On July 2, we blogged that the SEC was seeking to require some defendants to admit wrongdoing as part of future regulatory settlements. It looks like the SEC may be putting its money where its mouth is. On August 19, 2013, the SEC announced that Harbinger hedge-fund manager Philip Falcone admitted wrongdoing as part of a settlement with the SEC. Falcone and his hedge fund, Harbinger Capital Partners, will pay a total of more than $18 million and Falcone will be banned from the securities industry for at least five years. It is about time that parties committing investment fraud are required to admit what they did.
The settlement, which a federal judge must approve, would resolve SEC lawsuits alleging, among other things, that Falcone improperly used $113 million in Harbinger fund assets to pay his personal taxes, secretly favored certain customer redemption requests at the expense of other investors, and conducted an improper "short squeeze" in bonds. As part of their settlements with the SEC, Falcone and Harbinger admitted to multiple acts of misconduct that harmed investors and interfered with the normal functioning of the securities markets.
This marks the first time an individual or firm has admitted fault as part of an SEC settlement where there has not been a guilty plea or conviction in a criminal case. In the future, Falcone's admission may be looked back on as a watershed moment in securities regulation. While the terms of the settlement do not affect Mr. Falcone's or Harbinger's "right to take legal or factual positions in litigation or other legal proceedings" not involving the SEC, we believe that such admissions of wrongdoing could be helpful to litigants in civil court proceedings. The co-director of the SEC's enforcement division has said that Falcon's and Harbinger's admissions "leave no doubt that they violated the federal securities laws."