Obama SEC sues LightSquared backer Philip Falcone and Harbinger for fraud

Josh Peterson | Tech Editor

The federal government has committed itself to destroying once-favored Democratic political donor Philip Falcone, turning its back on a man whose investment efforts were aided by the Obama administration’s use of political and regulatory muscle.

On Wednesday, the Securities and Exchange Commission (SEC) alleged that Falcone — who made billions betting against subprime mortgages during the housing crisis — and his investment firm, Harbinger Capital Partners LLC, had “fraudulently obtained $113.2 million from a hedge fund that he advised and misappropriated the proceeds to pay his personal taxes.”

Falcone’s attorney says the charges are unsupported, but the billionaire hedge-fund manager and backer of the now bankrupt broadband company LightSquared, owed that same amount in federal and state taxes in 2009, according to the agency’s filing, by which he took a loan from his firm to repay the debt.

Not only did Falcone use hedge fund money to pay his taxes, said the SEC filing, but he gave preferential treatment to “certain strategically-important investors” in order to gain an advantage over his competitors.

The agency is seeking “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.”

Perhaps the most severe penalty the SEC is seeking — aside from a monetary penalty through the “disgorgement of ill-gotten gains, prejudgment interest and civil money penalties from Falcone and Harbinger — is that it “seeks to prohibit Falcone from serving as an officer and director of any public company.”

Falcone’s attorney, Matthew Dontzin of The Dontzin Law Firm, said in a statement to The Daily Caller, “This has to be the first case involving an act of supposed dishonesty in which a client simply followed the advice of his lawyer.”

“The notion that Mr. Falcone committed a fraud in connection with the loan from a Harbinger fund is unsupportable,” said Dontzin. “The loan was obtained after receiving considered written legal advice from a leading national law firm on the basis of fully disclosed facts; that same firm proposed the idea of the loan, structured the transaction, documented it, advised on the timing and form of disclosure to investors, and explained it when investors made inquiries.”

“The investors were fully paid back with interest,” said Dontzin. “As the SEC well knows and the Court will soon learn, the notion propagated by the SEC that investors were harmed by that conduct or any other is not only irresponsible but completely unsupported by any evidence. The other matters are equally without merit and will all be vigorously defended in the courthouse.”

TheDC previously reported on how the Obama administration had once provided favorable treatment to Falcone and Harbinger, having driven LightSquared’s competitors out of business in order to create a favorable business climate for the company. When it was discovered that the company’s technology interfered with GPS systems, however, the party was over. The company withered in regulatory limbo until it was finally denied full regulatory approval by the FCC.

Former LightSquared CEO Sanjiv Ahuja had also resigned shortly after The Daily Caller reported on his close ties to the Obama White House, although his resignation statement was silent about this fact. His resignation sparked an investigation by the Republicans in the House Energy & Commerce Committee into the FCC and other numerous executive branch agencies involved with the LightSquared affair. Republican Sen. Chuck Grassley had already been holding up the confirmation of two new FCC commissioners until his own investigation’s demands into the FCC’s role in the LightSquared affair were met.

As Falcone scrambled to assemble the funds necessary to appease his creditors and keep LightSquared afloat, Falcone went on to say that he felt he was “caught in the middle of a maelstrom for reasons not of [his] doing.” LightSquared ended up filing for bankruptcy in May.

A spokesman for Falcone told TheDC that Falcone was unavailable for interview.

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