Harbinger Plans In-Kind Redemptions, Investors Grumble

Jun 8 2011 | 12:15pm ET

Some Harbinger Capital Management investors are none too happy about the hedge fund's plan to pay some redemptions in kind—with shares of Harbinger's wireless venture, LightSquared.

Harbinger told clients this week that first-quarter redemptions will not be paid entirely in cash. Instead, investors will receive some of Harbinger's illiquid LightSquared holdings, which amount to some 80% of the hedge fund's assets, AR magazine reports.

"In light of my high conviction in LightSquared, its size within our portfolio and the necessity of maintaining a controlling position while we join forces with a strategic partner, we have determined to distribute a portion of the withdrawal proceeds for March 31, 2011, withdrawal requests in-kind," Harbinger founder Philip Falcone wrote. "While we have had opportunities to monetize a portion of our LightSquared position in recent months, I feel strongly that any sale by our funds of an interest in LightSquared would have been premature and would not only have jeopardized the ability to join forces with a strategic partner, but also would have limited the substantial upside that I am convinced will come to all of our investors as our plan is executed."

Some of those investors also feel strongly—about Harbinger's in-kind distribution.

"He's presenting it as, 'hey, we're helping you and doing you a favor,' which is just his way of trying to make it sound like he hasn't side-pocketed," one investor told AR. "But that's exactly what this is."

Falcone has given investors a number of things to be unhappy about in recent months, notably a controversial loan he took from a Harbinger hedge fund in 2009 to pay a tax bill, sparking grumbling from clients and two investigations. And an investor in Falcone's permanent capital vehicle, Harbinger Group, sued the firm over its plan to transfer its stake in Spectrum Brand Holdings to Harbinger Group in exchange for a 93% stake in Harbinger Group.

The in-kind distributions also come six months after Harbinger said it would have "no issues" meeting redemptions without selling some of its LightSquared stake.

LightSquared is to begin trials in four cities later this year, in spite of objections from four Cabinet-level departments and others about possible interference issues. The company has already struck a couple of deals with distributors and is in talks with other potential partners.

Falcone and his wife, Lisa Maria, are featured in a lavish spread in this month's issue of Vanity Fair. In response to allegations that he is "stubborn, volatile and aggressive" and possibly untrustworthy, Falcone scoffs.

"I have always kept the bulk of my money, and I mean the bulk of my money, in the fund," he said. "How can anyone possibly say my interests aren't aligned with theirs?"

"When I hear people bashing Philip, I think, 'But he's the American Dream!'" Lisa Maria gushed.

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