Bloomberg News

Falcone’s Harbinger Fund Lost 47% on LightSquared in 2011

February 14, 2012

(Updates assets in fourth paragraph.)

Feb. 3 (Bloomberg) -- Phil Falcone’s Harbinger Capital Partners LLC lost 47 percent for investors in his main hedge fund last year as he was forced to slash the value of his troubled wireless venture by more than half, according to a person familiar with the results.

Most of the decline in the Harbinger Capital Partners Offshore Fund I came from Falcone’s investment in LightSquared Inc., which plans to offer high-speed data service to as many as 260 million people. The Reston, Virginia-based company is awaiting final clearance from the Federal Communications Commission as regulators weigh test results that show the service’s signals disrupt global-positional system equipment used by cars, tractors, boats and planes.

“The decline was primarily due to a conservative adjustment in the fund’s holdings of LightSquared, to be consistent with the results of work done by the fund’s third- party valuation firm,” Lew Phelps, a spokesman for the New York-based fund, said in a statement. “The valuation takes into account uncertainty about the outcome of political issues related to alleged interference with the GPS system by LightSquared transmitters,” added Phelps, who confirmed the fund’s loss.

The 59 percent reduction in the value of the fund’s LightSquared stake illustrates the precarious nature of the investment on which Falcone, who is also under investigation by U.S. regulators, is betting the future of his firm. Harbinger, which managed $4 billion at the end of last year, put about $3 billion into LightSquared, and the investment accounted for 62 percent of the main fund at the end of May.

Private-Equity Losses

Jonathan Atkin, a San Francisco-based analyst with RBC Capital Markets LLC, said last month that LightSquared may run out of money within six months.

LightSquared Chief Executive Officer Sanjiv Ahuja said in a Dec. 9 interview that the company would be adequately funded through the government’s review period, which he expects will last until early 2013. The company argues that GPS manufacturers should have planned to accommodate the company’s use of the airwaves, and that technical solutions exist to resolve interference.

The fund’s other losses came from a portfolio of private- equity investments that tumbled about 31 percent in 2011, according to the person, who asked not to be identified because the fund data is private. The biggest holding in the so-called side-pocket, which Harbinger is in the process of liquidating, is a 27 percent stake in Ferrous Resources Ltd., an iron-ore producer in Brazil that canceled plans to sell shares to the public in June 2010 because of volatile equity markets.

Spectrum Brands

Investments in public companies, including a 54 percent stake in Spectrum Brands Holdings Inc., a Madison, Wisconsin- based manufacturer of pet food and batteries, accounted for the rest of the loss. Spectrum Brands tumbled 12 percent last year.

Harbinger’s losses last year almost matched those by John Paulson, the hedge-fund manager who, like Falcone, made his name by betting that the subprime market would tumble in 2007. One of Paulson & Co.’s largest funds plunged 51 percent in 2011 as he wrongly bet on a recovery in bank shares.

In December, the Securities and Exchange Commission told Falcone it is considering suing him and two other fund executives over alleged violations of securities laws. As a result of the potential suit, Falcone said he would suspend client withdrawals for a second time in three years.

SEC Investigation

The SEC is investigating whether Harbinger gave some investors preferential treatment by allowing them to withdraw money while barring others from doing so. Harbinger is also being investigated by the SEC and the U.S. Attorney’s office over a $113 million loan Falcone took from one of his funds.

Falcone has denied giving preferential treatment to any investors.

Falcone, a 1984 graduate of Harvard University in Cambridge, Massachusetts, started Harbinger in 2001 and became a billionaire after making a profitable bet on the collapse of the subprime loan market. Harbinger’s assets mushroomed to $26 billion by June of 2008, only to drop in the wake of the financial crisis.

--With assistance from Saijel Kishan in New York and Todd Shields in Washington. Editors: Steven Crabill, Christian Baumgaertel

To contact the reporter on this story: Katherine Burton in New York at kburton@bloomberg.net

To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net


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