johnson's picture

Which I love to do (mostly Transsexuals but Transvestites if they are real cute).  We knew for over 2 years that Falcone was doing shady things with his fund and now the SEC is doing something.  This is a joke, something must have happened.

Doña K's picture

And... If any other hedge fund manager that does not cooperate with the FED and deviates from the story line will be facing the same.

If they buy gold, sell or short stocks, increase cash position or badmouth the economy, they are dead meat.

hedgeless_horseman's picture



...a market manipulation scheme in which an investor constricts the supply of a security, through large purchases or other means, with the intent of forcing settlement from short sellers at arbitrary and inflated prices.

How, exactly, is this illegal Ms. Shapiro?  Because, if it is, then there are some folks at 33 Liberty you must also investigate.  You can start with this guy...

Brian P. Sack is the executive vice president of the Markets Group at the Federal Reserve Bank of New York [The PPT]. He is also the Manager of the System Open Market Account for the Federal Open Market Committee (FOMC). The Markets Group oversees domestic open market and foreign exchange trading operations and the provisions of account services to foreign central banks.




ebworthen's picture


And the J.P. Morgue, and Citibunk, and Bunk of Amurika, and...

hedgeless_horseman's picture



...and isn't POMO an acronym for large purchases and inflated prices?

Purchases Over Market Operations

ebworthen's picture


And somewhow, the FED front-buying bonds from the Treasury supports employment, controls inflation, and is deemed "legal" (*cough*).

vast-dom's picture

ad hominem: naive man, everyone knows...micro to the macro and vice-versa.

long-shorty's picture

Falcone may or may not be a bastard, but this "market manipulation" allegation by the SEC is such bullshit.

the SEC itself and Citi orchestrated a massive short squeeze during the Citi preferred--->common exchange offer.

how do you charge someone with a crime for buying 113% of the outstanding of a security? isn't the crime on the part of the people who SOLD the 13% that didn't exist in the first place?

the current crony capitalism + abuse of executive power in America reminds me of my visit to Moscow in 1997. except ours is larger in scale.


slaughterer's picture


ReallySparky's picture

LOL. I hope you have a big checkbook cuz that girl likes bling and expensive artistic hobbies.

GMadScientist's picture

I hope you have a paper bag...cuz that surgery went wrong.

jez's picture

Finally someone mentions the lovely Lisa.


Who cares about all this SEC stuff? What we want to know is: has the lovely Lisa bought any more highly tasteful new outfits lately?

GMadScientist's picture

Looks like someone beat you to that punch.

jez's picture

Bad case of the ol' redeye, except that the redness is on her eyelids. What an odd photo.

vast-dom's picture

micro to The Fed's macro.

HelluvaEngineer's picture

A Harbinger of things to come?  Unfortunately no.

Animal Cracker's picture

"Short Squeeze" would be a solid prison nickname for this fine gentleman.

VulpisVulpis's picture

One step for civilized society.

FL_Conservative's picture

And Corzine is next, right?  Beuller....Beuller....Beuller....

RacerX's picture

Obviously Falco forgot to write a check to Our Dear Leader's reelection campaign.

El Oregonian's picture

Corzine is like Corexit, a dispersant for breaking up oily slick Banksters. That is why they will not release him. Too dangerous...

Bastiat's picture

Can we liquify him and pump him into the Gulf of Mexico or is he too toxic?

Jonas Parker's picture

Hell, the sharks wouldn't even eat Corzine! He'd give them terminal indigestion!

12ToothAssassin's picture

Or its just professional courtesy

Bunga Bunga's picture

That would be a worse desaster than Deepwater Horizon.

q99x2's picture

Maybe they'll make him pay a fine.

LawsofPhysics's picture

Wake me, when the SEC actually goes after the big perps of fraud, someone is actually put in a real prison for life (or hung), and all the funds are recovered with interest from the private wealth of the perps and management.

Otherwise, more circuses to go with your bread, enjoy.


Hope you have an extra supply of's gonna be a while.