Harbinger's Falcone admits to putting short squeeze on MAAX bonds

By Angela McDaniels

Tacoma, Wash., Aug. 19 - New York-based hedge fund adviser Philip Falcone admitted to conducting an illegal short squeeze in bonds issued by MAAX Holdings, Inc., according to the Securities and Exchange Commission.

The short squeeze was one of several actions that caused the SEC to file fraud charges against Falcone and his advisory firm, Harbinger Capital Partners, in June 2012. Falcone and Harbinger have agreed to a settlement in which they must pay more than $18 million and admit wrongdoing. Falcone also agreed to be barred from the securities industry for at least five years.

At Falcone's direction, Harbinger purchased a large position in the MAAX bonds during April 2006 and June 2006. That summer, Falcone heard rumors that a Wall Street financial services firm was shorting the bonds and encouraging its customers to do the same.

The SEC said that in September 2006 and October 2006, Falcone retaliated against the Wall Street firm for shorting the bonds by having the Harbinger funds purchase all of the remaining outstanding bonds in the open 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, the SEC said, and at one point, Harbinger had purchased 22 million more bonds than MAAX had ever issued.

Falcone and the other defendants then demanded that the firm settle its outstanding transactions in the bonds and deliver the bonds that it owed. They did not disclose at the time that it would be virtually impossible for the firm to acquire any bonds since nearly the entire supply was locked up in the Harbinger funds' custodial account and the Harbinger funds were not offering them for sale, the SEC said.

The firm bid daily for the bonds, which quickly doubled in price. The SEC said Falcone then engaged in a series of transactions with some 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.

Falcone also admitted to improperly borrowing $113.2 million of fund assets to pay his personal taxes and secretly favoring some customer redemption requests at the expense of other investors.

The settlement, which must be approved by the U.S. District Court for the Southern District of New York, requires Falcone to pay $6.51 million of disgorgement, $1.01 million of prejudgment interest and a $4 million penalty. The Harbinger entities are required to pay a $6.5 million penalty.

Falcone has been barred him from association with any broker, dealer, investment adviser, municipal securities dealer, municipal adviser, transfer agent or nationally recognized statistical rating organization with a right to reapply after five years. The bar will allow him to assist with the liquidation of his hedge funds under the supervision of an independent monitor.

MAAX Holdings is based in Montreal. It is a manufacturer of bathroom products and spas for the residential market.

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