Why the SEC thinks Falcone was involved with Market Manipulation

The SEC has a bulls eye on Phil Falcone’s Harbinger Capital. On Friday the famed billionaire hedgie was forced to write investors explaining his publically traded Harbinger Group Inc is subject to a Wells Notice. This means the Securities and Exchange Commission, its regulator, has launched an official investigation into how the firm might have engaged in violations of federal securities laws and could bring an enforcement action.

This news sent nearly everyone of my finance jurno peers into speculation overload printing tales the SEC is really focused on unfair investor redemptions with Goldman (Falcone flat out denies this on the record and I believe him) to this continued wonderment over a $113 million loan Falcone took to pay off taxes. A loan he told me was paid back with a hard-money interest rate, in 2010, that delivered a profit to the fund he borrowed it from. But speculation is all my fellow jurnos have given the rarity of Falcone’s willingness to do interviews in the past. Instead all the ‘people familiar with the matter’ news leaks have come from a very few disgruntled Harbinger investors to a female ex-Harbinger employee (who use to work at Blackstone) that was asked to leave the firm last year.

I’ve been interviewing Falcone since we first met in early 2008 while I was reporting a story on the top 100 hedge fund income earners for Trader Monthly. I’ve written more exclusive, first to the story news, on the fund’s trades and Falcone than any other journalist for: New York Post, Forbes, Greenwich Time, Trader Monthly, DealFlow Media, FINalternatives and even Clusterstock. And I’ve watch some of my fellow journalist write blatantly inaccurate reports,mainly from Reuters, on the fund manager simply because I think they never had chance to interview Falcone and ask his version of the facts.

So to cut through all the chatter on what Falcone and his firm “could have” done wrong to garner this much heat from the SEC I’m going to you tell what I think is Falcone’s biggest worry: The Market Manipulation Investigation.

In 2010 Harbinger Group Inc had to disclose the SEC was looking over a bond trade. Falcone hasn’t disclosed which company this trade was in but I know it was one he went all in on. The problem was the broker he did the deal with didn’t have the borrow, yet still shorted more to Falcone. It’s my understanding this put Falcone in a position where he bought more of the deal than existed. When the broker had his ‘oh Shit’ moment and figured out he couldn’t get the borrow he got worried about his own rear and decided to call the SEC. Essentially setting up someone in this trade for a naked short – something the SEC is not fond of. It’s also possible while Falcone was moving fast to short the deal and the broker couldn’t find enough borrow he said “I don’t care, keep shorting it”. Then when other broker dealers found out his broker was naked short they told the SEC about it. Once the SEC came calling, Falcone’s broker dealer might have said “it’s not us, it’s our client.” So Falcone is left explaining to regulators why he thinks what happen in the trade isn’t his fault.

Falcone has stated he plans to fight any suit the SEC brings on and I expect he will. Of course knowing the SEC they’ll likely offer a slap on the hand with a small financial fine and Phil’s lawyer will suggest he settels. The question will be if this trader, who the New York Post once called Iron Man, will fold or finish this battle with the SEC and clear his name. I hope he does the later because a SEC v. Falcone trial (assuming they really sue him which isn’t a reality yet) would be a heck of a financial news show.


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  1. Andy – You’re right about the naked short and I’ve corrected the text.

    Yes I think the B/D’s boss made him call the SEC and I don’t think Falcone bought the bond from a large I-B but a smaller dealer.

    There are still lots of unanswered Q’s in this trade. Which is why the SEC came knocking.

  2. I’m confused, you said he bought the entire deal? How does that make him naked short the deal? If the broker oversold the deal that would make the broker naked short, not Falcone, right? And would a broker dealer really call the SEC on a huge client like Falcone? In addition to trading revenue Lightsquared is a huge I banking client too.

    I’m confused.

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