Bloomberg News

Harbinger Capital, Falcone Sued Over LightSquared Investment

February 21, 2012

Feb. 19 (Bloomberg) -- Hedge fund manager Phil Falcone and his Harbinger Capital Partners were sued by a New York woman who claims she and others were misled about the fund’s decision to put most of the money they invested into LightSquared Inc.

Lili Schad, a Wallkill, New York, resident who said she invested $4 million with Harbinger, claiming she wasn’t told that more than 60 percent of the partnerhip’s money went into LightSquared, a company attempting to build a high-speed wireless network, according to a complaint filed yesterday in federal court in Manhattan.

Schad, who seeks to represent all the limited partners in Harbinger Capital Partners Fund I LP, also claims she wasn’t informed that LightSquared’s plan to build the network faced obstacles from U.S. regulators. The suit seeks unspecified damages.

“Had plaintiff known that defendants would concentrate the fund’s investments in LightSquared or known of the regulatory obstacles the company faced, she would have refrained from investing in the fund or immediately sought to withdraw her investment from the fund,” Schad said in the complaint.

Schad alleged that Harbinger allowed some “favored investors,” including Goldman Sachs Group Inc., to redeem their investments on terms unavailable to others. She said that in 2009 Harbinger let Goldman Sachs redeem a $50 million investment in the fund.

Lew Phelps, an outside spokesman for Harbinger Capital, didn’t immediately return a phone message yesterday seeking comment on the suit.

FCC Decision

The U.S. Federal Communications Commission said Feb. 14 it won’t let Reston, Virginia-based LightSquared begin service because its signals interfere with GPS navigation of cars, boats and planes. Harbinger Capital has invested $3 billion in the venture.

Falcone is seeking to swap spectrum owned by LightSquared with that controlled by the U.S. Department of Defense, a person with knowledge of the company said, in an effort to salvage his $3 billion investment and save his hedge fund.

The hedge fund manager hired Moelis & Co., a New York-based investment bank, and other advisers to help study alternatives, said the person, who asked not to be named because the company is private. If the defense department is not interested in a swap, Falcone could try to sell the spectrum.

How much he could get for it remains unclear. As of the end of January, Falcone carried his investment in LightSquared equity at $1.5 billion, or about half of what his hedge fund had invested to date, according to a Harbinger document.

Book Value

Brian Miller, an analyst at Bloomberg Research, says the spectrum is now worth about $500 million. That’s the book value that its former owner SkyTerra Communications placed on it when it was originally licensed. At that time the spectrum could only be used by satellites. In November 2004, the FCC ruled that the satellite system could be augmented with land-based cell towers, which was the network LightSquared planned to build.

The FCC’s Feb. 14 decision wasn’t “based on science or technology, but was a politically motivated decision fueled by special interest groups in the GPS and telecom industry,” Falcone, 49, said in an e-mailed statement Feb. 15. “There are solutions to this problem that can and will address the needs of the GPS community,” added Falcone, who declined to be interviewed.

The U.S. Securities and Exchange Commission and Justice Department are investigating him over alleged violations of securities law. He’s had to borrow $190 million from Jefferies Group Inc. with an effective interest rate of 24 percent, has investor cash tied up in an iron-ore company in Brazil that he’s now trying to sell and posted record losses last year. Falcone has denied any wrongdoing.

The case is Schad v. Harbinger Capital Partners LLC, 12- CV-1244, U.S. District Court, Southern District of New York (Manhattan).

--Editors: Peter Blumberg, Andrew Dunn

To contact the reporters on this story: Bob Van Voris in New York at rvanvoris@bloomberg.net; Patricia Hurtado in New York at pathurtado@bloomberg.net.

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net.


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