More On Legal & Compliancefrom The Advisor's Professional Library
- Updating Form ADV and Form U4 When it comes to disclosure on Form ADV, RIAs should assume information would be material to investors. When in doubt, RIAs should disclose information rather than arguing later with securities regulators that it was not material.
- Client Communication and Miscommunication RIA policies and procedures must specify what type of communications should be retained. The safest course of action is for RIAs to retain all communicationsto clients, from clients, and about client accounts. To comply with fiduciary obligations, communications must be thorough and not mislead.
In another score for the Asset Management Unit within SEC’s Division of Enforcement, the commission filed fraud charges against New York-based hedge fund advisor Philip Falcone and his advisory firm, Harbinger Capital Partners, on Wednesday.
The Securities and Exchange Commission accuses Falcone and his firm of illicit conduct that included “misappropriation of client assets, market manipulation and betraying clients." The SEC also charged Peter Jenson, Harbinger’s former chief operating officer, with aiding and abetting the misappropriation scheme. Additionally, the SEC reached a settlement with Harbinger for unlawful trading.
In a separate, settled action, the SEC charged Harbert Management Corp., whose affiliates served as the managing members of two Harbinger-related entities, as a controlling person in the market manipulation.
According to the complaint, Falcone allegedly used fund assets to pay his taxes, conducted an illegal “short squeeze” to manipulate bond prices and secretly favored certain customers at the expense of others. The complaint also alleges that Harbinger unlawfully bought equity securities in a public offering, after having sold short the same security during a restricted period.
“Today’s charges read like the final exam in a graduate school course in how to operate a hedge fund unlawfully,” Robert Khuzami (left), director of the SEC’s Division of Enforcement, said in a statement. “Clients and market participants alike were victimized as Falcone unscrupulously used fund assets to pay his personal taxes, manipulated the market for certain bonds, favored some clients at the expense of others, and violated trading rules intended to prohibit manipulative short sales.”
The SEC filed actions in U.S. District Court for the Southern District of New York against Falcone, Jenson and Harbinger, and, in connection with the illegal trading scheme, separately instituted and settled administrative and cease-and-desist proceedings against Harbinger.
In particular, the SEC alleges that:
- Falcone fraudulently obtained $113.2 million from a hedge fund that he advised and misappropriated the proceeds to pay his personal taxes;
- Falcone and two Harbinger investment managers through which Falcone operated manipulated the price and availability of a series of distressed high-yield bonds by engaging in an illegal “short squeeze;”
- Falcone and Harbinger secretly offered and granted favorable redemption and liquidity rights to certain strategically-important investors in exchange for those investors’ consent to restrict redemption rights of other fund investors, and concealed the arrangement from the fund’s directors and investors; and
- Harbinger engaged in illegal trades in connection with the purchase of common stock in three public offerings after having sold the same securities short during a restricted period.
“Not only are hedge fund managers expected to be savvy investors, they are supposed to serve the interests of their clients,” said Bruce Karpati, Chief of the Asset Management Unit in the SEC’s Division of Enforcement. “Here, in addition to raiding a fund for personal benefit and cutting secret deals with favored investors, Falcone then lied to investors about what he had done.”