Falcone sticks with plan, hit by lawsuit

Fri Feb 17, 2012 7:49pm EST

(Reuters) - Hedge fund manager Philip Falcone told investors he is sticking by plans to build a national mobile broadband service even as an investor charged in a lawsuit that he deceptively raised billions of dollars that went to the struggling venture.

On an hour-long conference call on Friday, the billionaire investor sounded a defiant note, according to two investors who spoke with Reuters, saying he was working on ways to salvage LightSquared Inc despite a serious blow dealt by communications regulators this week.

The Federal Communications Commission on Tuesday said it planned to revoke permission for LightSquared to build out its network after tests showed it would interfere with the Global Positioning System used by airlines, the military and others.

Falcone has funneled billions of dollars into the Reston, Virginia-based company which is the biggest holding in his $4 billion Harbinger Capital Partners portfolio.

Lili Schad filed a lawsuit in the Southern District of New York on Friday alleging that Falcone breached "contractual and fiduciary duties" by making "deceptive and misleading statements" while raising money for the Harbinger fund.

Schad, a filmmaker who lives in Walkill, New York, invested $4 million with Falcone, according to the lawsuit. She alleges that the offering documents said Falcone would focus "primarily on turnarounds, restructurings, liquidations, event driven situations and capital structure arbitrage."

Even though Falcone sent out monthly performance summaries, she charges in the suit that these "did not give any information specific to the investments in LightSquared or (its predecessor) SkyTerra and did not offer information sufficient to determine the degree to which investors' money was concentrated in a single investment."

Schad seeks, on behalf of herself and other investors, an amount to be determined at trial.

Harbinger spokesman Lew Phelps said the firm had no comment.

Falcone, who shot to fame in the $2 trillion hedge fund industry for making a huge return on a bet against subprime mortgages, has been reengineering his portfolio over the last few years to make an outsized bet on bringing a new highspeed wireless network to America.

So far investors estimate that he has sunk $3 billion of the fund's money into LightSquared making it the biggest equity investor in LightSquared.

The Harbinger fund gave up 47 percent of its value last year, in large part because of a sharp markdown on the value of the LightSquared investment.

After the FCC news, some analysts speculated that bankruptcy may be close at hand for LightSquared, especially after it had earlier warned that it would run out of money early this year. So far, Falcone has ruled out a bankruptcy filing. On Friday's call he did not offer any details on the plans he may be pursuing to save LightSquared, the investors said.

According to sources familiar with LightSquared, the company, which is due to make a $56 million payment to satellite partner Inmarsat this weekend, has enough money to keep going for a few more quarters.

For Falcone, the lawsuit and current showdown with communications regulators are the latest in a string of problems.

Last year he was warned that he and top lieutenants are being probed for possible securities violations, and many investors have still not forgiven him for having borrowed money from the fund to pay his personal taxes when they could not access their money.

The Schad case is Schad v. Harbinger Capital Partners LLC, Harbinger Holdings, LLC and Philip A. Falcone, Southern District of New York, No. 12-civ-1244.

(Reporting by Svea Herbst-Bayliss in Boston and Sinead Carew in New York; Editing by Tim Dobbyn)

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