Updated, 8:26 p.m. | When Philip A. Falcone admitted committing “multiple acts of misconduct” in a settlement this summer with the Securities and Exchange Commission, the hedge fund billionaire appeared to put his legal woes to rest.
But that admission, a rarity given the S.E.C.’s longstanding policy of allowing defendants to “neither admit nor deny” wrongdoing, has given rise to a fresh set of problems for both Mr. Falcone and the commission.
On Monday, New York’s top financial regulator used the admission to punish Mr. Falcone in an unrelated case, imposing a seven-year ban on the billionaire from controlling insurance companies licensed in New York. Mr. Falcone was also barred from serving as an officer or director of Fidelity and Guaranty Life Insurance, which is owned by the Harbinger Group, the publicly traded company that Mr. Falcone runs. Under New York state law, regulators can prevent someone from overseeing insurance companies if the person demonstrates “untrustworthiness.”
For Mr. Falcone, who has no day-to-day involvement with the insurer, the fallout is limited. And in an interview on Monday, his first since the settlement, he played down the implications.
“It’s very frustrating but it is what it is,” said Mr. Falcone, a 51-year-old money manager. “I don’t need to knock my head against a wall.”
But the action by the New York regulator, Benjamin M. Lawsky, could cause headaches for the S.E.C., potentially creating a precedent that undermines its campaign to extract admissions of wrongdoing from Wall Street. With the prospect that such admissions could come back to haunt defendants in other cases, legal experts say, there could be a chilling effect on the banks and hedge funds that regulators seek to punish. Investors might also use the admissions to bolster civil lawsuits.
“This is the event that is going to stick in the craw of every defense lawyer,” said Thomas A. Sporkin, who spent nearly 20 years in the S.E.C’s enforcement unit until last year, when he moved to the law firm Buckley Sandler.
Rather than settle, Mr. Sporkin said, defendants might be more inclined to take a case to trial, straining S.E.C. resources and imperiling the agency’s chance at a victory.
The S.E.C. declined to comment on Monday, but as recently as last week, it said it welcomed a courtroom fight.
“We will demand admissions, and if the defendant isn’t prepared to agree, we will litigate at trial,” Andrew J. Ceresney, the co-head of the S.E.C.’s enforcement unit said at a legal conference.
The deal with Mr. Falcone on Aug. 19 underscored this approach. The regulator sued Mr. Falcone in 2012, accusing him of borrowing $133 million from his hedge fund to pay his taxes, manipulating bond markets, and favoring certain investor requests for redemption over others.
Mr. Falcone agreed to a settlement in May 2013 that did not require an admission of wrongdoing. But in an unexpected turn of events this summer, the commission overturned the original settlement and changed its policy of allowing defendants to “neither admit nor deny” wrongdoing.
As part of the new settlement and admission of wrongdoing, Mr. Falcone was barred from the securities industry for five years.
In the speech last week, Mr. Ceresney argued that admissions were important for holding defendants accountable and providing catharsis to the investing public. He noted that the shift had already begun to “bear fruit,” citing a recent action admission from JPMorgan Chase, which acknowledged violations of securities laws over its $6 billion trading loss in London last year, and the settlement with Mr. Falcone.
Mr. Lawsky’s action came nearly two months after the S.E.C.’s deal with Mr. Falcone.
“It is vital to ensure that those who operate insurance companies will always put retirees and policyholders first and act with the utmost integrity,” Mr. Lawsky said in a statement. Citing the admission, and relying on an obscure state law, Mr. Lawsky said that Mr. Falcone failed to meet those criteria. Mr. Lawsky was likely to review the settlement, even in absence of an admission.
Mr. Lawsky’s office added that the S.E.C. had anticipated that Mr. Falcone’s settlement “may have collateral consequences under federal or state law and the rules and regulations of self-regulatory organization, licensing boards, and other regulatory organizations.”
It appeared that some consequences have already materialized.
As part of the action against Mr. Falcone, employees at his hedge fund, Harbinger Capital, were also prohibited from controlling an insurance company licensed in New York. And ahead of that ban, two Harbinger Capital employees — Robin Roger, general counsel and co-chief operating officer at Harbinger Capital, and Keith M. Hladek, chief financial officer — stepped down from Fidelity’s board.
In a statement on Monday, a spokesman for the Harbinger Group said that it “takes its obligations with regulators very seriously and we look forward to continuing to manage Fidelity and Guaranty Life for the long term.”