In a regulatory filing made on July 19, 2013, Harbinger Group, Inc. (Harbinger Group), a publicly traded investment company, announced that the US Securities and Exchange Commission (SEC) had rejected an agreement in principle that Harbinger Group had reached with the staff of the SEC’s Enforcement Division. The agreement was to settle allegations that Philip A. Falcone and the hedge fund he managed, Harbinger Capital Partners LLC (Harbinger Capital), misappropriated client assets, manipulated markets and betrayed clients.
The agreement would have resolved civil charges that the SEC filed last June in the US District Court for the Southern District of New York against Harbinger Capital, Falcone and Harbinger Capital’s former Chief Operating Officer Peter A. Jenson. The complaints charged Falcone and Harbinger Capital with violating Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5, and Sections 206(1), 206(2), 206(4) and 206(4)-8 of the Advisers Act. Falcone also was charged as a control person under Section 20(a) of the Exchange Act; Jenson was charged with aiding and abetting Falcone and Harbinger Capital’s alleged violations.
According to a quarterly report by Harbinger Group in May 2013, Falcone and Harbinger Capital were close to an agreement to settle the charges. Under the proposed agreement, Falcone would have been banned from the securities industry for two years and Harbinger Capital would have paid $18 million in penalties without admitting or denying the SEC’s allegations. Despite the proposed ban, the agreement would have allowed Falcone to continue running Harbinger Group as Chief Executive Officer.
While the settlement may have been agreed to in principle by the defendants and the staff of the SEC’s Enforcement Division, it was still subject to ratification by the full Commission, which requires a vote by the five commissioners of the SEC, including Mary Jo White, the new Chair whose term began in early April 2013. Although the deliberations of the commissioners are not public, public reports have suggested that several commissioners, including White, believed that the proposed settlement was too lenient on Falcone and Harbinger Capital. Whatever the reason, the SEC’s decision means that the civil cases will continue, at least for now.
The Commission does not lightly or often reject settlements that are supported by its Enforcement Division. The SEC’s decision to do so here could suggest, as it has publicly proclaimed, that it will be taking a more aggressive stance in enforcement matters. When coupled with the SEC’s new policy of seeking admissions of wrongdoing in certain settlements (in opposition to their traditional position of allowing settlements without either “admitting or denying” the SEC’s allegations), today’s decision could portend a new enforcement climate where settlements are more costly and the collateral consequences more severe.