The SEC charged New York-based hedge fund adviser Philip A. Falcone and his advisory firm, Harbinger Capital Partners, LLC, for conduct that included misappropriation of client assets, market manipulation, and betraying clients.  The SEC filed three separate civil actions and opened an administrative proceeding against Falcone and his firm, for a variety of fraud charges.  It is unclear at this time whether investors in Falcone managed hedge funds will be able to initiate FINRA arbitrations against broker-dealers who sold the hedge funds.

According to the SEC, Falcone and Harbinger engaged in a fraudulent scheme to misappropriate $113.2 million from a Harbinger fund in order to pay Falcone’s personal tax obligation.  In 2009 Falcone declined to pursue other financing options to pay his obligation, such as pledging his personal property as collateral for a bank loan, instead Falcone took out a loan from Harbinger Capital Partners Special Situations Fund, L.P.    The transfer of the fund’s assets to Falcone was structured as a loan and concealed from fund investors for approximately five months.  In 2011, after the SEC initiated its investigation, Falcone repaid the loan.

The SEC alleged that in another breach of Defendants’ fiduciary duties to their investors, Falcone and Harbinger implemented a ‘vote buying’ scheme.  In early 2009, following the credit crisis of the previous year, one of Harbinger’s funds experienced a sharp decline in assets under management.  As a result of the investment losses, many investors were seeking to redeem their interests.  Falcone and Harbinger, in an attempt to stabilize the situation, proposed an amendment to impose more stringent redemption restrictions on investors.  The proposed change required investor approval.  To secure consent, Falcone and Harbinger made side deals with certain strategically-important investors, providing those investors with favorable redemption and liquidity terms in return for their favorable vote for the amendment.  Falcone and Harbinger allegedly permitted the preferential investors to withdraw a total of approximately $169 million.  These quid pro quo agreements to buy votes were concealed form fund investors and the fund’s board of directors.

In a separate cease and desist administrative proceeding, the SEC found that between April and June 2009, Harbinger violated anti-manipulation securities laws while 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.  The SEC reached a settlement with Harbinger for unlawful trading.  Without admitting or denying any of the Commission’s findings, Harbinger will pay disgorgement in the amount of $857,950, prejudgment interest in the amount of $91,838, and a civil monetary penalty of $428,975.