Hedge fund manager Falcone to settle fraud case

WASHINGTON — Billionaire hedge fund manager Philip Falcone and his firm have agreed to pay $18 million to settle civil fraud charges that he used fund money to pay his taxes and favored some clients over others.

Falcone would be barred for two years from working as an investment adviser or broker under the agreement in principle between the Securities and Exchange Commission and Falcone and Harbinger Capital Partners, the firm said in a filing Thursday.

Under the settlement, Falcone and Harbinger would neither admit nor deny the SEC’s allegations.

Falcone, a prominent figure on Wall Street, could continue to own New York-based Harbinger Capital. But it would be overseen by an independent monitor. Falcone couldn’t make investments for the fund or raise money for it.

The agreement must be formally approved by a majority of the SEC commissioners. The SEC had sued Falcone and Harbinger in June.

In 2007, Harbinger bet against bonds that were used to finance risky subprime mortgages and posted huge gains when the bonds fell in value. But the firm began to struggle in 2008, and it tightened its rules about when and how much money investors could withdraw.

The SEC alleged in its lawsuit that from 2006 through early 2008, Falcone manipulated the market for high-yield, high-risk bonds issued by a company called Maax Holdings Inc. Using fund money, Falcone bought many of the bonds to shrink the supply on the market and drive up prices, the SEC asserted.

The SEC also said Falcone and Harbinger secretly gave some key investors in the fund the right to cash out of their holdings. In exchange, the favored investors gave Falcone and the fund permission to bar the other investors from being able to cash out, according to the SEC. It said that arrangement was hidden from Harbinger’s directors.

Last year, the SEC reached a settlement with Harbert Management Corp., a firm with ties to Harbinger. The SEC said Harbert had the power to control Falcone and Harbinger but failed to stop the bond manipulation scheme.

Harbert and two related firms agreed to pay a $1 million civil fine. They, too, neither admitted nor denied wrongdoing.