Thursday, January 23, 2014

For Harbinger’s Philip Falcone, a Ban for Life

The simple statement by the Securities and Exchange Commission (SEC) that Philip A. Falcone of Harbinger Capital Partners has “agreed to be barred from the securities industry for at least five years” may list a time period, but effectively he is out of the business for life. In an industry that has had its share of phoenixes, Falcone has made too many mistakes to claw his way back. Breaking the law is perhaps the least among them.

The SEC took a long time to catch up to Falcone. Many of the misdeeds that triggered penalties against him occurred in 2006. Once the agency was able to get a negotiated settlement, it became clear how little leverage the hedge fund manager ever had:

"Falcone and Harbinger engaged in serious misconduct that harmed investors, and their admissions leave no doubt that they violated the federal securities laws," said Andrew Ceresney, Co-Director of the SEC's Division of Enforcement. "Falcone must now pay a heavy price for his misconduct by surrendering millions of dollars and being barred from the hedge fund industry."

After Falcone made investors huge sums by betting against mortgage-backed securities just as that market collapsed, he committed the worst sin a hedge fund manager can — he lost his investors almost all of their money, based on a single, wild gamble.

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Falcone decided he was smarter than the executives at all the major wireless, cable and telecom companies combined. They had not made efficient use of spectrum to distribute broadband at the lowest prices possible. For a total of about $5 billion, the company he backed, LightSquared, bought satellite frequency and even launched a satellite of its own. All of this money was invested on the premise that he could set fees that would undercut the markets.

Falcone made two awful calculations. The first is that the U.S. government would approve the use of the spectrum he bought for his new broadband distribution scheme. The chance that would work ended quickly. The spectrum conflicted with that used for GPS devices. The government was not about to cripple the massive franchises that had grown from that technology.

His second mistake was one Falcone never got to make. He never had a practical plan to compete with entrenched broadband providers. Most of the leaders in the field have multibillion dollar annual budgets and tens of thousands of employees.

Falcone will be well shy of 60 when his ban expires five years from now. Wall Street may forgive him for breaking the law. Losing most of his investor’s money is another thing.

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