MANHATTAN (CN) - The SEC claims that hedge fund operator Philip Falcone swiped $113 million from his company, Harbinger Capital Assets, which he ran "like the final exam in a graduate school course in how to operate a hedge fund unlawfully."
The SEC also accused Harbinger's former COO Peter A. Jenson of aiding and abetting Falcone.
In a third, settled complaint, the SEC charged Harbert Management Corp., "whose affiliates served as the managing members of two Harbinger-related entities, as a controlling person in the market manipulation," the SEC said in a statement.
"Today's charges read like the final exam in a graduate school course in how to operate a hedge fund unlawfully," CEO enforcement director Robert Khuzami said in the agency's 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."
In its federal complaint against Falcone, Harbinger and Jenson, the SEC claims: "Falcone and Harbinger, aided and abetted by Jenson, engaged in a fraudulent scheme to misappropriate $113.2 million from a Harbinger fund in order to pay a personal tax obligation owed by Falcone. Instead of paying his personal taxes with his own assets, which may have required Falcone to curtail his lifestyle and personal expenditures, Falcone obtained $113.2 million from a hedge fund that Falcone and Harbinger manager during a period when Harbinger had precluded investors in the fund from redeeming their interests."
The SEC claims the men concealed the deal for 5 months, and "(t)o give the appearance of legality, the defendants engaged a law firm to advise them; however, the defendants failed to disclose all material information to the law firm. In addition, the defendants did not act in accordance with the advice that they did receive from the law firm."
Harbinger is a Delaware LLC owned and managed by Falcone, 49. Harbinger managed $26 billion in assets at its peak in 2008, according to the complaint. Jenson, 46, an Australian citizen who lives in Illinois, was a Harbinger managing director and COO from April 2009 through July 2011.
In a second complaint, the SEC sued Falcone, Harbinger Capital Partners, Offshore Manager LLC and Harbinger Capital Partners Special Situations GP LLC. The latter two are unregistered investment managers Falcone controls, according to the complaint.
SEC associate director of enforcement Gerald Hopkins said in the statement: "After he took control of an entire issue of high-yield bonds, Falcone kept buying with an eye toward rigging the market and punishing short sellers to settle a score. In the process, Falcone hijacked the market for the bonds and illegally manipulated their price and availability."
In the second complaint, the SEC claims that Falcone and Harbinger bought 22 million more MAAX bonds than the bond issuer had actually issued.
"Having seized control of the supply of the MAAX bonds, Falcone then demanded that the Wall Street firm and its customers settle their outstanding MAAX short sales, not disclosing that it would be virtually impossible to find bonds available for delivery," the SEC said in its statement. "The Wall Street firm bid daily for the bonds, which quickly doubled in price. Then, Falcone engaged in a series of transactions with certain short sellers at arbitrary, inflated prices, while at the same time valuing the funds' holdings on his books at a small fraction of the prices he charged the covering short sellers."
Harbert agreed to pay $1 million to settle, without admitting anything, the SEC said.
The SEC seeks disgorgement and penalties from Falcone and Harbinger, and it wants Falcone ordered not to do such a thing again.