Billionaire Phil Falcone, whose hedge fund was one of the biggest winners from the financial crisis, has once again been banned from an industry by one of his regulators.
Following an SEC settlement in August in which Falcone and his fund Harbinger Capital Partners were fined for $18 million and banned him from the securities industry, New York’s financial and insurance regulator, the Department of Financial Services, has banned Falcone from servicing as an officer in Fidelity & Guaranty Life Insurance Company of New York, its parent company Fidelity & Guaranty Life, or any insurer licensed in New York for seven years.
Fidelity & Guaranty Life, the Maryland-based insurer with a New York subsidiary, is controlled by Falcone’s Harbinger Group, a holding company that also owns a Bermuda-based reinsurance company and several consumer brands.
In Falcone’s August SEC settlement, Harbinger Capital admitted to secretly loaning $113 million to Falcone even when his investors couldn’t make redemptions from the fund, favoring some investors in getting money out of the fund, and violating securities laws in a 2006 bond trade.
“It is vital to ensure that those who operate insurance companies will always put retirees and policyholders first and act with the utmost integrity,” Benjamin M. Lawsky, head of the DFS, said in a statement announcing Falcone’s ban.
Falcone’s Harbinger is one of many hedge funds and private equity firms to get involved in the insurance industry. Apollo, the private equity giant recently acquired the U.S. insurance business of Aviva, a British insurer.
Lawsky and other state insurance regulators have recently stepped up their scrutiny of private equity and hedge fund investors controlling insurance companies, especially ones that offer fix annuities, which are insurance contracts that guarantee payments to policyholders over a certain period of time. In a speech this April, Lawsky said that private equity owners “may not be long term players in the insurance industry and their short-term focus may result in an incentive to increase investment risk and leverage in order to boost short-term returns.”
Falcone’s ban from “exercising direct or indirect control” over Fidelity New York lasts for seven years and applies to other Harbinger Capital employees. DFS said in the release announcing Falcone’s ban that the SEC’s settlement, and specifically Falcone’s admission of wrongdoing, a rarity when the SEC settles, “demonstrate serious issues related to Mr. Falcone’s fitness to control the management, operations, and policyholder funds of a New York insurance company.”
The SEC said in its settlement with Falcone “may have collateral consequences under federal or state law and the rules and regulations of self-regulatory organizations, licensing boards, and other regulatory organizations.”
This subsequent ban is an example of just that and a result of the SEC’s move towards getting more defendants to admit guilt when they settle civil cases. The admissions can be groundwork for both further civil lawsuits from investors and provide a groundwork for other regulators to pursue their own investigations and settlements.
Fidelity is in the midst of a planned initial public offering, looking to raise $100 million on a valuation of $1 billion, according to Bloomberg. Harbinger will still maintain majority control of the company following the stock offering.
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