High-Flying Falcone Clipped By Fraud Charges
On Tuesday, Bloomberg News reported that the regulator would claim Falcone illegally borrowed client money to pay taxes and created a sweetheart deal with Goldman Sachs to exit his flagship fund.
The SEC is also pushing for "market manipulation" charges against the billionaire hedge fund guru in relation to bond investments in the debt of MAXX Holdings group.
The SEC alleges that from 2006 through early 2008, Harbinger allegedly orchestrated an illegal 'short squeeze' on the supply of the bond issue - after hearing of banks buying short positions in the security -- with the intent of forcing settlement with short sellers at inflated prices.
In that strategy, the SEC says Falcone raised Harbingers stake in MAXX bonds to approximately 13% more than their available supply. Having taken control of the supply of the MAAX bonds, Falcone then demanded that short sellers settle their outstanding MAAX shorts at unfair and manipulative prices.
Harbinger has been the focus of federal scrutiny for over a year after it was reported that Falcone used a $113 million loan in 2009 to pay personal taxes. The SEC investigation focused on whether the loan -- which was eventually revealed -- was disclosed in a timely fashion, according to the Wall Street Journal. According to its suit on Wednesday, the SEC claims that Harbinger misrepresented its financial situation to investors and its legal advisors.
Without admitting or denying guilt, Harbinger also settled an order that alleged the fund violated the Securities Exchange Act of 1934 in purchasing shares of an initial public offering during its restricted period and selling those securities short, in violation of Rule 105. As a result of the settlement, Harbinger will pay a disgorgement of $857,950, interest of $91,838, and a civil monetary fine $428,975.
Harbinger and Falcone have faced massive losses over the past year as a bet on high-speed wireless went south after 4G wireless provider LightSquared declared bankruptcy and wiped out most of Harbinger's near-$3 billion investment.
"Any allegations by the SEC of impropriety by Mr. Falcone or Harbinger are supported neither by the facts or the law," said Matthew Dontzin, counsel for Falcone, in a Tuesday statement related to the SEC's pending civil charges. "Should a lawsuit be brought it will be contested vigorously."