SEC files fraud charges against hedge fund, LightSquared backer

By Peter Schroeder and Brendan Sasso - 06/27/12 02:50 PM ET

The Securities and Exchange Commission (SEC) has filed fraud charges against Philip Falcone, alleging the hedge fund adviser misused client funds, manipulated financial markets and betrayed investors.

The civil suit filed against the billionaire founder of Harbinger Capital and LightSquared runs down a litany of misbehavior, including accusations he used over $100 million from a hedge fund he advised to pay his personal taxes. The fund's former chief operating officer, Peter Jenson, was charged with aiding in the scheme.

"Today's charges read like the final exam in a graduate school course on how to run a hedge fund unlawfully," said Robert Khuzami, the SEC's enforcement director.

The SEC also claims that Falcone attempted to illegally manipulate the market on some distressed high-yield bonds in a bid to seek "revenge" against other investors, buying up all of a particular company's debt and then bidding up the price on the debt to the detriment of investors that had taken "short" positions on the bonds.

The regulator also charges that Falcone and his fund gave certain clients secret, favorable treatment and also participated in illegal trades tied to three public offerings of stock.

Falcone, through his lawyer, has contested any charges of impropriety.

“Any allegations by the SEC of improprieties by Mr. Falcone or Harbinger are neither supported by the facts or the law,” Matthew Dontzin, an attorney for Falcone, told Bloomberg. “Should a lawsuit be brought, it will be contested vigorously.”

Beyond the SEC charges, Falcone's business activity has also garnered the attention of Congress, via the high-profile failure of the wireless broadband company LightSquared.

Falcone invested billions of dollars in LightSquared, which planned to build a nationwide high-speed cellular network. But the company was forced to file for bankruptcy last month after the Federal Communications Commission (FCC) moved to block its network over concerns that it would interfere with GPS devices.

Some Republicans have questioned why the FCC allowed LightSquared to get as far as it did in the regulatory process despite evidence of the interference problem. They have suggested the company and Falcone may have benefited from political connections at the FCC and the White House.

Republicans on the House Energy and Commerce Committee have launched an investigation into the FCC's review of LightSquared.

Falcone, who has donated thousands of dollars to both Democrats and Republicans in recent years, says he is a registered Republican and has denied any attempts to influence the process through political connections.