Falcone, Harbinger put short squeeze on MAAX high-yield bonds: SEC

By Susanna Moon

Chicago, June 27 - The Securities and Exchange Commission said that Philip A. Falcone and two affiliated Harbinger investment management companies manipulated the market in a series of distressed high-yield bonds issued by MAAX Holdings Inc.

In a civil action, the commission alleged that Falcone and the Harbinger companies orchestrated a short squeeze, which is a market manipulation scheme in which an investor constricts the supply of a security, through large purchases or other means, with the intent of forcing settlement from short sellers at arbitrary and inflated prices, according to an SEC press release.

The SEC also filed fraud charges against the New York-based hedge fund adviser and his advisory firm Harbinger Capital Partners LLC for misappropriation of client assets, market manipulation and betraying clients. The commission also charged Peter A. Jenson, Harbinger's former chief operating officer, for aiding and abetting the misappropriation scheme. Additionally, the SEC reached a settlement with Harbinger for unlawful trading.

In the civil action, the complaint alleged that at Falcone's direction, Harbinger purchased a large position in the MAAX bonds during April and June of 2006. "After hearing rumors that a Wall Street financial services firm was shorting the MAAX bonds and also encouraging its customers to do the same, Falcone decided to seek revenge," the SEC said.

According to the SEC, in September 2006, Falcone directed the Harbinger-managed funds to buy every available bond in the market, often purchasing the bonds from short sellers. Ultimately, Falcone raised the funds' stake to about 13% more than the available supply of the MAAX bonds.

At one point, Harbinger had bought 22 million more bonds than MAAX had ever issued, the release said. At the same time, Falcone locked up the MAAX bonds in a custodial account to prevent his brokers from lending out the bonds to sellers seeking to deliver the bonds to purchasers after short sales.

Falcone then demanded that the Wall Street firm and its customers settle their MAAX short sales after having seized control of the bond supply, the SEC said, and he did not disclose that it would be virtually impossible to find bonds available for delivery.

The Wall Street firm bid daily for the bonds, which quickly doubled in price. Then Falcone engaged in a series of transactions with certain short sellers at arbitrary, inflated prices while at the same time valuing the funds' holdings on his books at a small fraction of the prices he charged the covering short sellers, according to the SEC.

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