A billionaire hedge-fund manager whose largest investment — a Reston startup wireless phone network — filed for bankruptcy last month has been charged by the Securities and Exchange Commission (SEC) with misappropriation of client assets, market manipulation and betraying clients.
The SEC charged in a civil lawsuit filed Tuesday in U.S. District Court in New York that Philip A. Falcone, 49, fraudulently borrowed $113.2 million in investors’ money without their consent from a hedge fund he advised through Harbinger Capital Partners LLC to pay his personal federal and state taxes in 2009.
At the time, Mr. Falcone was not allowing investors to take their money out of the fund. He repaid the loan in 2011 with interest after the SEC began its investigation. Also charged in the case was Peter A. Jenson, Harbinger’s former chief operating officer, who was accused of aiding and abetting the misappropriation scheme. The SEC also reached a settlement with Harbinger for unlawful trading.
Mr. Falcone, who made billions of dollars betting against the subprime mortgage market, has spent much of his time and investors’ money on trying to build a wireless network from scratch through LightSquared Inc., the Reston company he set up. It was the largest investment for Harbinger Capital.
His dream of building a broadband network to compete with AT&T and Verizon was dealt a major blow in February when the Federal Communications Commission (FCC) rescinded a decision to allow LightSquared to proceed. In reversing itself, the FCC said the LightSquared network would interfere with GPS signals.
LightSquared, which said it invested more than $4 billion in the network, filed for bankruptcy protection in May. Mr. Falcone said at the time that the bankruptcy filing would help keep the company away from creditors.
Sen. Chuck Grassley of Iowa, the ranking Republican on the Senate Judiciary Committee who raised concerns with the FCC last year about the LightSquared wireless project, said he initially got “the brushoff.”
“Now it turns out those concerns appear to have been well-founded,” he said. “It appears the FCC nearly granted billions of dollars in taxpayer assets to someone accused by our nation’s financial regulator of having ‘victimized’ clients. … Maybe the next time, the FCC won’t be so dismissive about concerns raised about its business.”
Matthew Dontzin, an attorney for Mr. Falcone, said the SEC charges are “without merit” and will be vigorously defended in court.
“This has to be the first case involving an act of supposed dishonesty in which a client simply followed the advice of his lawyer,” said Mr. Dontzin. “The notion that Mr. Falcone committed a fraud in connection with the loan from a Harbinger fund is unsupportable.”
But Robert Khuzami, director of the SEC’s Division of Enforcement, disagreed.
“Today’s charges read like the final exam in a graduate school course in how to operate a hedge fund unlawfully,” Mr. Khuzami said. “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 is seeking to bar Mr.Falcone from serving as an officer or director of any public company. The commission also wants to Mr. Falcone to pay unspecified penalties and restitution.
Mr. Falcone’s hedge fund, which had $26 billion in assets by 2008, has since sustained $23 billion in losses and withdrawals, according to published accounts.