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High-Flying Falcone Clipped By Fraud Charges

NEW YORK ( TheStreet) - Fraud charges aren't a harbinger of bad things to come for embattled hedge fund titan Philip Falcone - they're his next big headache.

Falcone and Harbinger Capital Partners, the hedge fund he founded, have been charged with fraud, market manipulation and betraying clients in a civil suit filed by the Securities and Exchange Commission on Wednesday.

The SEC alleges that Falcone illegally used $113.2 million in client funds to pay his personal taxes, while also engaging in illegal bond and stock trading. The hedge fund manager is also accused of misappropriation in allowing some investors to pull $169 million from his floundering hedge fund. Separately, Harbinger agreed on to pay nearly $1.4 million to settle with the SEC on alleged illegal stock trading.

The charges were widely expected after previous media reports highlighted the SEC's inquest into Falcone's use of client funds for his personal finances and Harbinger's potentially illegal trading and redemption strategies.
Harbinger Group Phil Falcone

"Today's charges read like the final exam in a graduate school course in how to operate a hedge fund unlawfully," said Robert Khuzami, director of the SEC's Division of Enforcement in a statement.

"Clients and market participants alike were victimized as Falcone unscrupulously used fund assets to pay his personal taxes, manipulated the market for certain bonds, favored some clients at the expense of others, and violated trading rules intended to prohibit manipulative short sales."

The SEC alleges that Falcone fraudulently took a $113.2 million loan from the Harbinger Capital Partners Special Situations Fund to pay his personal taxes. At the time, the fund was suffering losses and had suspended investors from redeeming their money. In that loan, the SEC says Falcone and Harbinger never asked for consent from investors and misrepresented details to its legal advisor, which approved the transaction.

The complaint alleges that Harbinger fund investors also suffered from preferential treatment for some clients, which allowed some clients to pull $170 million from otherwise locked-up funds.

The fraud and manipulation suits are civil charges, meaning that the SEC will its try its allegations against Falcone and Harbinger, potentially banning the once high-flying fund manager from the securities industry and corporate boards. However, the SEC hasn't recommended criminal charges, meaning that, as of now, the U.S. Department of Justice won't pursue a case that could land the manager in jail.

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.
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