Falcone Says He Didn't Know Ergen Was Buying LightSquared Debt

Jan 17 2014 | 5:14am ET

Harbinger Capital Management's Philip Falcone said he did not who was buying up the debt of his wireless Internet venture until less than a year ago.

Falcone—who arrived in court late due to Manhattan traffic—testified yesterday in federal bankruptcy court in New York. Harbinger's LightSquared has asked the court to find that the buyer of the debt—Dish Network Chairman Charles Ergen—had acquired it fraudulently, in contravention of debt covenants barring competitors from investing in it.

On the stand, Falcone said he suspected the buyer might be Ergen. But his e-mails showed that he suspected it might be someone else using Sound Point Capital to acquire some $1 billion in LightSquared debt, including Mexican billionaire Carlos Slim Helu and Cablevision Systems' James Dolan. It wasn't until May of last year, just before Dish made a $2.2 billion bid to buy LightSquared's share of the electromagnetic spectrum out of bankruptcy, that Falcone learned with certainty that the buyer was Ergen, he said.

Falcone's ignorance wasn't due to lack of effort, he said. He told the court that he was "turning over rocks" to find the buyer's identity. "We believed it was of importance not only for the company, but so we could work with whoever it was," he said. Without that knowledge, "it's almost impossible for someone to come in and invest and get a deal done."

Dish last week dropped its offer for the LightSquared assets.

Falcone put LightSquared into bankruptcy in 2012 after the Federal Communications Commission barred the company from using its spectrum to build a wireless Internet network, citing interference concerns with global positioning systems. Late last year, he put together a new bankruptcy exit plan, financed largely by Fortress Investment Group, that would keep LightSquared independent.

LightSquared is seeking to swap its spectrum to alleviate the interference concerns, and Falcone told the court that he has "a pretty good feeling" about that effort.

Ergen's lawyers attacked Falcone, accusing him of dragging out the bankruptcy process in an effort to keep control of LightSquared.

"You believe LightSquared is best served remaining in bankruptcy until FCC approval," James Dugan asserted.

"No," Falcone said. Falcone also denied allegations that he would not agree to sell LightSquared until he received those approvals, saying that he would do so "at the appropriate valuation." Falcone suggested that LightSquared's spectrum is worth as much as $10 billion.

Dugan also asked why Falcone didn't simply subpoena the buyer to learn his identity. "Do you normally let the lawyers decide how many rocks to turn over? Do you have good lawyers?"

"Yeah, I have pretty good lawyers," Falcone shot back.

Falcone's testimony followed that of both Ergen and Dish Treasurer Jason Kiser, who advised Ergen on the debt purchases. Kiser said that he didn't consider whether he was acting on Ergen's behalf or on Dish's when he first looked into buying the debt.

Ergen told the court this week that he kept his purchases a secret to prevent their price from rising, and due to privacy concerns. It was a "great investment," but "I just don't really like people knowing my personal investments."

Ergen admitted that he liked to "play in the mud," but denied he had done anything wrong when buying the debt. If the court disagrees, it could cost him the $700 million he spent on it.

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