On Friday, hedge fund manager Philip Falcone filed two motions to dismiss SEC charges against him and his firm, Harbinger Capital. (A prior post on the charges is here.) One set of charges accuses Falcone of a “short squeeze” — buying up securities to “squeeze” short sellers into paying more to cover their shorts — and Falcone argues there is nothing fraudulent about that:
Although “short squeezes” have existed for centuries, no court ever has held that the conduct alleged here constitutes market manipulation, and for good reason: the Complaint alleges no misrepresentations; no omissions, apart from Defendants’ withholding “from the market…information about their holdings” (id. ¶ 102); no profits made by Defendants; no losses suffered by the short sellers who were Defendants’ only alleged intended victims; and no deception of or intent to deceive any short sellers. Plaintiff believes that perfectly lawful market conduct—here, buying bonds that Defendants admittedly believed “would rally” (id. ¶ 39), and simultaneously refusing to lend those bonds to short sellers—can be transformed into illegal market manipulation merely by alleging that Defendants had manipulative intent no matter how implausible that alleged intent might be. Plaintiff is wrong.
The motion describes the alleged short squeeze as a open feud with Goldman, rather than fraud:
Rather than alleging an intent to deceive short sellers, the Complaint merely alleges an intent to frustrate Goldman Sachs (“Goldman”)—referred to in the Complaint as “the Wall Street firm” (id. ¶ 3)—in retaliation for what Defendants believed was unethical conduct on the part of its proprietary traders. As the Complaint alleges, Defendants learned that Goldman “was shorting the bonds and encouraging its customers to do the same,” while simultaneously serving as Defendants’ prime broker in connection with the bonds. Id. ¶¶ 3-4. Goldman’s conduct “angered” Defendants because they felt that Goldman “was putting its proprietary trading interest ahead of [their] own.” Id. ¶ 46. Defendants allegedly “retaliated against” Goldman by refusing to allow Goldman’s traders to borrow their bonds. Id. ¶ 4. But the Complaint does not allege that the Defendants had any duty to lend their bonds (they did not), or that Defendants intended to deceive Goldman or its traders in any way. To the contrary, the Complaint alleges that, a month before they allegedly formed any manipulative intent, Defendants told Goldman that they did not want their bonds lent to anyone. Id. ¶ 45.
In a separate motion in the same case, Falcone seeks to dismiss allegations relating to a personal loan from Harbinger that was allegedly “repaid in full at above-market interest” and disclosed to investors. The motion responds to second alleged fraudulent scheme with a similar defense of “so what?”:
The second “fraudulent scheme” is likewise based on conduct that harmed no one and was permitted under the relevant Harbinger fund documents. Plaintiff alleges that, in March 2009, Harbinger entered into side letters with three investor representatives granting their clients “preferential liquidity” in exchange for an affirmative vote on a change to the redemption provisions of a separate Harbinger fund, the Harbinger Capital Partners Fund I (“HCP Fund I”). Compl. ¶ 64. But, so what? It is undisputed that Harbinger had the right under HCP Fund I’s governing documents to grant preferential liquidity to select investors, and the Complaint does not allege otherwise.