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Pity the Billionaire: Why We Should Feel Sorry for Phil Falcone

Hedge fund manager Phil Falcone claimed he never forgot his humble origins. But his personal and professional behaviour tell a different story.

In 2009, Phil Falcone told the Harvard Crimson, the newspaper of his alma mater, “I try to always never forget where I came from. I’ve never let money intimidate me, and even today, I never intimidate with money. Because it’s just money."

Perhaps the saddest part of Phil Falcone’s downfall is his failure to remain humble and deferential to his modest upbringing.

Growing up poor in Chisholm, Minnesota, a small town of 5,000 people, he was the youngest of nine children living in a three-bedroom house, the son of a utility superintendent father and mother who toiled at a shirt factory. The Minnesota hockey star attended Harvard on financial aid, where he played on the hockey team.

And he married a woman, Lisa of equally humble roots, having grown up a troubled family in Spanish Harlem.

For awhile it was looking like your quintessential rags-to-riches story. The 49 year-old Falcone became a billionaire after his New York hedge fund, Harbinger Capital Partners, correctly bet against subprime mortgages in 2007.

But at same time he was telling the Crimson that he never forgot where he came from, he was lavishly renovating the 27-room, $49 million dollar Manhattan penthouse he had bought from publisher Bob Guccione and flying back and forth to his home on the Caribbean island of St. Barts on his private jet. The former Minnesota hockey star even bought a sizeable minority stake in the National Hockey League’s Minnesota Wild, not to mention a sizeable art collection.

Not that there is anything wrong with accumulating these assets. In fact, it is smart wealth diverisification. But the Falcones seemed to live their life — a life their families could not even have dreamt of enjoying — in an arrogant, swashbuckling style that barely tried to avoid, and some would say actively courted, the gossip pages of the New York City tabloids.

Lisa, who has been with Philip for about two decades, unapologetically made it clear that their tenure and her lack of a prenuptial agreement entitles her to her husband’s riches. “Obviously, my husband’s made the money, but we’ve been together 18 years. And the person behind the person isn’t usually seen,” she told Bloomberg Businessweek several years ago. “So the money I’m using I’ve earned.”

Before they renovated the Guccione mansion, Lisa and Phil reportedly held a flashy third birthday party for their twin daughters, Carolina and Liliana, complete with walls painted with The Wizard of Oz scenes and hand-calligraphed invitations, according to published reports.

And Lisa was not shy about thrusting herself into New York’s social scene. She made headlines in 2009 when she interrupted a speech by Joshua David, a co-founder of the Friends of the High Line, to announce she and her husband were donating $10 million. She also is celebrated for being seen dancing onstage with Kerry Washington and Alicia Keys at another party.

And, as ever with a huge media profile, not all of the publicity was necessarily welcome. The Falcones were also sued for sexual harassment by their gay former house manager, alleging Lisa shoved her hands down his pants and punched him in the face. And according to the New York Daily News, while in St. Bart’s, Lisa allegedly urged him to wear “a more revealing bathing suit.” The Falcones’ published response at the time asserted: “Phil and Lisa Maria have zero tolerance for discrimination of any kind and any suggestion to the contrary is completely untrue, as are all the other allegations in the complaint.”

And it now appears that Falcone’s approach to his professional life was as ill-considered as his approach to his private life. Despite the enormous bet that changed Falcones’ lives — the one-time junk bond trader personally made about $1.7 billion on subprime mortgages and by 2008 managed $26 billion — he fell under the radar of the Securities and Exchange Commission.

On June 27, the Securities and Exchange Commission filed a number of charges against Falcone and Harbinger Capital Partners for using fund assets to pay his taxes, conducting an illegal “short squeeze” to manipulate bond prices and other securities infractions.

For example, the SEC alleged that Falcone fraudulently obtained $113.2 million from a hedge fund that he advised and misappropriated the proceeds to pay his personal taxes at the same time they barred a majority of investors from redeeming their stakes.

The SEC is seeking a permanent bar from serving as an officer or director of a public company. His future as an owner of a less-regulated hedge fund does not look much more promising either.

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