The agency accused Falcone of leading a “lavish lifestyle” while working to limit the ways clients could pull out their investments. In one instance, Falcone took out a $113.2 million loan from one of his hedge funds to pay personal taxes while most of the fund’s investors were unable to redeem their money.
The agency also alleged that Falcone and others in his firm manipulated the bond prices of Maax, which manufactures bathroom fixtures.
Although the agreement bars Falcone from critical hedge fund activities for two years — such as raising new funds or being involved in dealmaking through his firm — it did not require him to admit wrongdoing. He can also remain chief executive of Harbinger Group.
The agreement calls for Falcone to pay $4 million of the fine — likely a tiny portion of his net wealth — and Harbinger Capital will pay the rest, according to a person familiar with the matter who spoke on the condition of anonymity because the settlement is not final.
Falcone’s fame grew quickly across Wall Street after he bet against subprime mortgages right before those loans sparked a credit crisis that threatened to topple the financial system.
He used his wealth to gain allies in Washington, critics say, contributing to both Democratic and Republican campaigns. And he frequented Washington as he attempted to push through a venture called LightSquared, which proposed using satellites to create a cellular network that could compete with AT&T’s and Verizon’s.
Falcone’s $3 billion bet on LightSquared proved ill-fated. The Federal Communications Commission, after initially embracing the plan, turned on it last year after other federal agencies complained that the technology could interfere with GPS devices and airplane systems.
That reversal cost Falcone the loyalty of many of his clients. Some demanded that he resign; others sued. LightSquared is now in bankruptcy.
With Falcone’s reputation already marred, the SEC settlement could be the deathblow to his once prominent career, some analysts said. But many infamous investors on Wall Street have endured similar bans only to resurrect their careers later.
The settlement is only preliminary. It needs approval from the SEC’s commissioners and a federal court.
Falcone did not respond to requests for comment. Harbinger and the SEC declined to comment.
Under the terms, Falcone and the firm must “expeditiously” return any money to investors in Harbinger Capital funds. He and that hedge fund would be subject to the oversight of an independent monitor for the duration of the two-year stretch.