Falcone Said to Be Seeking Spectrum Swap to Salvage LightSquared

Senior Managing Director of Harbinger Capital Philip Falcone
Senior Managing Director of Harbinger Capital Philip Falcone. Photographer: Brendan Smialowski/Bloomberg

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

Falcone’s Harbinger Capital Partners LLC has sunk $3 billion in LightSquared, a Reston, Virginia-based firm that plans to build a high-speed broadband network to serve 260 million Americans. The Federal Communications Commission said Feb. 14 it won’t let the company begin service because it interferes with GPS navigation of cars, boats, planes and tractors.

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.

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.

Mike Sitrick, a spokesman for New York-based Harbinger, declined to comment. Falcone’s efforts to swap spectrum was first reported by the Wall Street Journal.

‘Politically Motivated’

The FCC’s decision “was not a decision 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 yesterday. “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 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 only way people would ever give him money again to manage would be if the LightSquared investment were a home run,” said Brad Balter, head of Boston-based Balter Capital Management LLC, which invests client money in hedge funds. “Even breaking even won’t do anything for his reputation.”

Ferrous Resources

Five years ago, Falcone ran a $26 billion hedge fund firm, one of the industry’s biggest, after more than doubling clients’ money on a successful bet that subprime mortgages would tumble. As little as two months ago, he said in an interview that he wanted to use Harbinger Group Inc., a publicly traded holding company he controls, to make long-term investments akin to Warren Buffett’s Berkshire Hathaway Inc.

As of the end of January, his Harbinger Capital Partners had dwindled to $4 billion. About $2.8 billion was in three positions. In addition to the LightSquared equity, it held $648 million in Ferrous Resources Ltd., the Brazilian iron-ore producer that he has been trying to sell, and $645 million in Harbinger Group Inc., which currently owns an insurer and a consumer company.

Falcone’s troubles started after his big win on subprime, and hedge fund investors said that his success on that trade may have propelled him to take bigger and bigger risks.

2011 Losses

His penchant for concentrated bets hurt him during the financial crisis of 2008. A stake in iron-ore producer Fortescue Metals Group Ltd. slumped 74 percent that year, as did large holdings in Cleveland-Cliffs Inc., which tumbled 49 percent, and Freeport-McMoRan Copper & Gold Inc. that lost 76 percent.

Then there was the LightSquared bet. He started building his stake in 2006 and completed his purchase of SkyTerra in March 2010, which awarded him the licenses that analysts at the time said were worth $9 billion.

The fund wasn’t just hit by investment losses. In 2009, he borrowed $113 million from his Special Situations Fund to pay his personal taxes, a move that is now being investigated by the SEC and the U.S. attorney.

Last year, Falcone’s main fund tumbled 47 percent as he was forced to write down his stake in LightSquared by half.

His main fund borrowed $190 million from Jefferies Group Inc. last month to help pay off a $400 million loan from UBS AG that came due at the end of January. The Jefferies loan matures in October and the fund said it would immediately start trying to sell its 19.5 percent stake in Ferrous to raise cash. In all, Harbinger owns 26 percent of the company.

“After the subprime trade, it was almost as if he had to go for a home run every time,” Balter said. “He couldn’t help himself.”

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