December 22, 2010 / 7:32 PM / 9 years ago

Hedge fund manager Falcone sued over stock swap

BOSTON (Reuters) - A lawsuit filed against Philip Falcone charges that the investor took advantage of his position in engineering a stock swap between his hedge fund and a small publicly traded company that he also controls.

Harbinger Group Inc, a holding company with little more than $100 million in cash on its balance sheet, is paying too much for the assets of Spectrum Brands Holdings Inc, which sells pet care products and small appliances like the George Foreman grill, the lawsuit charges.

Falcone already owns the majority of Harbinger Group.

Now he is planning to increase his stake to 94 percent from 51.6 percent by swapping 120 million newly issued shares of Harbinger for about 27.8 million shares of Spectrum Brands, a large holding in his hedge funds.

Falcone’s hedge fund firm Harbinger Capital Partners oversees roughly $7 billion.

“HGI is vastly overpaying for the acquisition of assets from its majority and controlling shareholder,” according to the suit, which was filed by Harbinger Group investor Alan Kahn in Delaware Chancery Court on Tuesday. Kahn sued Falcone, other directors and Harbinger Group itself.

A lawyer for Kahn, Harold Obstfeld, declined to comment beyond the suit.

A spokesman for Falcone and Harbinger Group called the suit “meritless” and said the defendants will seek to have it dismissed. “This transaction was reviewed at Harbinger Group by an independent committee of directors advised by outside financial and legal advisors. The conclusion from this process was that the transaction was in the best interests of the shareholders,” Jeff Zelkowitz said.

For Falcone, who cemented himself as a hedge fund industry star with a bet against the U.S. housing market that earned his investors a triple-digit return in 2007, this suit draws more unwelcome attention to how he is currently reorganizing his investment empire at the same time that he is trying to build a new wireless network. Several prominent investors recently announced plans to exit his fund, and Falcone’s decision to take a loan from his fund to pay his personal taxes is being probed by regulators.

Contending that the price for the exchange is unfair, the lawsuit said that Falcone’s Harbinger Capital Partners proposed the exchange when Harbinger Group’s “common stock was trading at roughly a 25 percent discount to its liquid assets.”

Harbinger Group, which used to be known as Zapata Inc, was renamed by Falcone a year ago when he began reshaping it as a vehicle to make long-term acquisitions.

The company is nominally based in Rochester, New York, but is effectively run out an office in the same midtown Manhattan building where Falcone’s hedge fund Harbinger Capital Partners is housed — albeit three floors below the hedge fund.

The company has a little over $100 million in cash on its balance sheet and does not have much of an operating business. It recently sold $350 million of high-yield bonds to help finance the Spectrum Brands stock swap with the hedge funds.

Some people familiar with Harbinger Group, however, say that the deal might be more favorable than it is depicted in the lawsuit. Indeed, some traders have been arbitraging the deal by shorting Spectrum Brands and going long Harbinger Group shares, people familiar with it said.

The suit is Kahn v. Philip A. Falcone, CA6088, Delaware Chancery Court (Wilmington).

Reporting by Svea Herbst-Bayliss, editing by Gerald E. McCormick

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