SEC Changes Its Mind About Deal With Phil Falcone That Included "Go Ahead And Keep Committing Fraud" Provision

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Poor guy:

The Securities and Exchange Commission overruled its own enforcement division’s decision to settle a civil case with the high-flying money manager Philip A. Falcone and his flagship hedge fund, a rare reversal that signals a broader crackdown by the agency. ... While the deal also included at least a two-year ban from raising new capital, a potential death knell to a hedge fund manager, that punishment came with a number of caveats. And in a a moral victory for Mr. Falcone, the deal also omitted a common provision that prohibits defendants from committing future violations with fraudulent intent.

Apparently SEC Chairman Mary Jo White killed the deal:

White, a former Wall Street defense lawyer, and Democrats Luis A. Aguilar and Elisse B. Walter, in a 3-to-1 vote, were concerned that Falcone wasn’t barred from serving as officer or director of a public company, said the people, asking not to be named because the deliberations aren’t public. The SEC informed Falcone’s Harbinger Capital Partners LLC of the decision yesterday, according to a filing from Harbinger Group Inc.1

Man it's hard to be the SEC. Presumably they employ a lot of people who do, like, actual work. They come in every morning and data-mine for shady options trades or browse the web for pump-and-dump newsletters or otherwise do stuff that keeps stupid investors safe from stupid fraudsters. Sometimes that shades into the big time, and into complicated questions. Were Harbinger investors stupid? Is Phil Falcone stupid? Is he a fraudster? I dunno, I mean, he keeps his elbows razor-sharp, but the SEC's case isn't a slam-dunk. There's a lot of "your lawyers told you that this was illegal so you got other lawyers to say it was okay," which is not great, exactly, but the other lawyers said it was okay, right?2 Reasonable minds can disagree: it's a sensible case for the SEC staff to bring, and it's a sensible case for Falcone to fight.

Cases like that should settle, obviously, and so the SEC staff and Falcone sensibly agreed to settle. For $18 million plus some symbolic mishegas of which the most important was that Falcone shouldn't be allowed to run outside money for two years. That I suppose was a symbolic loss for Falcone, though less of a practical one given that (1) "Falcone, 51, said previously that he planned to move away from hedge-fund investing, where clients can pull out their money at regular intervals,3 and instead use Harbinger Group to finance long-term investments," and (2) honestly 2 years seems like about the right amount of time for people to get over the whole borrowing money from gated funds thing. And in exchange Falcone got some symbolic victories, like not having to admit wrongdoing - honestly just the hollowest of these provisions4 but also the most discussed - and not having to agree not to commit fraud in the future, which, remember, nobody's supposed to commit fraud in the future, so this is not really a big deal.

Except that, in addition to its doing-stuff divisions, the SEC has this massive overlay of symbolic worrying, and the symbolic worrying overruled the stuff-doers here. Really the symbolic worrying is the face of the SEC. Here is John Coffee on Fab Tourre:

“The SEC is in this ‘damned if you do, damned if you don’t” position,” says Mr. Coffee.

A loss could raise questions about the SEC’s trial expertise, he adds. “If they win the case, the general reaction will be ‘you only went after the office boy.’”

Right? If you lose, you suck. If you win, then you've proved you can win difficult cases - so why didn't you bring any difficult cases against senior figures? If you can prove wrongdoing, why do you keep settling without demanding that people admit it?

Meanwhile, if you're an SEC enforcement staffer, how do you feel about this very public5 no-confidence vote? Pretty crap, right? Bloomberg quotes former SEC lawyer Bradley Bondi saying that "The aggressive move may signal that the commission thinks more of its chances than the staff actually does, or that the proposed settlement is somehow insufficient to the commission, or some combination of both.” "The commission thinks more of its chances than the staff actually does" is pretty rough: the staff are the people actually, y'know, working on the case, reading the documents, and deciding what they can prove. The commission are not exactly in the trenches, and they have other things on their plate than just winning a trial. What do they know about your chances?6

Why go after complicated fraud cases with messy facts and uncertain law? If you win at trial, you'll get second-guessed. If you lose, you'll get second-guessed. If you settle, you'll get second-guessed by your own bosses. Really you might as well stick to insider trading.

S.E.C. Rejects Its Own Deal With Hedge Fund Manager [DealBook]
Falcone SEC Settlement Said Rejected by White as Too Weak [Bloomberg]
SEC rejects settlement with fund manager Phil Falcone [Reuters]
Harbinger Group 8-K [EDGAR]

1.Here's the filing:

Late in the afternoon on July 18, 2013, Harbinger Capital Partners LLC, Harbinger Capital Partners Offshore Manager, L.L.C., Harbinger Capital Partners Special Situations GP, L.L.C., and Philip A. Falcone (collectively, the “HCP Parties”) were informed that the United States Securities and Exchange Commission (“SEC”) voted not to approve the previously disclosed agreement in principle between the enforcement staff of the SEC and the HCP Parties regarding the settlement of two civil actions filed by the SEC against the HCP Parties.

2.Did they? Also I feel like Falcone's short squeeze on those MAAX bonds, which the SEC thinks was manipulative, doesn't get talked about enough. That really was great and he should totally get away with it. What has become of our country if a cold, vicious, buying-more-than-100%-of-the-outstanding-to-fuck-a-guy-who-fucked-you short squeeze is illegal market manipulation?

3.EXCEPT AT HARBINGER I MEAN.

4.I mean, maybe not, I suppose there's the potential to create liability in private lawsuits. But honestly if you go to a party and people are like "I hear you paid the SEC a fine" does it matter if you reply:

  • "Oh yeah but we just settled as a tactical decision and didn't admit or deny wrongdoing" or
  • "Oh yeah but we just settled as a tactical decision"?

Grown-ups don't take admissions or non-admissions of wrongdoing in negotiated court settlements seriously. Lawyers do, but that's it.

5.Well, technically, secret - "the deliberations aren’t public" - but immediately and comprehensively leaked, which is really worse.

6.I'm reminded of Ina Drew's instructions to her traders that she "likes cheap options." Okay boss whatever! And the SEC likes sweeping victories in fraud cases.

Related

Appellate Court Willing to Entertain the Possibility that Citi Was Not Committing Fraud

I've had some fun these last few days proposing counterintuitive theories for why Citi might not suck as much as you probably think it does and it's nice to see others joining in the pastime, even if this sounds a little far-fetched: The district court’s logic appears to overlook the possibilities (i) that Citigroup might well not consent to settle on a basis that requires it to admit liability, (ii) that the S.E.C. might fail to win a judgment at trial, and (iii) that Citigroup perhaps did not mislead investors. That piece of rank conjecture is from the Second Circuit's opinion on an appeal* of Judge Rakoff's rejection of the settlement between the SEC and Citi over some mortgage-backed securities. Here's DealBook: