By Svea Herbst-Bayliss
BOSTON, June 27 The bad news keeps coming for
Philip Falcone, once one of the hedge fund industry's biggest
The U.S. Securities and Exchange Commission filed a lawsuit
in federal court on Wednesday charging the 49-year-old
billionaire with market manipulation, giving preferential
treatment to several big clients, and borrowing cash from his
hedge fund Harbinger Capital Partners to pay personal expenses.
"Today's charges read like the final exam in a graduate
school course in how to operate a hedge fund unlawfully," Robert
Khuzami, director of the SEC's division of enforcement, said in
The lawsuit comes just one month after LightSquared, a
wireless telecommunications upstart backed by Falcone, which
over time became his fund's biggest investment, filed for
The one-two punch of the LightSquared bankruptcy and the SEC
civil charges raise questions about Falcone's future in the $2
trillion hedge fund industry.
Once known as a savvy investor whose well-timed bet against
the overheated housing market expanded his fund to $26 billion,
Falcone has watched his assets dwindle to about $3 billion as he
had to keep writing down investments in LightSquared.
Falcone and his lawyers said he will fight the charges, but
did not elaborate.
Industry analysts and investors worry about how well Falcone
can perform his duties as a money manager while defending
"It is clearly a challenge to spend your time defending
charges on the one hand and managing a fund on the other," said
Richard Heller, a partner at law firm Thompson Hine. "It is like
having two full-time jobs, at the same time."
News of the suit did not come as a surprise. Falcone first
told investors about the SEC's potential plans late last year
and months of settlement talks in Washington proved fruitless.
Regulators wanted to bar Falcone from operating as an
officer of a public company. He is currently chairman and chief
executive officer of Harbinger Group Inc.
The SEC in the lawsuit also charged Harbinger, as the
adviser to the hedge funds, with securities fraud. A spokesman
for Harbinger could not immediately be reached.
The case offers fresh evidence of just how feverishly the
U.S. government is working to root out improper trading at hedge
funds now that big U.S. pension funds are relying on them to
help shore up retirement savings for average Americans.
The government listed a string of charges against Falcone,
who has made headlines both for his investing prowess and his
charitable gifts -- his wife made a spur of the moment $10
million donation to the High Line Park in New York in 2009.
Falcone, a former Harvard hockey star, and others
manipulated the bond prices of bathroom fixtures maker MAAX
Holdings Inc, between 2006 and 2008, the government charged.
Regulators also allege that Falcone treated his investors
unfairly at the height of the financial crisis, when many of the
fund's assets were tied up in the collapse of Lehman Brothers.
He allegedly let out at least two big clients, even though he
told others on Christmas Eve in 2008 that they would not be
allowed to get their money back for quite some time.
The government said Falcone illegally gave himself a $113
million loan from the fund to pay for his personal taxes,
something that made investors especially angry because they
could not access their own money.
Falcone contends that lawyers signed off on his loan, which
sources close to Falcone said he has repaid.
The case will pit Falcone, once one of Wall Street's most
powerful figures, against governmental regulators in Washington,
a place where he has had tough relations with lawmakers for some
During the fight to build out LightSquared after the Federal
Communications Commission gave its tentative promise to proceed,
Falcone ran up against powerful Iowa Senator Charles Grassley
and his fierce opposition.
"It appears the FCC nearly granted billions of dollars in
taxpayer assets to someone accused by our nation's financial
regulator of having 'victimized' 'clients and market
participants alike'," Grassley said on Wednesday. "Maybe the
next time, the FCC won't be so dismissive about concerns raised
about its business," the lawmaker said.
Separately, the SEC settled charges with Harbert Management
Corp, which had given Falcone some initial investments and been
a big backer. The regulator said the group had not properly
watched over him during the alleged bond market manipulation.