Hedge fund Harbinger Capital and its manager Philip Falcone reached a settlement in principle last month to settle with the SEC by agreeing to pay $18 million and have Falcone be banned from the securities industry for two years.  A transcript from the argument on the defendants’ motion to dismiss the SEC’s case, which was recently released on the public docket, sheds some light on the risks and benefits of proceeding with litigation. At the outset of the argument, Judge Crotty appeared sympathetic to the defendants’ argument that there is nothing manipulative or wrong with a “short squeeze” — buying up securities to “squeeze” short sellers into paying more to cover their shorts:

THE COURT: Tell me, Mr. Gottesman [SEC counsel], what is the danger to the capital markets from this conduct that Harbinger engaged in? MR. GOTTESMAN: The danger is that you don’t have natural force of supply and demand dictating the price. You have somebody who went out and cornered the market. THE COURT: What do you mean you don’t have supply and demand? You have restricted supply and unlimited demand. I mean, I’m having difficulty seeing exactly where the wrong occurred here.

However, Judge Crotty seemed troubled by allegations that Falcone arranged for the fund to make him a personal loan, without immediately disclosing it:

THE COURT: Are you familiar with the Latin maxim of nemo iudex sui causia? MR. DONTZIN: I don’t, your Honor. THE COURT: Did you go to Harvard? I will translate for the Harvard guys here. MR. DONTZIN: Thank you. THE COURT: It says no man can sit in judgment of himself. So, I am having very grave difficulty saying how could Mr. Falcone make a loan to himself at what the SEC alleged to be preferential rates without disclosing it.

Prior posts on the case are here and here.