November 14, 2010 / 8:58 PM / 9 years ago

REFILE-Falcone applies for another loan, clients fume

(Refiles to add dropped word in paragraph 12)

* Harbinger’s Falcone gets loan from Bank of America

* Investors concerned about loan he took from fund

By Matthew Goldstein and Svea Herbst-Bayliss

NEW YORK/BOSTON, Nov 14 (Reuters) - Billionaire money manager Philip Falcone, facing regulatory scrutiny for having borrowed $113 million from his hedge fund, is now taking a more conventional path to getting a loan — he’s going to a bank.

Earlier this month, Falcone and his wife posted some of their “fine art” as collateral for a secured five-year loan from Bank of America (BAC.N), public records show.

The so-called security agreement between Bank of America and the Falcones was filed with the New York Secretary of State’s office on Nov. 4.

The two-page document does not specify the amount the couple borrowed, the terms of the financing package or exactly what the “certain items of fine art” posted as collateral are.

It also does not say what the Falcones, now renovating a $49 million Manhattan town house, wanted the money for.

Falcone, whose triple digit returns in 2007 made him an industry star, declined to comment on his latest loan.

News of the new financing agreement comes nearly a year after the 48-year old former Harvard hockey star borrowed money from a fund managed by his firm, Harbinger Capital Partners.

Investors with Falcone say he now manages roughly $7 billion, down from $26 billion in 2008.

FACING GOVERNMENT SCRUTINY

The loan Falcone took from the so-called Harbinger Special Situations Fund has sparked a recent inquiry by the Securities and Exchange Commission and federal prosecutors in New York, said a person familiar with the matter, who declined to be identified because the preliminary investigations aren’t public. It has also angered investors, several clients said.

Federal authorities are trying to determine whether there was anything improper with the loan, taken at a time Falcone limited clients’ ability to exit some of his funds.

In email exchanges with Reuters on Sunday, Falcone expressed surprise about the controversy over the loan he took last year. He said he borrowed from the Harbinger Special Situations Funds to help pay taxes and has paid back more than half of the $113 million. The rest should be be paid off sometime in the next few months, he said.

But several of Falcone’s investors, all of whom declined to be identified, said the loan from the fund has been a source of concern for months. What bothered them most was that Falcone only disclosed the loan in March, five months after arranging it.

PERSONAL PIGGY BANK

“You can’t treat the fund like a personal piggy bank to pay taxes,” said one investor. “I don’t know that there is really anything illegal about it, but it is certainly disgustingly immoral and shows a complete lack of fiduciary care.”

Other investors fumed that they found out about the loan by reading the fine-print footnotes in the financial statement.

The 2009 year-end financial statement for the Special Situations Fund, sent to investors in March, said the loan would be “used to solely to discharge the borrower’s U.S. federal, state and local income tax derived from management of and investment in the Harbinger Funds,” one investor said.

A security agreement for the five-year loan from the Special Situations Fund, which also was filed with the New York Secretary of State on Oct. 15, 2009, said it was secured by Falcone’s equity interest in that fund.

PERSONAL STAKE IN FUNDS

Of the roughly $7 billion managed by Harbinger’s six funds, about $2 billion is Falcone’s money, according to investors. As of the end of 2009, Falcone told investors that his equity stake in the Special Situations Fund was $234 million.

The Wall Street Journal reported the federal investigation into the loan late on Friday. The paper also reported that authorities are probing if Falcone gave preferential treatment to some clients by letting them withdraw money from his funds.

“Many (investors) are very displeased,” said one client. “If they find he treated some LPs preferentially, he is done.”

The news of the investigations comes at a time several high profile clients, including Goldman Sachs Group (GS.N), Blackstone Group (BX.N) and the New York State Retirement Fund have already told Harbinger they want out.

Some investors say they now worry about the chance Falcone may “gate” or freeze all redemptions from his flagship fund, having already restricted clients’ desired exits elsewhere.

Besides the loan controversy, Harbinger investors also are concerned about funds’ big equity investment in an upstart wireless telecom company called LightSquared. Falcone’s main funds now have more than 40 percent of their net assets committed to LightSquared, which plans to bring high-speed wireless Internet access to all corners of the United States.

Telecom analysts said Falcone may need to raise another $6 billion, on top of the nearly $2 billion LightSquared already has raised, to build out its network of orbiting satellites and land based relay towers. The company took a big step forward on Sunday with the successful launch of the first of two telecom satellites that it intends to blast into space.

Still, several investors said they are worried about Harbinger morphing from a hedge fund into something that looks more like a private equity strategy. Said one investor: “The private equity concern is quite real.” (Reporting by Matthew Goldstein and Svea Herbst-Bayliss; Editing by Marguerita Choy)

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