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The Five Dumbest Things on Wall Street This Week: June 29

2. Falcone's Failure

Harbinger Capital founder Phil Falcone once had it all. Too bad he was so full of himself that he failed to spread it around.

The Securities and Exchange Commission initiated a lawsuit against the formerly high-flying hedge fund manager on Wednesday, accusing him of illegally borrowing $113 million in client money to pay personal taxes in 2009.

Falcone is also being sued by the government over a sweetheart deal that allowed Goldman Sachs (GS - Get Report) (who else?) to flee his flagging flagship fund while other investors were still locked up, as well as manipulating the prices of distressed high-yield bonds by engaging in an illegal "short squeeze."

"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.

Poor Phil. If only he adhered to the investing adage that diversification is the only free lunch on Wall Street. If he had he might have avoided this sorry situation. Alas, instead of seeing the light, Falcone saw 4G wireless provider LightSquared and totally lost it.

And when we say "lost it" we mean both his mind and his money. Not since Klaus Kinski went over the falls in Fitzcarraldo have we seen such suicidal devotion to a single idea.

Falcone's fanatical wager on the now bankrupt high-speed wireless network wiped out most of his fund's nearly $3 billion investment. Even worse, it caused Falcone to allegedly skirt the law to save his own skin. At last check the fund, which peaked at $26 billion in assets in 2007, was down to $3 billion.

Look, we understand that concentrated bets occasionally payoff. And we also appreciate the fact that most of the world's richest people became that way by betting on their own transformational vision as opposed to the market's conventional wisdom. Heck, that's how Falcone amassed his pile in the first place, by betting big against subprime mortgages before they collapsed.

The very smart ones, however, realize that those once-in-a-lifetime trades are exactly that. Once they make their big score, they check their egos to prevent themselves from giving their winnings back.

The very dumb ones, on the other hand, believe the hype, give it all back and occasionally, like our good friend Phil, get sued by the government for breaking the law.
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