The US Securities and Exchange Commission has filed civil charges against Philip Falcone and his hedge fund group Harbinger Capital Partners, alleging that he used customer funds to pay his taxes, manipulated markets and gave favourable treatment to certain clients.
A civil claim has also been brought against Peter Jenson, Harbinger’s former chief operating officer, for allegedly aiding Mr Falcone.
The SEC said it had reached a settlement with Harbinger over a separate allegation of unlawful trading under which the group will pay $1.4m, but not admit or deny wrongdoing.
Mr Falcone, a former professional ice hockey player, made a fortune by betting against the US housing market before the financial crisis.
“In addition to raiding a fund for personal benefit and cutting secret deals with favoured investors, Falcone then lied to investors about what he had done,” said Bruce Karpati, chief of the asset management unit in the SEC’s enforcement division.
One issue involves a $113.2m loan Mr Falcone took from his Special Situations fund to cover personal tax obligations, at a time when he had barred investors from cashing out their holdings in the fund.
Matthew Dontzin, Mr Falcone’s lawyer, said the loan deal was structured by a “leading national law firm”, which had advised Mr Falcone the transaction was legal. Mr Dontzin also said the loan was paid back fully with interest.
The SEC also claims that Mr Falcone gave certain “strategically important investors” preferential treatment on redemptions, in return for their support of the bar on redemptions by other investors.
The agency said Mr Falcone had conducted an improper “short squeeze”, to manipulate the prices of distressed high-yield bonds. Short squeezes involve market participants pushing up the price of a security, until short-sellers have to buy it to close out their short position.
In another allegation of market manipulation, the SEC said Harbinger wrongfully bought shares during three public offerings, after selling the same shares short during a restricted period.
Mr Dontzin said the other allegations were “without merit and will all be vigorously defended”. Harbinger declined to comment. Mr Jenson could not be reached for comment.
The charges mark the latest setback for Mr Falcone, after LightSquared, a satellite company in which Harbinger is the main investor, filed for bankruptcy court protection in May.
Mr Falcone’s investment in LightSquared began to sour after the Federal Communications Commission withdrew a waiver, which would have enabled the company to operate a ground-based broadband network, over concerns it could interfere with GPS navigation systems.
LightSquared has continued to function in bankruptcy with the approval of creditors that as of the start of June included the hedge funds Fortress Investment Group and Appaloosa Management.
Neither Appaloosa or Fortress would comment on whether the SEC charges against Mr Falcone would change their approach to the bankruptcy proceedings.
Additional reporting by Zach Coleman