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SEC Requires Admission of Wrongdoing as Part of Settlement

Reversing its longstanding policy, the Securities and Exchange Commission recently required hedge-fund adviser Philip Falcone and his firm Harbinger Capital Partners LLC (Harbinger) to admit multiple acts of misconduct in order to settle two enforcement actions filed last year.

In papers filed in the US District Court for the Southern District of New York, the SEC alleged, and Falcone and Harbinger admitted, that: (i) Falcone improperly borrowed over $113 million from a Harbinger fund to pay his personal taxes, and did so at a preferential interest rate and despite his refusal to honor other investors’ redemption requests, and then failed to disclose the transaction for five months; (ii) Falcone and Harbinger favored certain investors over others, and did not disclose such preference to the board or other investors; and (iii) in 2006, Falcone and Harbinger engaged in an illegal “short squeeze” of a certain company’s bonds to punish a financial services firm. 

As part of the settlement, Harbinger must pay a $6.5 million penalty. Falcone must pay approximately $6.5 million in disgorgement, $1 million in prejudgment interest and a $4 million penalty. He also agreed to be barred from the securities industry for at least five years. 

Previously, the SEC permitted defendants to settle cases while still denying any wrongdoing. Thus, the Falcone and Harbinger settlement, with its numerous and specific admissions, marks a policy shift that raises several important questions. For example, as discussed elsewhere, such admissions may expose defendants to criminal liability. See Kurt Orzeck, “Falcone’s SEC Admission Leaves Criminal Charges Up in Air.” How the SEC and the Department of Justice will coordinate the prosecution of those accused of securities violations remains to be seen.   

SEC v. Falcone et al., Case No. 12-cv-5027 (PAC) (S.D.N.Y. Aug. 19, 2013); SEC v. Harbinger Capital Partners LLC et al., Case No. 12-cv-5028 (PAC) (S.D.N.Y. Aug. 19, 2013).

©2020 Katten Muchin Rosenman LLPNational Law Review, Volume III, Number 242


About this Author

Michael Rosensaft, white collar criminal litigator, Katten, New York Law Firm

Michael M. Rosensaft focuses his litigation practice on representing individuals and businesses in white collar criminal matters, regulatory enforcement matters, corporate internal investigations, insurance and health care fraud and complex civil litigation.

Prior to joining Katten, he served as an Assistant US Attorney for the Southern District of New York. In that capacity, Michael oversaw the investigation and prosecution of numerous criminal cases involving terrorism, international money laundering, export violations, bribery of foreign...

Tenley Mochizuki, Katten Muchin Law Firm, Litigation Lawyer

Tenley Mochizuki concentrates her practice in litigation and dispute resolution matters.

While attending law school, Tenley participated in the Advocacy for the Elderly Clinic and worked on the Virginia Environmental Law Journal. Before joining the firm, she worked in a medical office, a primate cognition laboratory and various nonprofit organizations.