LightSquared, Falcone, Ergen Lawyers Spar Over Debt

Mar 18 2014 | 12:46pm ET

If nothing else, the judge overseeing the bankruptcy of Harbinger Capital Management’s wireless internet venture is certainly sick of the bickering between LightSquared and Dish Network founder Charles Ergen.

U.S. Bankruptcy Judge Shelley Chapman trenchantly asked why LightSquared didn’t sound the alarm about Ergen’s purchase of its debt, which it argues was barred by covenants keeping competitors from investing. But she also warned Ergen’s lawyers that “there’s got to be a consequence” for their client’s action.

Chapman is considering LightSquared’s request to have Ergen’s debt purchases declared illegal. Such a move could prevent Ergen from blocking the company’s restructuring plan, as well as allow LightSquared to either forfeit his $850 million in debt or have it declared junior to that of other creditors.

During closing arguments in that case yesterday, LightSquared argued that Ergen’s claim that he bought the LightSquared debt as a personal investment is a lie.

“Mr. Ergen is not a market participant,” LightSquared lawyer Andrew Leblanc said. “He is a competitor. His interest was always in destroying the value, damaging the value, of LightSquared,” to allow Dish to swoop in an buy the company’s share of the electromagnetic spectrum. LeBlanc noted that Dish Treasurer Jason Kiser made the purchases.

A lawyer for Harbinger founder Philip Falcone called the matter “a $700 million breach of contract,” arguing that it would be “insane” and “defy commercial sense” to assume that Ergen was unaware that the ban on competitors buying debt covered him.

Chapman wondered why LightSquared hadn’t moved to block Ergen before last year. “We went over a year without anybody calling 911,” she said. “Nobody said, ‘help, there’s a competitor in my capital structure.”

Leblanc said LightSquared did not know who was behind SP Special Opportunities, the hedge fund that bought the debt. It eventually emerged that the vehicle was Ergen’s.

A lawyer for Ergen and Dish said that LightSquared was simply trying to find a scapegoat for its troubles. The company filed for bankruptcy after federal regulators refused it permission to begin building its wireless network.

“LightSquared is in a bad place,” Rachel Strickland said.

“There’s no Machiavellian corporate raider that brought LightSquared to its knees,” she added. Indeed, “Phil Falcone welcomed bankruptcy,” which he saw “as a way to delay, to bog things down and buy time because he was waiting for an FCC resolution that would allow him to retain his equity.”

“It’s crystal clear that LightSquared has an interference problem,” Strickland added. “That interference problem is Phil Falcone.”

Chapman is set to begin considering LightSquared’s Fortress Investment Group-backed bankruptcy exit plan tomorrow. LightSquared has said that the plan would not succeed unless the judge finds in its favor on the Ergen matter.

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