LightSquared Founder and Key Financial Backer Charged with Fraud
Philip A. Falcone and his advisory firm, Harbinger Capital Partners have been charged with a series of allegations by the Securities and Exchange Commission (SEC).
Philip Falcone and Harbinger were the principle backers of the LightSquared LTE network which failed to launch after the regulator blocked it due to concerns about interference with GPS receivers.
The SEC filed fraud charges against them, claiming they engaged in illicit conduct that included misappropriation of client assets, market manipulation, and betraying clients. The SEC also charged Peter A. Jenson, Harbinger's former Chief Operating Officer, for aiding and abetting the misappropriation scheme.
Additionally, the SEC reached a settlement with Harbinger for unlawful trading.
The SEC alleges that Falcone used fund assets to pay his taxes, conducted an illegal "short squeeze" to manipulate bond prices, secretly favored certain customers at the expense of others, and that Harbinger unlawfully bought equity securities in a public offering, after having sold short the same security during a restricted period.
"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. "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 the misappropriation scheme, the SEC alleges that Falcone unlawfully used fund assets to pay his personal taxes. In 2009 Falcone owed federal and state authorities $113.2 million in taxes. Declining to pursue other financing options, such as pledging his personal assets as collateral for a bank loan, Falcone elected instead to take a $113.2 million loan from the Harbinger Capital Partners Special Situations Fund, L.P. - the same fund from which Harbinger had earlier suspended investors from redeeming.
Falcone authorized the transfer of fund assets to himself in a transaction that Jenson helped structure. Falcone and Harbinger never sought or obtained consent from investors prior to using the fund's assets to benefit Falcone.
As part of the misappropriation scheme, the SEC alleges that Falcone and Harbinger, aided by Jenson, made several material misrepresentations and omissions in seeking legal advice regarding the loan and in subsequent communications with investors.
The SEC also alleges that Falcone and Harbinger delayed disclosing the loan for approximately five months because of their concern that disclosure of Falcone's financial condition might have a negative impact on investor withdrawals and on Falcone's ability to attract more investments for other Harbinger funds.
Falcone repaid the loan in 2011, after the Commission commenced its investigation.
There is no mention of LightSquared in the charges, but the implications for the mobile network, which filed for Bankruptcy protection last month cannot be helpful in its attempts to secure a settlement with its creditors.