SEC accuses hedge fund of fraud

Michael P. Tremoglie Jun. 28, 2012, 7:00am

NEW YORK (Legal Newsline) - A New York-based hedge fund adviser and his advisory firm were accused Wednesday by the Securities and Exchange Commission of fraud.

Philip A. Falcone, and HarbingerCapital Partners LLC, were engaged in two fraudulent schemes that disadvantaged investors and elevated Falcone's and Harbinger's interests above the interests of the funds they advised, alleged the SEC.

Peter A. Jenson, Harbinger's former Chief Operating Officer, who allegedly aided and abetted one of the fraudulent schemes, was also accused.

According to the SEC, 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, Falcone allegedly obtained $113.2 million from a hedge fund that Falcone and Harbinger managed during a period when Harbinger had precluded investors in the fund from redeeming their interests.

The defendants neither sought nor obtained investor approval for the related party transaction, the SEC says. Falcone and Harbinger, aided by Jenson, concealed the related party transaction from fund investors for approximately five months, the SEC says.

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."

The SEC filed actions in U.S. District Court for the Southern District of New York against Falcone, Jenson and Harbinger, and, in connection with the alleged illegal trading scheme, separately instituted and settled administrative and cease-and-desist proceedings against Harbinger.

The SEC wants disgorgement o fill-gotten gains, prejudgment interest and civil money penalties from Falcone and Harbinger. The Commission further seeks to prohibit Falcone from serving as an officer and director of any public company. Against Jenson, the Commission seeks to enjoin Jenson from aiding and abetting future violations of the anti-fraud provisions of the Exchange Act and Advisers Act and seeks to obtain monetary penalties.

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