* Falcone told investors of heavy losses late last week
* Flagship fund was up in August
* LightSquared issues weigh on performance
By Svea Herbst-Bayliss and Katya Wachtel
BOSTON/NEW YORK, Oct 24 (Reuters) - Philip Falcone's flagship portfolio lost about 17 percent last month as telecommunications start-up LightSquared, one of the hedge fund manager's biggest investments, faced regulatory hurdles that threaten its business plan.
Investors with the billionaire stock picker were told late last week that Falcone's Harbinger Capital Partners Fund II, L.P. had dropped 16.76 percent in September while the Harbinger Capital Partners Special Situations Fund, L.P. lost 9.65 percent, said two investors who saw the numbers but are not permitted to discuss them publicly.
"Falcone waited until the end of the quarter to account for all the problems they are facing with LightSquared and that is clearly reflected in these numbers," one of the two investors said. For the year, the flagship fund is down about 12 percent, the source said.
The Reston, Virginia-based telecom company is trying to launch a broadband network to bring wireless service to rural areas. But critics say the network could interfere with the global positioning system and cause commercial airliners and freighters to lose their way.
Falcone had previously hinted at plans to take LightSquared public but said in September that such a plan would be unlikely in the near future.
A spokesman for Falcone did not immediately return a call seeking comment.
As LightSquared's trouble intensified over the last months, the prevailing market price of its 4-year term junk loans has slumped to about 50 cents on the dollar, from about 95 cents on the dollar only four months ago.
The news about Harbinger's performance came as something of a shock since Falcone had reported only a month earlier that the Harbinger Capital Partners fund gained about 5 percent in August when markets tumbled and many other hedge fund managers posted losses.
August's strong performance was fueled mainly by Falcone's bets against some mortgage insurers, said one of the investors who saw September's numbers.
This month, Falcone took significantly longer to say how he fared than most hedge fund managers who typically notify clients five business days after the end of the month.
Indeed, several Falcone investors have said that he had irked them before by failing to describe in a timely manner his plans to revamp the fund by stocking it with LightSquared securities and that he took a loan from the portfolio to pay taxes.
Even though many clients have demanded to get their money back in the last months, Falcone told them this summer that he would not be paying out cash but would instead hand out non-tradable shares in LightSquared.
Falcone is best remembered for his 116 percent gain on a bet against the housing market which helped his Harbinger Capital Partners swell to about $26 billion. Since then mixed returns and investor redemptions have shrunk assets to about $6 billion.
As LightSquared fights for its business, the company has also spent more money on trying to win influence in Washington. According to Senate Office of Public Records, LightSquared has spent $1.62 million on lobbying in 2011, significantly more than the $695,000 it spent in 2010.
Since September, LightSquared has hired four new lobbying firms -- Shockey Scofield Solutions, Podesta Group, Gibson Dunn & Crutcher and K&L Gates. The company added this quartet to a crew of five other firms it already uses to win influence on Capitol Hill.