The latest hedge fund manager to come under fire from the U.S. Securities and Exchange Commission is Harbinger Capital Partners’ Phil Falcone. What’s different about this civil settlement is the admission of “wrong doing,” something that hasn’t typically occurred in the past.
Here’s the story from the Wall Street Journal:
Hedge-fund manager Philip Falcone admitted wrongdoing as part of a civil settlement with securities regulators, a landmark in the government’s new drive to push defendants to acknowledge their bad behavior.
As part of the settlement, disclosed Monday, Mr. Falcone and his hedge-fund firm, Harbinger Capital Partners, will pay more than $18 million and Mr. Falcone will be banned from the securities industry for at least five years.
Securities and Exchange Commission Chairman Mary Jo White said after taking office earlier this year that she wanted more defendants to have to admit wrongdoing. Monday’s civil settlement marks the first time an individual or firm has made such an admission in a deal with the SEC, except in cases where they had previously pleaded guilty in a criminal proceeding or been criminally convicted.
The settlement was the resolution of two civil lawsuits filed by the SEC against Mr. Falcone and Harbinger last year. The suits alleged, in part, that they had duped investors about a $113 million personal loan Mr. Falcone took out from a Harbinger fund to pay his own taxes, even as other investors in the fund were prevented from pulling their money. They also accused Mr. Falcone of manipulating the bond prices of MAAX Holdings, Inc., now called MAAX Corp., a maker of bathroom fixtures.
While this might be the first admission of guilt under the new SEC chairman, the New York Times reported that this may not be the last time:
The new, tougher terms reflect a wider policy change that Ms. White outlined this year, aiming to shift the burden of admission of guilt onto the defendant, overturning a longstanding policy of allowing defendants to “neither admit nor deny” wrongdoing.
The agreement on Monday sets a potential precedent for the regulator, which is busy with investigations involving JPMorgan Chase and the hedge fund SAC Capital Advisors.
While going after a hedge fund manager is different than pressing a giant bank, the agency is said to be to seeking an admission of wrongdoing from JPMorgan in a settlement over a multibillion-dollar trading loss last at a bank unit in London, in an episode known as the London Whale.
“This is evidence of a tougher policy,” John C. Coffee, a securities law professor at Columbia University, said about Monday’s settlement. “This is a case where the S.E.C. should have been greatly embarrassed by original settlement.
Bloomberg said that Falcone will be able to work at a publicly traded company, a concession likely extracted during negotiations:
The settlement, in which the SEC described Falcone and his funds as acting “recklessly,” is pending approval by the U.S. District Court for the Southern District of New York.
The settlement marks the first use of the new policy under White to seek admissions of fault in some cases. At the same time, it doesn’t bar Falcone from working as an officer or director of a public company, and doesn’t include an injunction barring him from future violations of securities laws.
Ceresney said in May the SEC would better tailor injunctions to the misconduct observed in specific cases.
“So it’s possible there was more than the usual horse-trading in this settlement, where the SEC gave up some of its usual relief in exchange for setting the precedent for admissions of wrongdoing,” said Russell G. Ryan, a former SEC enforcement attorney and now a partner in Washington at King & Spalding LLP.
The agreement is a “step in the right direction” because it shows the SEC can carry out White’s policy, said James Cox, a professor at Duke University School of Law in Durham, North Carolina, who specializes in securities law. Banning Falcone from the industry for five years, instead of simply fining him, constitutes “real repercussions.”
“Where we are more likely to see cases like this are in the investment-adviser and broker-dealer, market-professional areas, where the damages are more confined and contained, and the fear of mega-liability and private suits is more limited,” Cox said.
MarketWatch wrote in a commentary piece that while the admission of guilt and the ban were stricter than usual penalties, it likely wasn’t enough to actually kill Falcone’s career:
Upon return (and yes, odds are he will, see Frank Quattrone and more), Falcone will have a fresh start if he wants it. You don’t run what was once a $26 billion investment fund without making enough friends to get you back in the game. Unlike Fuld, Falcone’s alleged wrongdoings didn’t help bring down the financial system — it just may have ripped off a few clients.
It’s that possibility that will make this settlement tough to take for fair market enthusiasts. Until penalties are harsh enough, it’s hard to believe future Falcones will check their behavior. Falcone, it can be guessed, knows it.
“I believe putting these issues behind me now is the best course of action for me and our investors,” he said in a statement.
In other words Falcone isn’t getting away with it, but in time, he can come back.
I’m not so sure about that. It would be a huge risk for any public company to have him as a board member or a director after admitting to violating securities laws. As he liquidates his hedge fund, that money will obviously be reinvested in other funds and locations, making it potentially difficult for him to get new capital in five years when the restrictions are lifted. While I know his track record is one of success, I find it hard to believe that investors will be willing to put money with him again simply because the risk to their reputations would be so great.