SEC Lowers the Boom on Falcone

In what could prove to be the final lights out for near-defunct LTE mobile network startup LightSquared, the SEC on Wednesday filed charges against hedge fund manager Philip Falcone, along with his Harbinger Capital Partners fund and its former CEO Peter Jenson.

The charges include misappropriation of funds, market manipulation, and preferential treatment for favored investors who were allowed to withdraw funds. Even without the moniker “harbinger,” those involved likely should have seen this coming.

“From the outside, this appears to be another very wealthy person operating in a highly regulated area discovering that the related rules are enforceable even against the very privileged,” said Rob Enderle, principal analyst of the Enderle Group. “The current environment does not favor a multibillionaire accused of self-dealing playing the victim card, and I doubt this will end well for him.”

The SEC declined to comment for this story.

Falcone’s Continued Fight

This turn of events is just the latest chapter in a saga that has been going on for some time. LightSquared was initially given conditional approval from the Federal Communications Commission in January to operate a land-based LTE network utilizing frequencies close to the GPS band. However, when test results showing interference between the LTE network and GPS were released, the FCC opted to shutter the network.

LightSquared, which has since declared bankruptcy, has continued to seek a way to build the network, including trying to press for another piece of the already-crowded wireless spectrum.

All this unfolded while, according to the SEC, Falcone may have fraudulently obtained US$113.2 million from the fund to pay his personal taxes; while Falcone and two Harbinger entities manipulated the market with high-yield bonds issued by MAXX Holdings; and while Falcone and Harbinger may have allowed some investors to take money from the fund, while not allowing other investors to do the same.

“These are very interesting and curious charges,” said telecommunications industry analyst Jeff Kagan. “We’ll have to wait and see whether he is found guilty or not.”

The government usually wins most of these cases, he noted.

“The question I have is simple,” added Kagan. “Did he know what he was doing? If he knew it was wrong, then he should take responsibility. If he didn’t know, then he is still responsible, but the penalty should be less.”

Falcone’s Defense

Falcone, through his attorney, has denied the charges.

“This has to be the first case involving an act of supposed dishonesty in which a client simply followed the advice of his lawyer, said Matthew Dontzin of the Dontzin Law Firm, attorney for Philip Falcone.

“The notion that Mr. Falcone committed a fraud in connection with the loan from a Harbinger fund is unsupportable,” Dontzin maintained. “The loan was obtained after receiving considered written legal advice from a leading national law firm on the basis of fully disclosed facts; that same firm proposed the idea of the loan, structured the transaction, documented it, advised on the timing and form of disclosure to investors, and explained it when investors made inquiries.

“The investors were fully paid back with interest,” Dontzin continued. “As the SEC well knows and the Court will soon learn, the notion propagated by the SEC that investors were harmed by that conduct or any other is not only irresponsible but completely unsupported by any evidence. The other matters are equally without merit and will all be vigorously defended in the courthouse.”

Lights Out for LightSquared

The twist in all this is that Falcone has never actually been an officer of LightSquared and only joined the board after the resignation of former CEO Sanjiv Ahuja. However, LightSquared makes up a large percentage of Harbinger assets.

“That matter has nothing to do with LightSquared,” said company spokesperson Terry Neal, who directed the E-Commerce Times back to Harbinger for comment.

Given that a deal with the SEC seems unlikely, especially now, LightSquared is likely facing a lights-out scenario.

“I think LightSquared is dead in the water — it’s just that Phil Falcone doesn’t realize it yet,” Kagan told the E-Commerce Times. “Anything could happen. The industry still needs the solution that LightSquared represented. So the idea is still workable. It’s just the spectrum they had was a problem.”

The concept behind the technology involved taking some currently unused spectrum to create an inexpensive high-speed mobile network.

“The idea was a good one,” said Enderle. “They were given conditional approval with the condition being they couldn’t break anything else. Unfortunately, the technology adversely impacted GPS signals, which are used for everything from consumers driving to plane, ship and drone navigation.”

No One to Blame but…

Any benefit of a low-cost, high speed network was obliterated by the concerns that the systems that depend on GPS might fail and do so catastrophically. That should have been the end of it — but Falcone seems to have taken matters from bad to worse.

“Surrounding all of this was a set of questionable deals involving investors and improper payments of very large sums to Falcone as the company’s revenue potential fell apart,” said Enderle.

“Alleging that two agencies, the FCC and the SEC, were colluding to hurt him — given that we know that most government agencies often can’t even figure out each other’s phone numbers — is likely a stretch,” he remarked.

“The FCC isn’t going to allow any firm to put GPS at risk, and the SEC has never been a fan of treating investors unevenly or self-dealing,” Enderle observed. “So unless both problems are manufactured, which seems doubtful, Falcone is screwed — and he appears to have done it to himself.”