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Sense of the markets: A study in risk at Falcone's Harbinger

by Paula Schaap | Published December 14, 2011 at 3:46 PM

LightSquared Inc. is getting closer to finding out whether its $5 billion wager on the next big thing in wholesale wireless is a boom or a bust.

The Reston, Va.-based company is trying to get the Federal Communications Commission to finalize a waiver that would make its licenses for 250 megahertz of broadband spectrum worth a lot more.

But the company has been up against a campaign by GPS service providers that claim LightSquared's plans will interfere with reception. A federal government GPS task force will meet Wednesday, Dec. 14, to discuss a recent test of the system. The task force can then make recommendations to the National Telecommunications and Information Administration, which is a part of the overall approval process.

Then, there is the matter of LightSquared's main backer, hedge fund manager Philip Falcone, founder of $9 billion Harbinger Capital Partners LLC. LightSquared was Falcone's next big bet after he hit it big shorting the subprime mortgage crisis. Although LightSquared has touted its fundraising efforts as approaching $5 billion, almost $3 billion of that, and possibly more, comes from one source: Falcone's holding company, Harbinger Group Inc.

The problem is that Falcone now has additional worries besides whether the FCC grants LightSquared its waiver. The Securities and Exchange Commission served Falcone and two other Harbinger Capital executives with "Wells Notices" on Dec. 8 that relate to trading done sometime during the firm's subprime mortgage shorting days, according to regulatory filings. Although Falcone said that he and his cohorts intend to fight any SEC action if it materializes (the notices only mean that the agency is contemplating an enforcement action, not that it will go ahead with one), it would make fundraising more difficult and stanch the flow of cash to his pet project.

Which is all the more likely because, after receiving the notices, Falcone wrote to his hedge fund investors that he was suspending redemptions from his funds for the time being.

Not that redemption notices do some of Falcone's investors that much good. Since the spring, investors in certain of his funds have been getting pieces of paper entitling them to invest in LightSquared, rather than their money back. Now, apparently, nobody is getting out, with IOUs for LightSquared shares or anything else.

Falcone's policy doesn't seem to have applied to his biggest backers, such as Goldman Sachs Group Inc. and Blackstone Group LP. When those powerful institutions asked for their money back last year after questions were raised about a $113 million personal loan Falcone took from his special situations fund while investors in general couldn't get their money out, they were permitted to cash out, according to sources familiar with the situation. (Falcone has since repaid the loan.)

Goldman and Blackstone declined to comment on their investments in the Harbinger funds. A spokesman for Harbinger said the firm doesn't comment on its funds.

Still, Falcone, and by extension, LightSquared, have some big names backing them. This summer, Harbinger Group got a $205 million investment from Fortress Investment Group LLC and also sold $400 million of convertible preferred stock, according to regulatory filings. Participating in the stock sale was George Soros' Quantum fund, private equity firm Providence Equity Capital Markets LLC, hedge fund firms JHL Capital Group LLC (whose founder, James Litinsky, once worked at Fortress), Luxor Capital Group LP, and high-yield debt and distressed hedge fund firm DDJ Capital Management LLC.

While the roster of investors sounds like a good deal for LightSquared, it also sounds like a group that knows how to derive value out of a dicey situation -- whether they have backed a winner or a loser or an also-ran, it's a group that knows how to hedge their bets.

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Sense of the markets: A study in risk at Falcone's Harbinger

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Paula Schaap

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