The Securities and Exchange Commission has filed fraud charges against the well-known New York-based hedge fund advisor Philip Falcone and his firm, including misappropriation of client assets, market manipulation and betraying clients.

Falcone fraudulently obtained $113.2 million from a hedge fund that he advised and used the proceeds to pay his personal taxes, according to the SEC.

Moreover, the regulator alleges that Falcone illegally manipulated bond prices, secretly favored certain clients, and that his firm, Harbinger Capital Partners, unlawfully bought equity securities in a public offering after having sold short the same security during a restricted period.

The SEC alleges that Falcone, who is one of the top 400 richest people in the US with a net worth of $1.1 billion according to Forbes, also lied to his clients about his actions.

“Today’s charges read like the final exam in a graduate school course in how to operate a hedge fund unlawfully,” said Robert Khuzami, director of the enforcement division at the SEC. “Clients and market participants alike were victimized as Falcone unscrupulously used fund assets to pay his personal taxes, manipulated the market for certain bonds, favored some clients at the expense of others, and violated trading rules intended to prohibit manipulative short sales."

Tax debt in 2009

Falcone owed federal and state authorities $113.2 million in taxes in 2009. Instead of pursuing other options, he allegedly took a loan from the Harbinger Capital Partners Special Situations Fund, a fund which Harbinger had earlier suspended investors from redeeming.

The SEC has also charged Peter Jenson, Harbinger's chief operating officer, who allegedly helped Falcone to structure the loan.

Falcone and Harbinger delayed disclosing the loan for about five months because of their concern that disclosure of Falcone’s financial condition might have a negative impact on investor withdrawals and the future of firm's funds, according to the SEC. Falcone repaid the loan in 2011, after the regulator had begun its investigation.

Separately, the SEC charged Harbert Management Corporation, whose affiliates served as the managing members of two Harbinger-related entities, as a controlling person in the market manipulation.

The SEC filed actions in the US District Court for the Southern District of New York against Falcone, Jenson and Harbinger, as well as instituting and settling administrative and cease-and-desist proceedings against Harbinger in connection with the illegal trading scheme.

The SEC seeks a variety of sanctions and relief including injunctions against Falcone and Harbinger from violations of the anti-fraud provisions of the Securities Act of 1933, the Exchange Act, and the Investment Advisers Act of 1940. The Commission further seeks to ban Falcone from serving as an officer and director of any public company as well as make him pay back ill-gotten gains, prejudgment interest, and civil money penalties. Against Jenson, the SEC seeks unspecified monetary penalties as well as stopping him from aiding and abetting future violations of the anti-fraud provisions of the Exchange Act and Advisers Act.