Sara Routhier, Managing Editor and Outreach Director, has professional experience as an educator, SEO specialist, and content marketer. She has over five years of experience in the insurance industry. As a researcher, data nerd, writer, and editor she strives to curate educational, enlightening articles that provide you with the must-know facts and best-kept secrets within the overwhelming world o...

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Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He also has an MBA from the University of South Florida. ...

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Reviewed by Joel Ohman
Founder, CFP®

UPDATED: Jul 3, 2012

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The Securities and Exchange Commission (SEC) filed fraud charges against Philip Falcone, the hedge fund adviser for Harbinger Capital Partners LLC, last week for manipulating and betraying clients.

The action the SEC targeted was Falcone’s withdrawing of $113 million from the hedge as a personal loan to himself. Falcone then used the personal loan funds to pay off his personal taxes.

While Falcone did repay the money, he put his client’s money at an enormous risk.

Personal loans are typically secured by some sort of collateral and offered by licensed lenders. In Falcone’s case, his money was not only unsecure, but it was also withdrawn at a time when clients were barred from pulling money from the fund. Had he defaulted or found himself unable to repay the money, his clients would have been out millions of dollars since his borrowing wasn’t a legal or secured personal loan.

In addition to using the hedge’s funds for his own personal use, Falcone was also accused of manipulating the market.

During the same time that Falcone withdrew client money for his own use, Harbinger also allowed Goldman Sachs to cash out on some of their money they had in the hedge fund. Clients were supposed to be entirely locked out from pulling money from the fund, but Goldman Sachs was granted special treatment.

 “Today’s charges read like the final exam in a graduate school course in how to operate a hedge fund unlawfully,” said Robert Khuzami, Director of the SEC’s Division of Enforcement, in a press release. “Clients and market participants alike were victimized as Falcone unscrupulously used fund assets to pay his personal taxes, manipulated the market for certain bonds, favored some clients at the expense of others, and violated trading rules intended to prohibit manipulative short sales.”

The SEC is hoping to strip Falcone of the ability to operate as an officer or director of any public company again.

Harbinger’s COO, Peter A Jenson, was also targeted by the SEC, and Harbinger itself entered into a settlement with the SEC for unlawful trading.