The U.S. Securities and Exchange Commission (SEC) today rejected a settlement with Philip Falcone and his hedge fund firm Harbinger Capital Partners LLC that had been proposed by the Commission’s own enforcement division. Under the terms of the rejected settlement, Falcone would have paid $18 million without having to admit or deny guilt on charges that he lied to investors about a $113 million loan from the funds to pay his personal taxes. Falcone would also have been banned from the securities business for two years.

Harbinger Capital is the hedge fund group of Falcone’s Harbinger Group Inc. (NYSE: HRG), and Harbinger Group notified investors in three hedge funds of the rejected deal late yesterday.

Falcone and Harbinger have sunk more than $3 billion into wireless network provider LightSquared Inc., but that company is now in bankruptcy proceedings following a frustrated effort to overcome interference issues in its wireless spectrum holdings. In May, Dish Network Corp. (NASDAQ: DISH) offered to pay LightSquared $2 billion for the spectrum and instead of negotiating, LightSquared filed suit charging Dish and chairman Charlie Ergen with violating an agreement on LightSquared’s restructuring.

Does Dish’s offer look any better today? Falcone’s personal fortune has been estimated at $1.2 billion and that’s certainly enough to get him over a few bumps in the road. But Harbinger’s investors might like to recover at least some of the money the Harbinger funds dropped on LightSquared and they might now be in a better position to demand that Falcone at least sit down with Ergen outside a courtroom.

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