Philip Falcone Said to Settle With S.E.C.

Philip A. Falcone, the once high-flying hedge fund manager whose recent brush with federal regulators capped a rapid fall from grace, is now poised to exit the government’s cross-hairs.

In a public filing on Thursday, Mr. Falcone disclosed that he had  “reached an agreement in principle” with investigators at the Securities and Exchange Commission, which accused him last year of manipulating the market, using hedge fund assets to pay his taxes and “secretly” favoring select customers at the expense of others. The settlement extends to Harbinger Capital Partners, Mr. Falcone’s flagship hedge fund.

The deal, which still requires approval from the S.E.C.’s commissioners, presents a mixed outcome for Mr. Falcone, who has stubbornly resisted a settlement for more than a year.

On the one hand, the deal signaled an end to his long career as an investing wizard. Mr. Falcone, who minted a fortune betting against the subprime mortgage market in 2007, has agreed to at least a two-year ban from raising new capital, a death knell for a hedge fund manager. He must also, according to the public filing on Thursday, “take all actions reasonably necessary to expeditiously” return money to investors who are fleeing the fund.

But the fine print of the S.E.C. deal suggests that Mr. Falcone, who is not required to admit or deny the agency’s accusations, could escape relatively unscathed.

For one, the deal comes with an $18 million fine from the S.E.C. â€" a rounding error to a hedge fund billionaire.  Mr. Falcone will personally pay $4 million of the penalty, according to the people briefed on the matter, while the fund will pay the rest.

The two-year ban also comes with limitations. According to the people briefed on the matter, the ban does not apply to the nine investment advisers that Mr. Falcone runs through Harbinger Capital. The S.E.C. granted the carve-out, the people said, so that Mr. Falcone can unwind the hedge fund without selling off the pieces at fire-sale prices.

Under the deal, Mr. Falcone can also remain the chairman and chief executive of Harbinger Group Inc., a publicly traded conglomerate that he uses to make a broad array of investments.

The settlement deal, the people said, is also notable for something that it did not include: a common provision that prohibits defendants from committing future violations with fraudulent intent. The lack of a so-called fraud injunction is an unusual victory for the target of an S.E.C. action.

An S.E.C. spokesman did not immediately respond to a request for comment.

For Mr. Falcone, the deal could close a painful chapter in his long Wall Street career.

There was a time when Mr. Falcone, who made his way from rural Minnesota to the Harvard hockey team, was seen as one of the savviest investors on Wall Street. His bet against subprime made him the envy of the hedge fund world and led Harbinger’s assets to soar near the top of the industry.

The success also thrust him and his wife, Lisa Maria, into the ranks of New York’s moneyed elite. Their charitable donations, like a $10 million gift to the High Line, were overshadowed only by a splashy taste for fashion and real estate that made them the subject of tabloid fascination.

But Mr. Falcone’s fortunes tumbled last year. A bet on LightSquared, an upstart wireless venture he sought to build from scratch, soured as the government blocked his effort to build a 4G network. A year ago, the company filed for bankruptcy, dealing a blow to Mr. Falcone, who once owned 96 percent of LightSquared’s shares.

Then, the S.E.C. came bearing down on him. In June, after settlement talks broke down, the agency filed two sets of civil fraud charges against Mr. Falcone.

In one case, it accused Mr. Falcone of carrying out an illegal “short squeeze,” in effect, cornering the market in a particular category of bonds. Mr. Falcone, the S.E.C. said, “hijacked the market for the bonds and illegally manipulated their price and availability.”

In a separate action, the S.E.C. accused Mr. Falcone of allowing three unnamed banks and investment firms - Goldman Sachs, HSBC and Pamco, according to people close to the case â€" to withdraw funds from his hedge fund when others could not. In exchange for the special treatment, and in what the S.E.C. called a quid pro quo, the investors voted to allow Mr. Falcone to suspend other redemptions.

The S.E.C. also took aim at Mr. Falcone for taking a $113.2 million loan from his fund to pay his own tax bill in 2009. He borrowed the money, the S.E.C. said, at a time when the fund had blocked investor redemptions, and then kept the deal secret for five months.

Mr. Falcone’s lawyer, Matthew Dontzin, has argued that Mr. Falcone took the loan only after a prominent law firm signed off on the arrangement. The S.E.C. alleged, however, that Mr. Falcone hired the firm “to give the appearance of legality,” but kept the lawyers in the dark about some information.

“Not only are hedge fund managers expected to be savvy investors, they are supposed to serve the interests of their clients,” Bruce Karpati, the head of the S.E.C.’s asset management unit, said at the time.” 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.”