The case in the US is being brought by the Securities and Exchange Commission against Philip Falcone, the founder of Harbinger Capital Partners. In a 28 page complaint, the SEC catalogues seemingly brazen conduct by Falcone and Peter Jenson, Harbinger’s former chief operating officer, in two allegedly fraudulent schemes that disadvantaged investors and put their interests above the interests of the funds.
It is alleged that Falcone, aided by Jenson, misappropriated $113 million from a Harbinger fund to pay a personal tax obligation (since repaid) at a time when other investors had been precluded from redeeming. In addition, so as to obtain investor approval to impose more stringent redemption restrictions on investors in a second Harbinger fund, Falcone is alleged to have granted certain large investors favorable redemption and liquidity terms in return for their vote to approve the restrictions. Falcone and Jenson then allegedly concealed this scheme from the fund's board of directors and the other investors, even though it was the fund’s board that had the authority to grant such preferential rights.
In the UK, the case to answer involves Weavering Capital, which collapsed in Match 2009, leaving investors around $600 million out of pocket. The Serious Fraud Office, which earlier declined to prosecute the matter, has now reversed its decision and will renew its investigation of Weavering and Magnus Peterson, the fund’s founder. As the SFO probe re-launches, its new director David Green will be able to review a wide body of evidence already heard in the Cayman Islands Grand Court and the UK High Court.
In the Cayman proceedings, the court last year delivered a judgement against the directors of the Weavering Macro Fixed Income Fund, for $111 million for wilful neglect and default. Meanwhile, in the UKproceedings, the court found that Peterson, along with his wife and two colleagues, were jointly and severally liable for a breach of fiduciary duties. The court awarded damages of $450 million against the four.
We have no wish to prejudge the outcome of either case. Falcone and Jenson deny any wrongdoing, while Peterson, who represented himself in the UK court during the civil case, has described the decision of Mrs Justice Proudman as “simply wrong.”
It is thus too soon to describe these events as watershed moments for hedge funds. They perhaps lack the urgency and the public documenting of self interested wrong doing that has gotten stuck to Barclays following its £290 million fine and reputational shredding for misdemeanors in the Libor scandal.
Yet what Weavering and Harbinger should manifestly do is firmly fix the spotlight of hedge fund investors on governance and the role of fund directors. The allegations detailed by the SEC raise serious questions. With Weavering, the inadequate governance has been documented in the two court judgements already rendered. In both cases, hedge fund investors will have much to digest and learn.
Bill McIntosh, Editor