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TheStreet Open House

Harbinger's Falcone Clipped By Misconduct Settlement

Stocks in this article: HRG

Updated from 4:57 p.m. ET with comment from Phil Falcone

NEW YORK ( TheStreet) -- Philip Falcone has admitted to wrongdoing in an $18 million settlement with the Securities and Exchange Commission that bars the embattled hedge fund titan from Wall Street for five years and may mark a turning point for enforcement in financial markets.

The SEC said Monday that Falcone and his firm Harbinger Capital Partners will admit to wrongdoing in a string of charges brought forward last year. Falcone will also be barred from the securities industry for at least five years.

In June of 2012, the SEC filed an enforcement action against Falcone that alleged he improperly used $113 million in fund assets to pay his personal taxes and secretly favored certain customer redemption requests at the expense of other investors. Harbinger was accused of market manipulation, by orchestrating an improper "short squeeze" in bonds issued by a Canadian manufacturing company.

An earlier deal allowed Falcone and Harbinger to settle with the SEC without admitting wrongdoing. After the settlement was rejected, Falcone and his once giant hedge fund are now leveling up to multiple charges of misconduct.

"Falcone and Harbinger engaged in serious misconduct that harmed investors, and their admissions leave no doubt that they violated the federal securities laws," Andrew Ceresney, co-director of the SEC's Division of Enforcement, said in a statement.

"I am pleased that we were able to reach a settlement to resolve these matters with the SEC," Falcone said in an e-mailed statement. "I believe putting these issues behind me now is the best course of action for me and our investors," Falcone added.

While Falcone's admission means he will now be barred from some Wall Street activity, the once prominent hedge fund manager will continue to work with finance and investments. The settlement will allow Falcone to focus on maximizing the value of a failed wireless venture, LightSquared, which is owned by Harbinger. "I remain committed to managing Harbinger Capital's portfolio of investments for the benefit of our investors," Falcone said.

In its initial charge, the SEC alleged that Falcone illegally used $113 million in client funds to pay his personal taxes, while also engaging in illegal bond and stock trading. The SEC said Falcone and Harbinger never asked for consent from investors and misrepresented details to its legal adviser, which approved the transaction.

The hedge fund manager was also accused of misappropriation in allowing some investors to pull $169 million from his floundering hedge fund. At the time, the fund was suffering losses and had suspended investors from redeeming their money. Harbinger investors also suffered from preferential treatment for some clients, which allowed some clients to pull $170 million from otherwise locked-up funds, the complaint said.

The SEC has leveled civil charges and won admissions. However, the regulator 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 hedgie in jail.

The SEC also pushed for "market manipulation" charges against the billionaire hedge fund guru in relation to bond investments in the debt of MAXX Holdings group.

The SEC said that from 2006 through early 2008, Harbinger orchestrated an illegal "short squeeze" on the supply of the bond issue -- after hearing of banks buying short positions in the security -- with the intent of forcing settlement with short sellers at inflated prices.

In that strategy, the SEC said Falcone raised Harbingers stake in MAXX bonds to approximately 13% more than their available supply. Having taken control of the supply of the MAAX bonds, Falcone then demanded that short sellers settle their outstanding MAAX shorts at unfair and manipulative prices.

Harbinger has been the focus of federal scrutiny after it was reported that Falcone used a $113 million loan in 2009 to pay personal taxes. The SEC investigation focused on whether the loan -- which was eventually revealed -- was disclosed in a timely fashion.

The SEC said Harbinger misrepresented its financial situation to investors and its legal advisers.

Harbinger and Falcone have faced massive losses in recent years as a bet on high-speed wireless provider LightSquared soured and wiped out most of Harbinger's near-$3 billion investment in the now bankrupt firm.

-- Written by Antoine Gara in New York

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