Important Implications and Recommendations for Hedge Fund Managers in the Aftermath of the SEC’s Settlement with Philip A. Falcone and Harbinger Entities

A new era in SEC enforcement has begun.  On August 19, 2013, Philip A. Falcone, Harbinger Capital Partners LLC (Harbinger) and other Harbinger entities agreed to a consent settling SEC charges.  The charges related to: (1) an improper loan effected between Falcone and the Harbinger Capital Partners Special Situations Fund; (2) improper arrangements between Falcone, Harbinger Capital Partners Fund I and various large fund investors that provided such investors with undisclosed preferential redemption terms; and (3) improper trading in the distressed high yield bonds issued by Canadian manufacturing company MAAX Holdings, Inc.  The groundbreaking settlement affirms the SEC’s commitment to extracting admissions of wrongdoing as a condition of settlement in select cases involving egregious conduct or significant harm to investors, which stands in direct contrast to its previous policy of allowing defendants to “neither admit nor deny the charges” in settlement agreements.  The settlement has broad implications for hedge fund managers, and it behooves such managers to understand how to address such issues.  This article describes the facts as admitted by the defendants; outlines the sanctions agreed to by the defendants; highlights important issues that hedge fund managers must address in light of the settlement agreement and the SEC’s new settlement policy; and provides practical recommendations for addressing such issues.  For a discussion of the SEC’s enforcement action initiated against the defendants, see “SEC Charges Philip A. Falcone, Harbinger Capital Partners and Related Entities and Individuals with Misappropriation of Client Assets, Granting of Preferential Redemptions and Market Manipulation,” Hedge Fund Law Report, Vol. 5, No. 26 (Jun. 28, 2012).

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