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State Board Report

September 2013

After in July having rejected an $18 million settlement that would have barred Philip A. Falcone from the securities industry for two years, the Securities and Exchange Commission on August 19 announced it had agreed to a settlement with hedge fund adviser Falcone and his firm Harbinger Capital Partners in which: they admit to multiple acts of misconduct that harmed investors and interfered with the normal functioning of the securities markets; he is barred from the securities industry for at least five years; and they must pay more than $18 million. NASBA Chair Gaylen Hansen observed, “The SEC’s entering into settlements without the defendants ‘admitting or denying guilt’ has been a vexing problem for State Boards when they go to discipline licensees based on the SEC’s action. Hopefully this will set the stage for a new attitude on this matter.”

The SEC originally filed its enforcement actions in 2012, alleging that Mr. Falcone had improperly used $113 million in fund assets to pay his personal taxes, secretly favored certain customer redemption requests at the expense of other investors, and conducted an improper “short squeeze” in bonds issued by a Canadian manufacturing company. As part of the settlement, the Harbinger defendants agreed they will not make any public statement denying any of these allegations nor will they create the impression that the complaints were without factual basis, and they will withdraw any papers filed in this action that deny any of the allegations.

In June, SEC Chairman Mary Jo White announced at a Wall St. Journal conference: “We are going to, in certain cases, be seeking admissions.”

Chairman White told a New York Times reporter: “In the interest of public accountability, you need admissions.” However, she also said that most cases would still be settled under the prevailing “neither admit nor deny” standard. Cases involving significant investor harm or egregious intentional conduct are the ones in which the SEC will be calling for admissions.

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