SEC rejects settlement with Phil Falcone’s Harbinger Capital

The U.S. Securities and Exchange Commission rejected a proposed $18 million settlement with Philip Falcone’s Harbinger Capital Partners LLC of claims that the hedge-fund manager borrowed money from his fund.

The SEC informed Harbinger Capital of the decision yesterday, according to a filing from Harbinger Group Inc., a New York-based firm that owns companies from an insurer to the maker of George Foreman grills.

Falcone in April agreed to a two-year suspension from investing client money in order to settle claims that he improperly borrowed money from his fund to pay his taxes. The agreement would have allowed Falcone to remain chief executive officer of Harbinger Group, a company he modeled on Warren Buffett’s Berkshire Hathaway Inc. Falcone’s Harbinger Capital hedge fund would have paid about $18 million in disgorgement, interest and penalities to resolve the SEC claims.

“The SEC is showing more backbone than its staff, and that is a welcome reversal,” said Erik Gordon, a business and law professor at the University of Michigan in Ann Arbor. “If not for Falcone, at least for his investors, and all investors.”

The settlement would have ended, at least temporarily, a 12-year career as hedge-fund manager for Falcone, who made billions for investors and himself by betting against subprime mortgages in 2006, only to tie up much of clients’ money in a wireless phone company, LightSquared Inc., that last year filed for bankruptcy.

Falcone, 50, said previously that he planned to move away from hedge-fund investing, where clients can pull out their money at regular intervals, and instead use Harbinger Group to finance long-term investments.

Falcone didn’t immediately return an e-mail and phone call seeking a comment.

None of the SEC’s actions were brought against Harbinger Group or its subsidiaries, according to the filing.

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