For as long as anyone can remember, whenever someone settles with the Securities and Exchange Commission, that person won't admit wrongdoing even after paying a hefty sum. That may have changed as of yesterday. Hedge fund manager Phil Falcone not only accepted a five-year ban from the securities industry and agreed to cough up a total of $11.5 million, but he and his company, Harbinger Capital, also admitted to breaking the law.
The deal comes a month after the commission had in a rare move overruled its own enforcement staff to reject a settlement struck with Mr. Falcone and Harbinger.Read the SEC press release here, the consent decree here and the proposed judgment here.
That original agreement had called for a two-year ban from raising new capital and no admission of wrongdoing. It also did not include an injunction against committing fraud in the future — language common to nearly every single securities settlement.
The original settlement terms had irritated the S.E.C.’s new chairwoman, Mary Jo White, people briefed on the matter said, and frustrated many others within the agency who saw that deal as too lax.
The new, tougher terms reflect a wider policy change that Ms. White outlined this year, aiming to shift the burden of admission of guilt onto the defendant, overturning a longstanding policy of allowing defendants to “neither admit nor deny” wrongdoing.
The SEC sued Falcone and Harbinger in June 2012 after finding out about a staggering litany of misconduct. Back in 2006, Falcone siphoned off $113 million of Harbinger assets to pay his personal taxes and favor some customer redemptions over others. Then in 2007, Falcone heard rumors that Goldman Sachs was shorting the bonds of MAAX Holdings, a Canadian bathroom products manufacturer, and and encouraging its customers to short MAAX' bonds as well. Harbinger then bought all of MAAX' outstanding bonds, then demanded that Goldman settle all outstanding MAAX transactions and deliver the bonds it owed--knowing full well Goldman couldn't deliver on the bonds since Harbinger had tied them all up. This caused the price of MAAX' bonds to more than double between 2007 and 2008.
Under the settlement, which is pending approval by a judge in the Southern District of New York, Falcone and Harbinger will end up paying a total of $18 million to settle the charges. However, the revised terms will take more money out of Falcone's own pocket. He'll have to disgorge $6.5 million, as well as pay prejudgement interest of $1.01 million and a civil penalty of $4 million. By comparison, Falcone would have had to pay only $4 million out of his own pocket under the original settlement. Harbinger was slapped with $6.5 million in penalties.
That sound you probably heard was lawyers for JPMorgan CHase and SAC shooting up bolt upright in their chairs. The SEC has been under fire for a long time for putting out settlements that allow defendants to neither admit nor deny wrongdoing. But all indications are that policy is out the window. Indeed, the SEC is reportedly trying to get Chase to admit that its lax controls allowed London traders to hide a multimillion-dollar trading loss.