Chidem Kurdas
The moves of Philip Falcone of Harbinger Capital could be considered a novel kind of distressed investing strategy. Usually distressed managers come in after a company runs into trouble. Instead, he rode a business into distress.
First, he sank several billion dollars into LightSquared and led an ambitious expansion in its wireless network, assuming the market and regulatory approval would be forthcoming. That did not happen.
With the business bankrupt, he and his clients’ money are locked into the distressed situation, which he then tried to manage.
He told investors in his funds that their withdrawals will be restricted because the investment is illiquid. They may have to wait four years or longer. This was not what they bargained for, so they headed for the door to the extent they could.
But apparently Mr. Falcone created side pockets, or portfolios separate from the main Harbinger funds, that in effect cannot be redeemed.
In June the US Securities and Exchange Commission charged that Mr. Falcone not only engaged in illegal trades and took money from client funds to pay his personal income tax but gave favorable redemption terms to certain important investors to get their consent to restrict the redemption rights of others.
A key question is whether he concealed this from the fund’s directors and investors, as the SEC alleges. As long as clients agree to it, their differential treatment is not a problem. After all, even mutual funds have share classes that come with different conditions, with institutional shares getting better terms.
It is another matter altogether if investors do not know of the arrangement and are locked in with no choice.
Meanwhile, the business that absorbed all those billions of dollars, LightSquared, burns through more cash and looks hopeless.
As things now stand, there is no point in trying to get out of the side pockets. You could end up with a stake in a bankrupt business with no obvious prospects.
Tags: Harbinger Capital, Philip Falcone
HedgeFundSmarts 
January 2, 2013 at 9:12 pm
[…] In the meanwhile many fund clients who tried to redeem were not allowed to do so. Mr. Falcone expects to take several years to unwind the funds and has locked up remaining capital in a side pocket. https://hedgefundsmarts.wordpress.com/2012/09/06/falcone-keeps-distress-in-side-pocket/ […]
January 21, 2014 at 3:33 pm
[…] You could define “private equity” broadly to include credit, business development and holding companies. That would cover Philip Falcone’s holding company, Harbinger Group Inc., bought by Mr. Cooperman—an intriguing choice given the problems Mr. Falcone has had. […]
February 18, 2014 at 12:03 pm
[…] Mr. Falcone denied most redemption requests from his funds, freezing assets for four years or longer… and tried to raise money by creating Harbinger […]
April 4, 2014 at 12:29 pm
[…] left him strapped for cash. For close to five years he denied most redemption requests from his funds and tried to raise money by creating Harbinger […]