A day after being told that U.S.regulators may sue him, billionaire hedge-fund manager Philip Falcone telephoned Sheldon Lowe, a close friend of 23 years, andtold him that he would fight back.
Falcone, 49, who rose to fame with bets against U.S.subprime mortgages in 2007, sounded calm and determined, Lowe, aMiami-based real estate developer, said in an interview.
��I told him it��s tough to stand up to the U.S.government,�� Lowe said. ��But I said that I believed he wouldnever intentionally do anything illegal or ethically wrong. Hesaid to me, ��You know that Sheldon.����
Falcone may be facing his toughest challenge yet as thegovernment considers whether to sue him over alleged violationsof securities laws. The threat of a lawsuit, disclosed lastweek, has prompted the hedge-fund manager to plan suspendingclient withdrawals for a second time in three years, which maymake attracting new investors difficult unless his bet on awireless telecommunications venture called LightSquared Inc.pays off.
Falcone, in an interview yesterday, said he is moving awayfrom hedge-fund investing and plans to use Harbinger Group Inc. (HRG),a publicly traded holding company he controls, rather than hisfund Harbinger Capital Partners, to finance investments in thefuture. Assets in the New York-based hedge fund have slumped to$5.7 billion from a 2008 peak of $26 billion.
��I will continue to manage the Harbinger Funds to achievethe best outcome for our investors, but I will structure newinvestments differently,�� he said by telephone. ��Goingforward, I��ve made a conscious decision to evolve away from ahedge-fund strategy. I am focusing on building a public companyand want to do more long-term investing.��
Harbinger Capital, based in New York, Falcone, Omar Asali,head of global strategy, and Robin Roger, the general counsel,on Dec. 8 received Wells Notices from the staff of the U.S.Securities and Exchange Commission that relate to alleged��violations of! the fed eral securities laws�� anti-fraudprovisions in connection with matters previously disclosed andan additional matter regarding the circumstances and disclosurerelated to agreements with certain fund investors,�� the NewYork-based hedge fund said last week.
The Wells Notices relate to an SEC investigation intowhether Harbinger allowed some clients, including Goldman SachsGroup Inc., to withdraw money while barring others, the WallStreet Journal reported on Dec. 9, citing unidentified peoplefamiliar with the matter.
��There was no inappropriate preferential treatment givento Goldman,�� said Mike Sitrick, a spokesman for Harbinger.Andrea Raphael, a spokeswoman for New York-based Goldman Sachs,declined last week to comment on the article.
Harbinger Group said in a filing in July that HarbingerCapital is being probed by the SEC and the U.S. Attorney��soffice over a $113 million loan Falcone took from one of hisfunds, according to a July filing. The investigation also lookedinto possible preferential treatment of some investors, twopeople with knowledge of the probe said last year.
Harbinger told clients in April that the government waslooking into whether it had engaged in market manipulation inits trading of the debt securities of an undisclosed firm from2006 and 2008. Investigators were examining a potentialviolation of a rule prohibiting investors from selling short astock within five business days of a secondary offering and thenbuying shares in that offering, the firm said then.
Falcone declined to discuss the Wells Notices and thesubject of the SEC investigations. He said last year thatallegations of preferential treatment of some clients were��completely and utterly untrue.�� He disclosed the loan, whichwas used to pay personal taxes, in the Special Situation Fund��sMarch 2010 financial statements.
Falcone, a 1984 graduate of Harvard University, startedHarbinger in 2001. He limited investor withdrawals fr! om hisfu nds in the aftermath of the September 2008 bankruptcy ofLehman Brothers Holdings Inc. when credit markets froze. Hesegregated about 30 percent of the main fund��s hard-to-sellassets into a separate portfolio and told clients it would takeas long as two years for them to get their money back.
The biggest holding in the side-pocket is a 26.6 percentstake in Ferrous Resources Ltd., an iron ore producer in Brazilthat canceled plans to sell shares to the public in June 2010because of volatile equity markets.
��I should have suspended 100 percent of the redemptions in2008,�� Falcone said. ��This would have given me time to sell ina more orderly fashion rather than selling positions into a downmarket, which did nothing but make the portfolio moreilliquid.��
Falcone said he returned as much as $10 billion that yearto clients who asked for their money back.
At the end of March, Falcone told clients seeking to pulltheir money that they would be paid in part by non-tradableshares of LightSquared. Harbinger told clients on Dec. 9 that it��anticipates�� withdrawals from its main hedge fund will besuspended on Dec. 30, following the SEC��s notices.
��Any fund that limits investor withdrawals due to non-market conditions and does it a second time within a short spaceof time will have a hard time convincing institutional investorsto allocate to it going forward,�� said David Slattery, apartner at Castellar Partners, a New York-based firm thatadvises clients on hedge-fund investing.
Betting on LightSquared
As of May 26, LightSquared shares accounted for 62 percentof the main fund��s assets.
LightSquared faces challenges from makers of global-positioning system devices that say the service will disruptnavigation by cars, boats, tractors and planes. The servicecaused interference to 75 percent of GPS receivers examined in aU.S. government test, according to a draft summary of resultsreleased on Dec. 9.
Martin Harriman, executiv! e vice p resident of LightSquared,said in an e-mailed statement that the firm was ��outraged bythe illegal leak of incomplete government data.��
The testing was requested by the NationalTelecommunications & Information Administration, a CommerceDepartment agency that oversees airwaves use. The agency isstill reviewing the data, a spokeswoman said.
��Every investor is hoping this resolves in a goodfashion,�� said Charles Holzer, a private investor in Harbinger.��A lot is riding on it.��
To help secure more permanent capital for investments,Falcone��s funds in 2009 bought Zapata Corp., a one-time oildriller, and turned it into Harbinger Group, a holding companythat can raise capital for long-term investments. Falcone plansto use Harbinger Group to finance investments in six industries,including consumer products, financial products and naturalresources, according to a filing last year.
Harbinger Group in March agreed to buy Old Mutual U.S. LifeHoldings Inc., a provider of fixed-annuity and life insuranceproducts, for $350 million. In May, the company said in a filingthat it��s raising $280 million from a group led by FortressInvestment Group LLC for general corporate purposes, which mayinclude investments and acquisitions.
��The Right Time��
The Wells Notices weren��t addressed to Harbinger Group orany of its subsidiaries, including Spectrum, and don��t affectthe hedge fund��s investment in LightSquared.
Falcone said his aim is to return money to his hedge-fundinvestors as quickly as possible.
��I am not trying to hang onto people��s money, I��m waitingfor the right time to monetize those positions,�� he said.
As for LightSquared, Falcone said he��s confident theinvestment will pay off.
��I believe it has tremendous value,�� he said in theinterview. ��I am not afraid to take risk and continue tobelieve in the wireless space.��