Harbinger Group Inc. (HRG:US) founder Philip Falcone wasted corporate assets in a bid to keep control of the investment firm after agreeing to a five-year ban on working in the securities industry, an investor contends in a lawsuit.
Falcone, whose hedge funds faced a wave of redemption requests after he accepted the ban as part of a settlement with the U.S. Securities and Exchange Commission, added two board seats to help secure a cash infusion of more than $400 million from Leucadia National Corp. (LUK:US), according to a complaint by Haverhill Retirement System, a Harbinger shareholder, filed yesterday in Delaware Chancery Court.
The latest claims against Falcone come as he’s trying to steer his wireless broadband provider LightSquared Inc. out of bankruptcy and close a long battle with Dish Network Corp. (DISH:US) Chairman Charlie Ergen for control of the company.
Leucadia, run by Jefferies Group LLC Chief Executive Officer Richard Handler, agreed last week to buy 23 million preferred securities from Harbinger for $253 million. Falcone’s hedge funds last year sold Leucadia $158 million in Harbinger shares as the billionaire worked to raise cash to meet redemption requests.
The new director positions, filled by Leucadia designees, give public shareholders “less of a voice” on Harbinger’s direction and amount to a misuse of corporate assets, the Massachusetts-based pension fund said in yesterday’s complaint. Haverhill claims Falcone and other Harbinger directors violated legal duties to minority investors.
“Falcone effectively used company assets to bail himself out of a personal financial crisis and maintain de facto control over HGI despite a shrinking equity stake in the company,” the fund said.
Dave Millar of New York-based Sard Verbinnen & Co, a spokesman for Harbinger, said in an e-mail today the company declined to comment on Haverhill’s suit.
Falcone, who became a billionaire by betting against the U.S. housing market in 2006, was accused by the SEC of improperly borrowing money from his funds to pay personal taxes and giving preferential treatment to some clients when returning their money.
The bar from the securities industry will allow Falcone, 51, to satisfy all investor-redemption requests made on his hedge funds under the supervision of an independent monitor, the SEC said. He and his firm also will pay an $18 million fine as part of the settlement.
Under the agreement, Falcone will continue to serve as chief executive officer of Harbinger, a $1.28 billion public holding company he controls.
Falcone didn’t give up any seats on Harbinger’s board when he created the new positions for Leucadia’s representatives, the pension fund’s lawyers said in the suit.
“The expansion of the board to add two Leucadia appointees reduced the percentage of independent HGI directors to a mere 30 percent of the board seats, diluting public stockholder representation without any corresponding benefit to the company or the public stockholders themselves,” the fund’s attorneys wrote.
Falcone’s actions amounted to an abuse of power, and directors failed to serve as a proper check on the company’s founder, the lawyers wrote.
The case is Haverhill Retirement System v. Asali, CA No. 9474, Delaware Chancery Court (Wilmington).
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