By Emily Flitter

NEW YORK (Reuters) - Philip Falcone's fall from hedge fund stardom deepened on Thursday when a public company he controls disclosed that the billionaire investor had reached a preliminary settlement with U.S. securities regulators stemming from a probe into market manipulation.

Falcone and his hedge fund, Harbinger Capital Partners, have agreed to pay $18 million to settle two lawsuits brought by the U.S. Securities and Exchange Commission, according to a filing by Harbinger Group Inc, a publicly traded investment company where Falcone is chairman and chief executive officer.

While the dollar amount is relatively small, the deal would require him to return money to his investors and effectively prohibit him from starting a new hedge fund for the next two years. It would, however, permit Falcone to remain CEO of the Harbinger Group.

The agreement would bring to close one of several major problems the beleaguered money manager has faced recently. Falcone made a bad bet when last year, LightSquared, a wireless telecom company he owned, was forced to file for bankruptcy.

That bankruptcy and the regulatory issues that attracted SEC attention have come to tarnish the reputation of Falcone as savvy debt trader, who made billions betting against the U.S. housing market on the eve of the financial crisis.

A federal judge and the SEC commissioners must still approve the settlement.

The SEC accused Falcone of market manipulation, giving preferential treatment to certain investors and borrowing cash from his own fund to pay his personal taxes.

The government asserted that at the height of the financial crisis, when many of the fund's assets were tied up in the collapse of Lehman Brothers, Falcone let select investors get out while denying that opportunity to others.

The SEC also claimed Falcone illegally loaned himself $113 million from the fund to pay his taxes, leaving investors unable to access their own money. Falcone eventually repaid the loan.

Falcone did not immediately respond to a request for a comment. The SEC declined to comment.

As part of the settlement agreement Falcone will be barred for two years from associating with broker-dealers and investment advisers, with the exception of the nine investment advisers managing Harbinger's hedge funds.

Through this exception, Falcone will be able to oversee a slow unwind of his investments, which include private equity-style, tie-ups overseas, and return money to investors as they submit redemptions.


In many ways, Falcone's fall from grace in the $2.2 trillion hedge fund industry was ordained even before the SEC sued him. A year ago, Falcone's hedge fund had been the biggest investor in Lightsquared, which filed for bankruptcy after failing to get final approvals from the federal government to build-out its national network.

The collapse of LightSquared was a big blow to Falcone and his Harbinger Captial, which owned 96 percent of the company. The bankruptcy filing led to heavy losses at Harbinger in 2012.

From the start, LightSquared was an ambitious and risky idea, given all the competition in the telecom space from giants companies like Verizon, AT&T and Sprint. But if his investment in LightSquared had succeeded, it would been another great success story for Falcone, whose savvy bet against the subprime housing market bolstered his fund at its in peak in 2007 to about $26 billion in assets under management.

By this year, his hedge fund had shrunk to roughly $3 billion.

The cases in the U.S. District Court, Southern District of New York, are: Securities and Exchange Commission v. Harbinger Capital Partners LLC et al, No. 12-5028, and Securities and Exchange Commission v. Falcone, No. 12-5027.

(Reporting by Emily Flitter, with additional reporting by Jonathan Stempel and Nate Raymond; editing by Matthew Goldstein and Leslie Gevirtz)