SEC may charge Falcone and Harbinger Capital

December 9, 2011

The Securities and Exchange Commission has told hedge fund mogul Philip Falcone and his firm, Harbinger Capital Partners, that they could be charged with securities fraud, according to a Friday regulatory filing.

The SEC sent Falcone, his firm and two associates notices that it intends to recommend or is considering recommending that the agency file civil actions against them, the disclosure by a Harbinger affiliate said.

Falcone has contributed both to Democrats and to Republicans, and his hedge fund has invested $2.9 billion in LightSquared, a Reston firm seeking to build a hotly debated wireless network. Falcone made a fortune betting against subprime mortgages but has since suffered reversals.

In a statement Friday, Falcone and Harbinger said that they “strongly disagree” with some of the SEC’s allegations — but not with all of them.

The statement said their disagreement did not extend to alleged violations of a rule that involves short-selling — essentially, betting that the price of a stock will decline. The rule they cited restricts shorting a stock before an offering in which shares are sold to the public.

As for the other matters under investigation, Harbinger plans to argue that the SEC should refrain from taking enforcement action, the statement said.

One focus of the SEC probe is a loan of more than $100 million that one of the Harbinger funds made to Falcone in 2009, Harbinger spokesman Lewis M. Phelps said.

Harbinger disclosed months ago that the SEC and the Justice Department were investigating a loan to Falcone. Falcone borrowed the money to pay taxes and has since repaid it, Phelps said.

The Friday regulatory filing gave only a vague description of the other matter under SEC in­vestigation, and the Harbinger spokesman would not elaborate. According to the filing, it involves “the circumstances and disclosure related to agreements with certain fund investors.”

The Wall Street Journal reported that the SEC has been examining whether Harbinger agreed to let some investors cash out their holdings while other investors were barred from doing so.

Harbinger said the SEC notices had nothing to do with LightSquared or Harbinger’s investment in the Reston company, and a spokesman for LightSquared echoed that statement.

LightSquared’s plan to build a wireless network has met resistance from competitors and other critics who say it would interfere with the Global Positioning System (GPS), a vital navigational tool for the military, private aviation and consumers.

As Republicans have put the company under a spotlight, LightSquared has denied it benefited from political connections.

In a statement Friday, Sen. Charles E. Grassley (R-Iowa) said the Federal Communications Commission is now faced “with the real possibility that it made a multi-billion-dollar grant of valuable spectrum to someone who could be charged with violating securities laws.”

In a July letter to Grassley, FCC Chairman Julius Genachowski said the FCC considers character issues, such as felony convictions, when making licensing decisions.

“Unless the applicant has allegedly engaged in non-FCC related misconduct so egregious as to shock the conscience and evoke almost universal disapprobation,” he added, “the Commission will consider such non-FCC misconduct only if the alleged misconduct has been adjudicated.”

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