Authorities probe Falcone’s Harbinger

ONE of America's most prominent hedge funds is being probed over whether it gave preferential treatment to its founder and clients.

The Securities and Exchange Commission and US Attorney’s office in Manhattan are looking into whether Harbinger Capital Partners misled investors by failing to disclose in a timely fashion a $US113 million personal loan it extended to founder Philip Falcone from the firm’s funds, according to people familiar with the matter.

The authorities also are examining whether Harbinger improperly allowed some clients to withdraw money following the financial crisis while barring others from doing so, these people said.

In an interview, Mr Falcone said Harbinger “did not give preferential treatment to any investor”.

He said the personal loan was made in accordance with the terms of the fund and disclosed in the firm’s audited financial statements for 2009. He said it “was reviewed by our accountants and outside legal counsel”. Mr Falcone said he has paid back more than $US70m of the loan, with the balance due in 2014. Also, he said the loan has been profitable for investors, and was backed by his holdings in the fund.

Mr Falcone declined to comment on whether he or the firm has been contacted by investigators. It is unclear whether the inquiries will lead to any legal action.

The parallel criminal and civil probes come as regulators are conducting a broad examination of hedge funds. Authorities are looking at trading by the private funds, which cater to sophisticated investors such as wealthy individuals, public pension funds and endowments. Also under scrutiny is the clout the funds have in markets and the methods they use to value their asset prices, which influence the fees they earn from clients.

The investigation is a potential black eye for Harbinger, known in the industry for both its size and its role in pushing for corporate changes at companies where it holds a significant ownership stake, including New York Times Co.

In 2007, Harbinger scored gains betting against bonds backed by subprime mortgages. Investors flocked to the firm, helping it rise to $US26 billion in assets in 2008 before it shrank from losses and client withdrawals. The firm now manages about $US9bn.

Harbinger’s main fund has declined about 15 per cent this year, a person familiar with the matter says, as the average hedge fund has seen positive returns. Some clients, including Goldman Sachs and Blackstone Group, have recently put in withdrawal requests, according to people familiar with the matter.

Mr Falcone, a former Barclays trader, grew up in Minnesota and played hockey at Harvard University.

In 2008, like many hedge funds, Harbinger stumbled as its investments in energy, finance and other companies lost value and some investors sought to withdraw money. In 2009, as Harbinger’s biggest funds rebounded, Mr

Falcone opened new funds and delved more deeply into deals in the telecommunications industry.

One focus of the investigation is the loan Harbinger executives authorised in late 2009 to help Mr Falcone pay personal taxes, people familiar with the matter say. Mr Falcone borrowed the funds from a Harbinger fund that had $US2.5bn in assets, while clients were barred from withdrawing money from the fund at the same time, according to fund documents and people familiar with the matter.

The SEC received investor complaints after Harbinger disclosed the loan in fund documents in March, according to people familiar with the matter. The agency’s enforcement unit began an inquiry into the loan this summer, said one person. A concern is investors weren’t informed at the time Mr Falcone borrowed the funds, the people say.

Another issue is that the loan might have increased the risk of losses without clients’ knowledge. The loan was reported in September by Bloomberg News.

Also at issue is whether clients were equally well-informed, including about risks to the funds, during the restructuring of Harbinger funds, according to people familiar with the matter.

One issue is whether some clients got different withdrawal terms than others, they say. It is unclear which clients are the focus of concern.

Last year, Harbinger executives were working to convince clients to keep their money in the firm’s biggest funds. The discussions came after Harbinger suspended redemptions in the funds in December 2008 and set aside hard-to-sell holdings, according to investors.

In 2009, the firm also tightened rules about investor withdrawals, adopting a 25 per cent limit per quarterly period for each investor as opposed to a limit that applied to all clients combined, according to investors and fund documents reviewed by The Wall Street Journal. The move, which was put to a client vote, meant any investor wanting to redeem fully could opt to do so over a year, with the set-aside illiquid assets potentially taking longer to sell.

Hedge-fund managers have wide leeway to change terms and withhold client money, which in some cases can protect assets during crises. The issue of equal treatment of investors is a focus of the SEC’s enforcement unit, which has investigated funds to determine whether some clients are favoured with better information or financial terms to the detriment of others.

Mr Falcone has been pushing an ambitious plan to launch a global wireless-satellite network, and has dedicated the majority of his assets in his biggest hedge fund to the venture, called LightSquared.

In the process, Harbinger has come to look less like the hedge-fund firm it was when many investors came to it, and more like a private-equity firm making a concentrated, long-term bet. Investors say the strategy shift has contributed to anxiety over having assets locked up in the firm.

Mr Falcone has some $US2bn of his own money invested in Harbinger, investors say, citing that as a strong reason to support his strategy.

In 2009, while some investors were asking for withdrawals, others were lining up to put money into Harbinger. They included Soros Fund Management, which during the past year became a significant new investor, say people familiar with the matter. A Soros spokesman declined to comment.

Michael Rothfeld contributed to this article.

HSBC clients face US criminal probe

THE US has launched a criminal investigation into taxpayers who may have evaded taxes through HSBC accounts in India and Singapore.

The Justice Department probe was revealed by tax attorneys close to the matter.

The agency is looking into whether taxpayers may have violated federal criminal laws by failing to report that they had a financial interest in, or signature-authority over, a financial account located in a foreign country, according to a Justice Department letter obtained by Dow Jones Newswires.

The letter doesn’t mention the bank by name, but the attorney who provided it confirmed that the recipient is an HSBC Holdings offshore-account holder. The DoJ said in the letter that it had “reason to believe” the person had an interest in a foreign account that wasn’t reported to the Internal Revenue Service on either a tax return or a special tax form used to report foreign accounts.

“You are further advised”, the letter concludes, “that you are the subject of a criminal investigation being conducted by the Tax Division”. It is signed by Kevin Downing, a senior litigation counsel at the DoJ.

Robert McKenzie, a partner at Arnstein & Lehr in Chicago, said he has had calls from two prospective clients with HSBC accounts in India.

The DoJ and HSBC declined to comment.

The development didn’t come as a surprise to tax lawyers who have worked closely on the UBS AG tax-evasion case over the past year. The Internal Revenue Service and DoJ conducted a wide-ranging investigation into whether Americans with UBS accounts in Switzerland used the accounts to evade US taxes by not reporting income on the assets in the accounts.

The IRS and DoJ have been saying for months that their efforts to target Americans with undeclared accounts are “not just about UBS”, said Scott Michel, an attorney at Caplin & Drysdale in Washington. Given the information the agency has obtained from about 15,000 voluntary disclosures, potential whistleblowers and informants, it is “utterly unsurprising” that the probe appears to have expanded to another world-wide institution, Mr Michel added.

Bryan Skarlatos, a partner at law firm Kostelanetz & Fink in New York, said he had spoken to several people who were approached by the IRS or DoJ about their accounts at HSBC. These people had HSBC accounts in several countries around the world, he said.

Iceland arrests banker in crisis probe

ICELANDIC authorities today arrested Hreidar Mar Sigurdsson, the former chief executive of the collapsed Kaupthing bank, making him the first high profile banker to be detained in the wake of the Nordic country's financial crisis.

The special prosecutor investigating the Icelandic banking crash of October 2008 said Mr Sigurdsson was suspected of falsifying documents and breaking laws on stock trading for personal gain.

Mr Sigurdsson is being held in police custody until a bail hearing tomorrow at the Reykjavik District Court.

Prosecutor Olafur Thor Hauksson said he planned to ask that the former banker be kept in custody for two weeks to prevent the possibility of him tampering with evidence or interfering with the investigation.

Mr Hauksson was appointed by Iceland’s post-crisis government to investigate whether there was any criminal activity in the lead up to the banking crash that crippled Iceland’s economy, sent its currency into a tailspin, frightened off foreign investors and forced out the country’s leaders of the time.

Britain’s Serious Fraud Office is still conducting its own investigation into suspected fraud at Kaupthing, with a focus on efforts by the bank to attract British investors to its “high yield” deposit account, Kaupthing Edge.

About 30,000 British individuals, companies and organisations made an investment.

When it opened the investigation in December, the British agency said that it would work with the Icelandic special prosecutor because it also looked closely at a series of decisions that appear to have allowed substantial value to be extracted from the bank in the weeks and days before its collapse.

The demise of Kaupthing, one of several Icelandic banks to collapse, sparked a political row between Reykjavik and London because Kaupthing had failed after the British Government invoked anti-terrorist legislation to freeze the UK assets of another collapsed Icelandic bank, Landsbanki.

Britain’s Treasury said that the move was necessary to ensure the money that British savers had placed in the bank would not be whisked back to Iceland.

But Iceland’s prime minister at the time, Geir Haarde, criticised the move as an “unfriendly act” and blamed the decision for inspiring panic that led to the subsequent collapse of Kaupthing.

A cross-party committee of British lawmakers was later critical of London’s handling of the situation, saying that the government’s statements on the ability and willingness of Reykjavik to compensate non-Icelandic account-holders was “ultimately unhelpful”.

Homes raided in insider trading probe

STAFF at some of London's biggest stock brokers, including an executive at Deutsche Bank and a trader at Moore Capital, one of the world's biggest hedge funds, have been questioned in the largest ever operation against insider dealing launched in Britain.

Six men were questioned after raids on 16 homes and businesses across London, Oxfordshire and Kent, carried out by 143 staff from the Financial Services Authority and officers from the Serious Organised Crime Agency (Soca).

It is the first time that the agencies have worked together and the size of the operation has sparked speculation that the alleged offences cover many hundreds of thousands of dollars.

In a statement, the FSA said that documents and computers had been seized from residential and business premises as part of a joint investigation with Soca that began in late 2007 into a sophisticated and long-running insider dealing ring.

“It is believed that the City professionals passed inside information to traders (either directly or via middlemen) who traded based on this information and have made significant profits as a result,” the FSA said.

The FSA did not name any of the individuals questioned or institutions that were raided.

However, The Times can reveal that one of the men is Julian Rifat, a trader at Moore Capital Management whose offices in Mayfair, Central London, were raided last night AEDT (early morning GMT).

Moore Capital said: “This morning, representatives of the FSA were at our London office to serve a search warrant for documents relating to an employee of Moore Europe working as an execution trader on its London Equity Execution desk.

“We understand from the FSA that the investigation concerns possible insider dealing and the investigation of the employee does not involve any of the funds managed by Moore Capital.”

Moore is co-operating fully with the FSA in its investigation. The employee has been placed on administrative leave pending completion of the investigation.”

The Times also understands that another of the men questioned was Graeme Shelley, a trader at Novum Securities, the stockbroking and corporate finance firm based in Park Lane, London.

Mr Shelley, a well-known and popular figure in stockmarket circles, joined Novum nine months ago from Religare Capital Markets, the broker formerly known as Hichens Harrison, where he had worked for more than nine years.

His mobile phone was switched off. Novum declined to comment, while a spokesman for Religare said that its offices had not been subject to any of yesterday’s raids.

Another of those questioned, The Times can disclose, is Clive Roberts, a trader at Exane Limited, the French-owned brokerage based in Mayfair. Andrew Melrose, the chief executive of Exane, confirmed that an employee had been questioned yesterday.

Others understood to have been questioned include a well-known former stockbroker with more than 35 years of experience in the City and who has long been in the sights of the authorities.

The individual, whose identity is known to The Times, was the subject of a long-running investigation in the late 1980s and early 1990s carried out by the Department of Trade and Industry — which used to have responsibility for pursuing insider dealing cases — and the Inland Revenue.

The identity of the Deutsche Bank staffer is not yet known but a spokesman for the bank said: “We are co-operating with the authorities as they look into this matter.”

It is believed that Soca’s involvement in the investigation may be linked to a wealthy Iranian-born entrepreneur based in the Middle East who has extensive business interests in the UK.

Additional reporting: Nick Hasell, Miles Costello and Michael Herman

Probe into credit access

CREDIT: The squeeze on small businesses access to credit will be the subject of a Senate inquiry initiated by the Coalition yesterday.

The inquiry will investigate the costs, terms and availability of finance for small businesses and whether steps could be taken to ensure a freer flow of credit to the sector.

The launch of the inquiry follows a survey by the Council of Small Business of Australia that found that access to finance was the No 1 concern for small and medium-sized businesses as the economy emerged from the global financial downturn.

Opposition spokesman on small business Bruce Billson said: “Almost without exception, small business operators and their peak advocacy bodies are sharing stories of small businesses facing higher costs and charges and sudden re-risk rating requiring them to provide greater security for their loans. If small business is to play its part in driving economic recovery and jobs growth, timely access to finance on reasonable terms is an important pre-condition.”

The inquiry will also look at government bank guarantees’ impact on commercial lending.

Liquidator to probe B&B directors

THE creditors of Babcock & Brown, the failed investment bank, have been asked to fund a campaign to have liquidators forensically examine whether directors acted solely in their own personal interests instead of their shareholders’ during the final months as the empire crumbled.

Creditors yesterday officially voted to liquidate B&B, the former high-flying investment group that failed in March after it was worth nearly $10 billion at the height of the bull market.

B&B collapsed under debt of up to $40bn across the group and liquidators from Deloitte are now keen to further investigate the motives of the board in the final few months when the company, started as a private investment group by Jim Babcock and Phil Green, started to unwind.

The deeper probe, however, will be funded by creditors despite the expectation that potential returns will be close to zero.

The return to B&B’s subordinated noteholders is expected to be just 1.5c in the dollar while shareholders will receive nothing.

The 8000 noteholders and creditors, which could be up to 30,000, were yesterday asked by Deloitte to voluntarily contribute $400 in a bid to raise up to $600,000 to finance the more in-depth forensic examinations of the company’s intricate debt-laden structure.

The closing date for contributions is September 15 and Deloitte confirmed a number of major litigation funders could become involved in the process.

The request came at a meeting of just a few B&B noteholders at a creditors meeting in Sydney.

Deloitte liquidator David Lombe said he was keen to investigate further the potential conflicts of interest between the directors on the B&B board, and the board of Babcock & Brown International, the main trading entity of the complex group of companies.

The probe will examine whether B&B traded while insolvent as it battled to stay alive, and whether troubled assets were not officially impaired by the board when they should have been.

“In particular, we are interested to further investigate a key question, at what stage did the B&B directors have regard to the interest of noteholders and creditors in making their decisions about the conduct of the group’s business,” Mr Lombe said. The official liquidation of B&B will grant Deloitte greater powers, but could prove embarrassing for the former board of the group which could be forced to publicly defend allegations of impropriety.

“Liquidation will allow us to investigate the matter in greater depth, conduct public examinations and, as a liquidator, receive increased powers to commence recovery actions,” Mr Lombe said. The collapse of B&B came after the bank built a “mini-Macquarie” model in which it would buy assets, create separately listed funds and implement high gearing levels.

It listed in 2004 at $5 a share and soared to a peak of $34.78 a share which gave it a market capitalisation of $10bn, with assets under management reaching $70bn globally.

An initial report from Deloitte found that B&B became insolvent in November last year, more than three months before it was tipped into administration after noteholders voted against a last-ditch bid to restructure B&B’s debt.

The run-down of B&B has resulted in a number of asset sales held by the main company, while the surviving satellite funds have cut ties with the Babcock name.