Falcone Follows Michael Jackson Path Taking Fortress Loan

Hedge-fund manager Philip Falcone, beset by declining assets, federal securities regulators and the bankruptcy of his largest investment, is borrowing money against personal real estate he bought during better days.

Falcone and his wife, Lisa, pledged their $39 million Caribbean villa to Fortress Credit Corp., the lender that provided Michael Jackson with a mortgage on his Neverland Ranch when the late pop idol was close to insolvency, according to a February regulatory filing. Within the past year, the couple also agreed to post both of their Manhattan townhouses as collateral for about $25 million of personal loans, real estate records show.

Assets under management at Falcone’s Harbinger Capital Partners LLC have plunged 89 percent since Falcone bought several of the properties in 2008, reducing the fees generated by the New York-based firm’s hedge funds. While it’s not unusual for wealthy individuals to use real estate as collateral, Fortress Credit specializes in higher-rate loans to borrowers who have difficulties getting bank financing, and it isn’t shy about seizing assets in a default, according to Steven Altman, an attorney who participated in litigation involving Michael Jackson’s debt.

“These are extremely rich loans for them,” Altman, whose firm is based in New York, said in an interview, adding that Fortress once seized California vineyards that one of his clients had pledged as security for a loan. “If the collateral is juicy and the guy is desperate, and he is willing to pay almost-hard-money interest rates,” Fortress Credit “will take a big bet on it.”

Guccione Townhouse

Steven Goldberg, a spokesman for Falcone, declined to comment. Peter Briger, Fortress’ co-chairman, confirmed the firm had made a loan to Falcone while declining to comment on the details.

Falcone, 50, vaulted into the top ranks of the hedge-fund world during 2007, when Harbinger made about $11 billion by betting that securities backed by subprime mortgages would collapse. His flagship Harbinger Capital Partners Fund more than doubled in 2007.

The following year, he and his wife paid $49 million to acquire a 27-room mansion in Manhattan that was once owned by the late Penthouse magazine publisher Bob Guccione, and 25 million euros ($39.3 million at the time) for a 7-bedroom villa on the island of Saint Barthelemy, an 8-square mile (21-square kilometer) island in the French West Indies that was once part of Guadeloupe.

Falcone’s fortunes have since soured, as a combination of money-losing investments and client withdrawals cut Harbinger’s assets under management to $2.9 billion as of May from about $26 billion in 2008. Harbinger’s wireless venture, LightSquared Inc. of Reston, Virginia, filed for bankruptcy protection in May.

Wireless Venture

Harbinger invested about $3 billion in the venture to build a wireless network powered by satellites and cell towers that would offer high-speed Internet service nationwide. The company filed for bankruptcy after the Federal Communications Commission said it would withdraw preliminary approval to build the network because it interfered with GPS devices. LightSquared last month won permission to remain in control of its bankruptcy through July 15 after reaching a deal with lenders.

Adding to Falcone’s woes, the U.S. Securities and Exchange Commission sued the investor in June, alleging he concealed a $113 million loan he received from the Harbinger Capital Partners Special Situations Fund in 2009 to pay personal income taxes. At the time, the SEC said, about 60 percent of the fund’s investors had unfilled requests to withdraw their cash.

‘Complicated Finance’

Falcone repaid the debt in full after the SEC began its investigation, according to the lawsuit. He asked a federal judge last year to dismiss the lawsuit.

Falcone had about $790 million, or almost 80 percent of his personal assets, invested in the main Harbinger fund and $228 million in the Special Situations Fund at the time, according to figures that his lawyers provided to the SEC. While money managers often borrow against the stakes they hold in their own funds, the SEC said in its suit that banks were unwilling to lend against Falcone’s interests in the Harbinger funds, which held many illiquid assets.

“You get into a little bit more complicated finance when you dig through a hedge fund’s assets to determine what they really have there as security,” said Chris Gleason, the head of MMG Capital, a Thousand Oaks, California-based firm that provides mortgages to high-net-worth individuals. “Real estate is a little bit more straightforward.”

Hockey Team

Peter Jenson, then Harbinger’s chief operating officer, proposed at the time that Falcone obtain appraisals of his two Manhattan townhouses and artwork for a bank loan, according to the lawsuit. Jenson also raised the possibility of borrowing against Falcone’s interest in the National Hockey League’s Minnesota Wild as well as the estate on St. Barths, according to the lawsuit.

Now that real estate markets are on the mend and financial institutions more willing to provide credit, the Falcones are borrowing against their properties.

The most recent example came in February, when Fortress Credit filed a notice with the New York Department of State that listed Philip and Lisa Falcone as the debtors and the shares of a company they controlled, SCI East 67th Street, as the security.

‘Les Etoiles’

According to public filings, SCI East 67th Street is a civil real estate corporation formed under the laws of Saint Barthelemy in March 2008 to hold a villa that the Falcones bought later that year from R. Steven Hicks, the former chief executive officer of Capstar Broadcasting Corp., once the top owner of U.S. radio stations. It was the largest of four villas in a subdivision called “Les Etoiles” that Hicks built on a hill overlooking the ocean in the Colombier neighborhood of St. Barths.

Hicks said in a telephone interview that he and his wife, after leasing the property for a year, had planned to live in the villa, which has three swimming pools and a master bedroom suite named and themed after designer Louis Vuitton. They changed their mind when Falcone, the first person to lease the villa, offered to buy the property for 25 million euros, which ranked as St. Barths’ largest private residence sale ever at the time, according to a June 2008 press release by Sotheby’s International Realty, the listing agent.

‘Best Deal Ever’

“That was the single best deal I have ever done,” Hicks, now the chairman of Capstar Partners LLC in Austin, Texas, said in an interview. “If it had been four months later, we never would have gotten out,” Hicks said, referring to the credit crunch and real estate bust that took hold during the second half of 2008.

The Fortress filing didn’t disclose the reason why the Falcones pledged SCI East 67th Street to the finance firm, or how much money they may have received in return. Lenders typically submit so-called UCC financing statements to notify other potential creditors that a specific asset is being used as collateral for a loan.

Fortress already has financial links to Falcone, having purchased LightSquared debt and led a $280 million investment in convertible preferred stock issued by Falcone’s publicly traded investment vehicle, Harbinger Group Inc., in May 2011.

Fortress specializes in providing credit in sectors that have a hard time getting bank loans, such as companies that want to borrow against assets that are difficult to value. Fortress Credit, run by co-chief investment officers Briger and Dean Dakolias, made about $4 billion of loans and commitments through its credit private-equity and hedge funds last year. The firm lends to “a variety” of companies, real estate borrowers and individuals, Briger said in an interview.

‘Difficult Borrowers’

“The team is comfortable with, and to some degree specializes in, difficult credits, difficult borrowers and difficult situations,” Fortress says on its website.

Fortress Credit in 2006 provided more than $300 million in loans to Jackson, who had accumulated a mountain of debt to support his lavish lifestyle. While the primary loan was tied to Jackson’s stake in a music catalog that was valued at more than $1 billion, Fortress also extended a $23 million loan secured by the ranch in Los Olivos, California, that Jackson had named after the fictional Neverland in “Peter Pan,” the classic children’s book by James M. Barrie.

After notifying Jackson that the mortgage was in default in October 2007, Fortress sold the note in May 2008 to Tom Barrack’s Colony Capital LLC several days ahead of a scheduled foreclosure sale.

Citigroup Loan

Prior to their agreement with Fortress Credit, the Falcones entered into several other financing deals secured by a pair of townhouses they own on East 67th Street on Manhattan’s Upper East Side. Real estate documents filed in New York show that the couple used the properties to secure personal loans.

In March of last year, they agreed to give Citigroup Inc. a second lien on the New York townhouse that was once owned by Guccione, to secure a credit line they received a year before, the real estate records show. The Falcones had asked Citigroup to extend and modify the credit line after they drew the maximum $15 million available, according to New York real estate records.

Natalie Marin, a spokeswoman for Citi Private Bank, declined to comment.

East 67th

In October, the Falcones transferred the other townhouse on East 67th Street, which they purchased in July 2004, to a limited liability company they controlled. This company, Three-Hundredth Street LLC, used the town home to borrow about $10 million in November from Vision Capital Partners of Salt Lake City, according to New York property records.

Ed Bailey, managing partner at Vision Capital, didn’t return telephone calls seeking comment. Vision Capital’s website says the firm makes senior secured asset-backed loans to middle-market companies and also provides clients with asset-management services and debt and equity restructuring, bankruptcy and workout solutions.

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