June 23 (Bloomberg) -- Harbinger Capital Partners, the hedge fund run by Philip Falcone, bet about $665 million on declines in the share price of U.K. mortgage lender HBOS Plc, the biggest short sale to be disclosed so far under the country's new rules.

The New York-based investment firm held a short position of 3.29 percent as of June 20, it said today in a statement. HBOS, the U.K.'s largest mortgage lender, had a market value of about 10.3 billion pounds ($20.2 billion) that day, meaning Harbinger, run by the former head of high-yield trading at Barclays Capital, borrowed stock valued at about 340 million pounds with plans to pay it back at a lower price.

``As the market hears more and more about smart investors taking large positions against HBOS, they could be tempted to do the same and put in shorts,'' said Mamoun Tazi, an analyst at MF Global Securities Ltd. in London who is ``neutral'' on the stock. ``This could create the opposite to what the Financial Services Authority wanted and result in much higher volatility in the shares.''

The FSA, the U.K.'s financial watchdog, started new rules last week to force investors to declare short-selling positions in companies trying to sell shares in rights offers. Lansdowne Partners had a short position of 0.58 percent in Edinburgh-based HBOS, and Meditor Capital Management was short on a stake of 0.3 percent, they said in statements today.

Strike Price

HBOS fell 4.3 percent today to 270.25 pence, less than the 275 pence strike price for its planned 4 billion-pound rights offering. Rightmove Plc said today that U.K. house prices dropped in June, and HBOS warned June 19 that house prices will fall as much as 9 percent this year, more than it forecast earlier.

Investors also disclosed short positions today in Bradford & Bingley, the U.K.'s biggest lender to property landlords. The Bingley, England-based bank slashed the price of its rights offering by 33 percent on June 2, citing rising late mortgage payments. The bank fell 3.7 percent today to 66 pence in London trading, bringing its decline for the year to 75 percent.

The largest disclosed short position in Bradford & Bingley came from Tiger Global Management LLC, which borrowed 3.4 percent of the company's shares, it said in a PRNewswire statement today.

London-based Odey Asset Management LLP, the $5.1 billion fund manager set up by Crispin Odey, holds a short position of 0.28 percent in Bradford & Bingley, it said in an earlier statement.

Six Short Sellers

Six other funds disclosed short positions in Bradford & Bingley today: GLG Partners LP, 2.81 percent; Steadfast Capital Management LLC, 1.23 percent; Steadfast International Ltd., 0.84 percent; Oceanwood Global Opportunities Master Fund, 0.45 percent; American Steadfast LP, 0.4 percent; FIL Ltd., 0.25 percent.

The FSA imposed new rules June 20 that require disclosure of short positions of more than 0.25 percent of stock for companies that are selling new shares in rights offerings.

``This is the first time we've had to do it, and we've done it,'' said David Stewart, chief executive officer of Odey, in an interview today. ``We've made history.''

The FSA cited short bets earlier this month for ``severe volatility in the shares of companies conducting rights issues.'' That followed a slump in shares of Royal Bank of Scotland Group Plc, Britain's second-biggest bank, and HBOS Plc.

Panmure Gordon forecast June 20 that HBOS shares might fall below the offering price of 275 pence. Sandy Chen, a Panmure analyst based in London, cut his share-price estimate to 250 pence from 350 pence, citing the outlook for rising bad loans.

Bearish on Banks

``It's a reflection of our overall view on the U.K. banks,'' Chen wrote. ``The expectation of significantly higher impairment charges as well as further writedowns drives us to make substantial cuts in our earnings-per-share forecasts, from 38.1 pence to 25.2 pence for 2008.''

Chief Executive Officer Andy Hornby plans to shore up capital after HBOS announced asset writedowns of almost 4 billion pounds since the credit crunch began a year ago. The bank's rights offer will follow a 12.3 billion-pound share sale by RBS.

HBOS's share sale may leave underwriters Dresdner Kleinwort Group Ltd. and Morgan Stanley with about 10 percent to 15 percent of unsold stock if the shares trade close to the offer price, said Alan Beaney, head of investments at Principal Investment Management in Sevenoaks, England.

The Alternative Investment Management Association, the $1.9 trillion hedge fund industry's largest trade group, tried to delay the new FSA regulations, which were made without consulting market participants, it said.

``We seem to be missing the justification for this,'' Andrew Baker, deputy chief executive of AIMA, said in a June 13 interview. ``This could be using a hammer to crack a nut.''

Stewart said Odey's position was a tiny percentage of Odey's funds under management and has been in place ``for months.'' The FSA disclosure requirement doesn't change Odey's view on the company or Odey's investment strategy, Stewart said.

To contact the reporter on this story: Jon Menon in London at jmenon1@bloomberg.net

Last Updated: June 23, 2008 11:53 EDT