The Falcone Settlement: A Harbinger Of Things To Come?

On August 19, 2013, the Securities and Exchange Commission (SEC) announced that New York-based hedge fund adviser Philip A. Falcone and his advisory firm Harbinger Capital Partners -- which once boasted $26 billion under management -- agreed to a settlement in which Falcone is barred from the securities industry for at least five years, Falcone and Harbinger must pay more than $18 million and, most notably, Falcone and Harbinger admit certain wrongdoing. The agreement comes several months after Falcone apparently jumped the gun by announcing to his investors that he and SEC staff had reached a more lenient settlement, which did not require any admission of wrongdoing. The new settlement reflects a more aggressive stance recently announced by the SEC and is a sea change from its long-standing policy of allowing defendants to "neither admit nor deny" wrongdoing. The rationale for this shift was articulated by Andrew Ceresney, new co-director of the SEC's enforcement division: "Falcone and Harbinger engaged in serious misconduct that harmed investors, and their admissions leave no doubt that they violated the federal securities laws." Time will tell if the Commission's interest in obtaining admissions of wrongdoing will enhance and advance a fair and effective enforcement program.

THE CHARGES

In June 2012, the SEC filed two civil lawsuits against Falcone and Harbinger.1 The most serious charge was that Falcone borrowed $113 million from a Harbinger fund to pay his own personal taxes at a time when his investors were prohibited from withdrawing their own money from the fund. The first complaint also alleged that Falcone allowed some large investors to pull their money from his funds in return for their vote to approve a plan to restrict client redemptions from a different fund. According to the SEC, Harbinger concealed these preferred shareholder deals from the funds' independent directors and investors. The second complaint alleged that Falcone and Harbinger, as part of Falcone's retaliation efforts against Goldman Sachs, manipulated the bond market by conducting an illegal "short squeeze" of bonds issued by a Canadian manufacturing company.

THE SETTLEMENTS

In May, the SEC reached an initial deal with Falcone and Harbinger in which the defendants would be barred from the securities industry for two years and, most notably, in which neither defendant was required to admit any wrongdoing. The deal was rejected two months later by the Commission as being too lenient. In the new settlement, the defendants specifically admit to acting "recklessly" and admit to a long list of facts, including that Falcone improperly borrowed millions...