Tuesday, August 20, 2013

Falcone the First To Admit Guilt Under New SEC Settlement Policy

By Tim Dulaney, PhD and Tim Husson, PhD

On Monday, Philip Falcone and Harbinger Capital Partners, LLC, the hedge fund he founded in 2001, agreed to a settlement with the Securities and Exchange Commission (SEC) that in addition to an $18 million penalty included an admission of wrongdoing.1  This is the first high-profile settlement with an admission of guilt since SEC Chairman Mary Jo White said the commission would seek more admissions of guilt rather than continue its longstanding policy of allowing defendants to 'neither admit nor deny' claims of fraud.

The SEC's Enforcement Division had previously reached a settlement with Falcone and Harbinger, but that agreement was rejected by SEC commissioners who reportedly deemed the deal too weak.  Monday's settlement is essentially the same dollar amount but increases the ban to five years for Mr. Falcone.  The additional admission of wrongdoing could represent a major step in the Commission's enforcement policy and could grease the wheels of potential civil and criminal cases against the embattled fund manager.

Falcone's case could have implications for the SEC's other investigations, including the infamous "London Whale" case against JP Morgan regarding derivatives losses.  Indeed, if the SEC is able to obtain admissions of wrongdoing in other cases, more criminal charges could be brought for securities fraud, effectively stepping up enforcement and penalties.

But there is another important implication as well.  The SEC's former 'neither admit nor deny' policy made it difficult for the public to definitively know whether a particular fraud occurred, or if the defendant merely accepted settlement to avoid prosecution.  This meant that investors could not ascertain the risk of such fraud in the future.  In fact, in 2011 a New York federal judge dismissed a $285 million SEC settlement with Citigroup on the grounds that its 'neither admit nor deny' clause prevented the court from determining guilt.

Monday's settlement brings to a close a long battle between the SEC and Mr. Falcone.  But it also could signal a new era at the SEC, one in which enforcement of securities laws does not end with a settlement agreement.

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The settlement stems from charges filed by the SEC in the June 2012 complaint (PDF).

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