STOCK MARKET WATCH -- Wednesday, 21 August 2013

[Demeter]

2. Falcone to Admit to Wrongdoing as S.E.C. Takes a Harder Line WALL OF SHAME

http://dealbook.nytimes.com/2013/08/19/hedge-fund-manager-to-admit-to-wrongdoing-in-revised-deal-with-s-e-c/?_r=0

Wall Street’s regulator sent a message on Monday that it was now taking a more aggressive stance on securities settlements as it extracted its first admission of wrongdoing under a new policy. The regulator, the Securities and Exchange Commission, said that the hedge fund manager Philip A. Falcone had agreed to admit wrongdoing and to be banned from the securities industry for at least five years to settle market manipulation accusations. As part of the settlement, he and his fund, Harbinger Capital Partners, must also pay more than $18 million. The deal comes a month after the commission had in a rare move overruled its own enforcement staff to reject a settlement struck with Mr. Falcone and Harbinger.

That original agreement had called for a two-year ban from raising new capital and no admission of wrongdoing. It also did not include an injunction against committing fraud in the future — language common to nearly every single securities settlement. The original settlement terms had irritated the S.E.C.’s new chairwoman, Mary Jo White, people briefed on the matter said, and frustrated many others within the agency who saw that deal as too lax. The new, tougher terms reflect a wider policy change that Ms. White outlined this year, aiming to shift the burden of admission of guilt onto the defendant, overturning a longstanding policy of allowing defendants to “neither admit nor deny” wrongdoing.

The agreement on Monday sets a potential precedent for the regulator, which is busy with investigations involving JPMorgan Chase and the hedge fund SAC Capital Advisors. While going after a hedge fund manager is different than pressing a giant bank, the agency is said to be to seeking an admission of wrongdoing from JPMorgan in a settlement over a multibillion-dollar trading loss last at a bank unit in London, in an episode known as the London Whale.

“This is evidence of a tougher policy,” John C. Coffee, a securities law professor at Columbia University, said about Monday’s settlement. “This is a case where the S.E.C. should have been greatly embarrassed by original settlement.”

Mr. Falcone was accused in June 2012 of manipulating the market by improperly using $113 million in fund assets to pay his own taxes and to favor some customer redemption requests secretly over others, among other things. His actions “read like the final exam in a graduate school course in how to operate a hedge fund unlawfully,” federal regulators said at the time. In the settlement, Mr. Falcone agreed that he had acted “recklessly” with regard to several market transactions, including granting favorable redemption and liquidity terms to big investors, and trying to manipulate bond markets. Though the total penalty amount is unchanged at $18 million, the latest settlement shifts more of it onto Mr. Falcone personally. He will be required to pay more than $11.5 million of his own money in disgorgement and penalty fines — far more than the $4 million in the previous settlement — while his Harbinger entities will have to pay $6.5 million. Mr. Falcone will be prohibited from raising any new capital for his hedge fund, but will be allowed to meet redemption requirements; this means he can liquidate the funds. Harbinger Capital has just under $3 billion in assets under management. Mr. Falcone will also be able to continue as an officer of a public company...

Andrew Ceresney, co-director of the S.E.C.’s enforcement unit, said on Monday, “Falcone and Harbinger engaged in serious misconduct that harmed investors, and their admissions leave no doubt that they violated the federal securities laws.” He continued, “Falcone must now pay a heavy price for his misconduct by surrendering millions of dollars and being barred from the hedge fund industry.”

Mr. Falcone put on a brave face, saying he was “pleased that we were able to reach a settlement to resolve these matters with the S.E.C....I believe putting these issues behind me now is the best course of action for me and our investors,” he said. “It will allow me to continue to focus on my permanent capital vehicles and maximizing the value of LightSquared for all stakeholders.”

The settlement must be approved by the United States District Court in Manhattan....

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