On Aug. 19, 2013, the Securities and Exchange Commission (SEC) announced that it filed a proposed settlement in which hedge-fund adviser Philip Falcone and his advisory firm, Harbinger Capital Partners, agreed to admit to wrongdoing, to pay more than $18 million and to be barred from the securities industry for at least five years. In the consent, which was filed in the District Court for the Southern District of New York, Falcone and Harbinger Capital Partners made 10 pages of factual admissions. If approved by the district court, the settlement will resolve two enforcement actions that the SEC filed on June 27, 2012. More importantly, the proposed settlement is an early indication of the type of case in which the SEC will require an admission of liability in order to settle the case.
On June 18, 2013, SEC Chair Mary Jo White announced that the SEC would depart from its longstanding, blanket policy of permitting defendants to settle enforcement actions without admitting or denying liability. In March 2012 the SEC had announced that it would eliminate the no-admit/no-deny language from settlements involving parallel criminal actions, but it reiterated the importance of its no-admit/no-deny policy. Although Chairman White acknowledged the importance of the SEC’s no-admit/no-deny protocol in her June 2013 statement, she announced that going forward the SEC would in certain cases require an admission of liability before settling an action. While the SEC has identified some factors it may consider in deciding whether to require an admission of liability — like the number of harmed investors or the egregiousness of the fraud — the agency still has a great deal of discretion. Thus, we have been left to question in what circumstances the SEC will require an admission of liability. The Falcone settlement begins to answer that question.
In June 2012 the SEC filed two enforcement actions charging Falcone and Harbinger Capital Partners with fraud. The SEC alleged that Falcone used $113 million in 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, while Harbinger Capital unlawfully bought equity securities in a public offering after having sold short the same securities during a restricted period. The SEC viewed the case as one involving the misappropriation of client assets and market manipulation.
After litigating the case for about a year, in May 2013 the SEC staff reached an agreement in principle on a more lenient settlement, pursuant to which the defendants would have neither admitted nor denied liability, would have been barred from the securities industry for just two years and would have paid $18 million. The SEC commissioners rejected the staff’s more lenient settlement proposal on July 19, 2013.
By rejecting the more lenient settlement proposal and approving the Aug. 19 settlement proposal, the commissioners have taken their first step in identifying the type of case in which the SEC deems an admission of liability critical to resolution of the case. We remain vigilant as to their next step.