Posted: December 16th, 2022

Asset Misappropriation at Harbinger Capital Partners LLC

Asset Misappropriation at Harbinger Capital Partners LLC

Types of Asset Misappropriations
Under the management of Philip A. Falcone, Harbinger Capital Partners LLC engaged in asset misappropriations. Falcone took the advantage as the adviser and the manager of the hedge fund to conduct an asset misappropriation to fraudulently obtain an amount worth $113.2 million to pay his personal taxes in the year 2009. The former Harbinger’s Chief Operating Officer, Peter A. Jenson, abetted Falcone in the mentioned misappropriation. Consequently, Falcone, Jenson and Harbinger were charged with asset misappropriation. The asset misappropriation types in the mentioned case include client assets misappropriation, clients’ betrayal, funds misuse, larceny, and market manipulations. Falcone borrowed for himself an amount of $113.2 million from the investor’s money without the hedge fund consent from which he was the manager and advisor through the HCP Company (Bollen & Pool, 2012). After that, he keeps investors in dark and does not involve legal advisories regarding loans. Finally, Falcone manipulated the market through inflating the prices of arbitrary products with short sellers while valuing the same on his records at lower prices than those he charged the short sellers.
At the moment, knowing that he had committed fraud, Mr. Falcone did not allow fund withdrawals by the investors. It was until 2011 when he repaid the loan with interest because the Security and Exchange Commission began investigations. Moreover, after the SEC’s investigations, Jenson was as well indicted for abetting Falcone’s actions. Furthermore, Harbinger Company was charged for carrying out unlawful trading.
The whole chain of the asset misappropriation as already seen was due to the poor organizational culture. When the top leaders involve in asset misappropriations and other frauds, the successor are likely to go on with the same poor culture unless the successors carry out thorough reforms. Poor organizational culture inheritance is a possible cause of fraud in the Falcone’s case because one of the predecessors abetted his actions. Secondly, for the reasons of personal and selfish gains, Falcone decided to borrow money for himself as opposed to the principles set for the hedge fund investors. His aim was to use the funds to begin his wireless network company through LightSquared Inc. Moreover, Falcone was left to take control of the entire system alone which would have been a huge loophole for a fraud. Finally, the clients of the hedge fund did not incorporate legal services for further monitoring and advice, a factor that easily propagates dishonest conducts.
In my opinion, poor organizational management and lack of management structure were to blame for the misappropriation. The management ought to include executives who control the system as a team rather than being left for a single individual. Additionally, there seemed to be lack of meetings with members to make deliberations as a team. This would be an indication of poor management that may easily promote fraudulent activities. Developing an organizational structure within the institution would have Helped since any activities within the organization are first communicated to the board of executives before the clients.
Legal Mechanisms to Recover the Assets
Legal asset recovery mechanisms for the case of Falcone and Harbinger Capital Partners or any other asset misappropriation include intelligence and evidence collection, tracing and recovering assets, and finally indicting the perpetrators. The criminal justice systems (CJS) usually take a lead in carrying out intelligent investigations. Electronic and physical surveillance, accounts auditing, monitoring, witness interviews, public source information, and other necessary expert reports are critical during the investigation stage (Ramos, 2003). Through the above tracing mechanisms, evidence is collected and used to secure assets. Asset securing enables confinement of movement and further confiscations of assets. The civil power to restrain assets is only given to the law enforcement company or investigating magistrate.
The CJS, civil and SEC commissions successfully worked together in recovering the organization’s embezzled assets. In the case of the crime committed by Falcone, HCP and Jenson, the legal authority that carried out investigations and charged the penalties was the Security and Exchange Commission (SEC). SEC filed a case against the three entities after which the CJS charged the correspondents with the civil penalty that amounts to $428,975, the disgorgement amount of $857,950 with the prejudgment interest of $91,838. SEC charged Harbinger and Falcone for violating the principles of the Securities Act of 1933, the Investments Advisers Act of 1940, and the Exchange Act. Other legal actions taken for further prevention of embezzlements were to outlaw Falcone from serving at any public company as a director or an officer. He also obtained monetary fines.
Management Responsibility to Share Breach Information
The management of any organization has a responsibility of sharing the company’s progress, failure and any case regarding breaching of the organizational guidelines to the stakeholders. The employees, executives and other major shareholders of a company play a major role in fraudulent activity prevention. Therefore, the management out to develop a system that efficiently communicates any breach of the principles that the institution is based on. Any suspicious action ought to be reported soon through mailings or electronically. The management must give the information about the state and federal laws, and organizational obligations to the stakeholders. This approach will enable easier identification and reporting of frauds to the necessary authorities. Therefore, it is upon the management to organize a security response team, design communication coordinator and allow the issuing of notification letters in case of breach. After the reporting of any breach, the management must constantly inform the stakeholders about the progress of investigations, asset recovery, the involved personnel, and the underway actions to prevent further embezzlements. Regular communication to employees after the breach would also trigger the release of any hidden information that employees and other stakeholders might have. The company management must be ready to share information that will Help in the damage recovery after a breach or fraud.
AICPA SAS No.99
American Institute of Certified Public Accountants issued the Statement on Auditing Standards no. 99 in 2002 to Help in determining whether the financial statements contain misstatements or not. The auditors perform thorough auditing to acquire reasonable assurance about the frauds based on the accepted inspection standards. The risk factors that relate to asset misstatements according to SAS No.99 include incentive or pressure to execute a fraud, opportunity to engage in a fraud and the attitude to justify fraudulent actions (Carpenter, 2007). Incentive to execute a fraud may occur when the management receives excessive pressure to attain profitability expectations of the external parties such as analysts and investors. Moreover, the demand for more finances to keep the business and a poor economic performance lead to fraudulent actions. Moreover, opportunity to engage in a financial fraud may result when a small group controls the whole company’s finances or when financial transactions are allowed away from the normal business routines. Finally, an attitude of justifying fraud may arise due to ineffective support and communication by the management. When the management passes the false information, ethical standards and values, or lacks internal control, then fraudulent action is likely to occur (Carpenter, 2007).
According to the Hedge Funds, the prevalent risk factors that possibly lead to asset embezzlement include the attitude of justifying or rationalizing fraud and the opportunity to engage in fraud. Since Falcone was an advisor and a manager of the hedge fund at the same time, he had all the leeway to borrow funds unnoticed, which lead to asset misappropriation. Secondly, Jenson promoted the atmosphere of rationalizing the fraud that Falcone committed. He was the former official at the Harbinger Capital Partners LLC which indicates that the poor culture of rationalizing a fraud was carried on from them previous management.
In a regular basis, Hedge Funds should review the risk factors plan and determine the methods of mitigating the risks. The management and the advisors of the hedge firm should include an external legal firm to Help in monitoring the performance as well as to carry out further audits of the company’s accounts regularly. The action will improve transparency and reduce frauds of any kind. Moreover, leadership should and management of the firm needs to incorporate executives and boards to provide effective control and management in the organization (Shadab, 2013).
Hedge Funds Governance Improvement
Investors are the core components of the hedge fund governance. They regularly redeem their short term finances considering the high performance sensitivity. The corporation regularly issue annual compensations to the investors including the investors own investments within the company. To improve the governance, the remote access permits major stakeholders of the non-subscribing institutions. Hedge funds require enhancements in valuation performance and the timing performance. However, in other occasions, investors benefit from less disclosure, less access, higher fees and less access to the investment (Shadab, 2014).
Fraud Prevention Strategy Recommended for Hedge Funds
Among the recommendations include creation of the right tone at the top management. That is, the top management should create the right organizational culture that promotes integrity as well as the economic benefits. The management should initiate the culture of fraud risk management schemes, develop fraud prevention strategies, detection and response. The company should also tolerate proper whistleblowing programs, where worker can anonymously report frauds (Crawford & Weirich, 2011). Moreover, semi-annual financial auditing and reporting will also reduce embezzlements. This strategy can be gazette to the public for transparency purposes. Finally, Hedge Funds should change her management system and leaders and initiate a new system and culture that will be trustworthy in her operations. With the already realized asset misappropriation that the company has carried out through Falcone, to win the public perception to think positively of the organization will take time. Constant, thorough and honest promotions must occur in the company and unless her clients and customers begin to commend her, the company will take some times to stabilize.

References
Bollen, N. P., & Pool, V. K. (2012). Suspicious patterns in hedge fund returns and the risk of fraud. Review of Financial Studies, 25(9), 2673-2702.
Carpenter, T. D. (2007). Audit team brainstorming, fraud risk identification, and fraud risk assessment: Implications of SAS No. 99. The Accounting Review, 82(5), 1119-1140.
Crawford, R. L., & Weirich, T. R. (2011). Fraud guidance for corporate counsel reviewing financial statements and reports. Journal of Financial Crime, 18(4), 347-360.
Ramos, M. (2003). Auditor’s responsibility for fraud detection. Journal of Accountancy, 195(1), Mustafa, S. T., & Ben Youssef, N. (2010). Audit committee financial expertise and misappropriation of assets. Managerial Auditing Journal, 25(3), 208-225. 28.
Shadab, H. B. (2013). Hedge fund governance. Stan. JL Bus. & Fin., 19, 141.
Shadab, H. B. (2014). Improving Hedge Fund Governance. Journal of Taxation & Regulation of Financial Institutions, 28(1).

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