SEC: Falcone used hedge fund as piggy bank to support his lavish lifestile
Hedge fund manager Phil Falcone improperly borrowed client cash to continue living the high life with his glamorous socialite wife, including a private jet, an estate on St. Barts and two Manhattan town houses, according to a bombshell complaint.
The Securities and Exchange Commission slapped Falcone, the founder of Harbinger Capital Management, with civil fraud charges yesterday, accusing him of taking out an improper loan from one of his funds to pay his personal taxes, playing favorites with clients and manipulating the markets.
What’s a guy to do when his personal dough is tied up in such essentials as a St. Barts villa and a private jet? S.E.C. filed two separate complaints. First accusing Mr. Falcone of treating Harbinger like his own piggy bank by taking out a $113 million loan to cover his tax liabilities and cutting side deals with outside investors to get their votes. The second claim is engineering a “short squeeze” on the bonds of a distressed company, which the S.E.C. asserts was an illegal market manipulation intended to inflate the price of the securities.
“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 a statement.
Falcone, who has been battling the SEC’s pending allegations for months, denied the charges yesterday through his lawyer, Matthew Dontzin.
“The notion that Falcone committed a fraud in connection with the loan from a Harbinger fund is unsupportable,” Dontzin said in a statement.
Dontzin said the loan was obtained with the approval of “a leading national law firm” and that all the charges will be “vigorously defended in the courthouse.”
The SEC claimed that Falcone’s need to keep up with the Joneses prompted the 49-year-old money manager to forgo a bank loan backed by his personal assets to pay off a looming tax bill in 2009, according to the charges.
Instead, Falcone borrowed the $113 million on the sly from Harbinger’s Special Situations Fund — a $2.4 billion fund that had recently barred nervous investors from taking their money out.
Falcone made billions betting against the subprime mortgage market — hid the transaction from investors for months, according to the suit. By June 2010, the fund was unable to meet the flurry of investor redemption requests.
Falcone “undertook significant personal expenditures” in early 2009 after Lehman Brothers collapsed, including “extensive” renovations on his Manhattan town houses and paying for a security detail, according to the complaint.
The SEC said Falcone was also sinking a lot of money into motion pictures — most likely with his wife Lisa’s production company, Everest Entertainment, which was behind the 2010 film “Mother and Child,” with Samuel L. Jackson.
The SEC is seeking to bar Falcone from serving as an officer or director of a public company, which would force him to step down as the head of his publicly traded Harbinger Group. It’s also seeking the return of ill-gotten gains and civil penalties from Falcone and Harbinger.
The suit is the latest in a string of embarrassments for Falcone. In May, his biggest investment, wireless startup LightSquared, filed for Chapter 11 bankruptcy.
The SEC yesterday also charged Falcone with market manipulation tied to bonds he traded in 2006 and 2007, and with wrongfully favoring certain investors’ redemption requests over others.
In addition, the SEC charged Peter Jenson, Harbinger’s former COO, with aiding and abetting Falcone’s improper loan.
Read More: NYPost
Find out Phil Falcone Net Worth