Skip to main content

Phil Falcone Sues Charles Ergen For Acting Like Phil Falcone

  • Author:
  • Updated:

Presumably someone is working on a book about the LightSquared saga though so far this is all that I can find on Amazon. But the twists and turns of Phil Falcone's efforts to build a relatively non-plane-crashing wireless communications network, the dizzying highs and subsequent definitive lows of his relationship with the FCC, LightSquared's bankruptcy, its ramifications for Falcone's hedge fund, and the fight to gain control of its spectrum in bankruptcy, are the very definition of excitement in business dealings, which is to say that they're a bunch of guys sitting in offices and sending emails to each other but, like, angry emails.1

The latest is that Falcone's hedge fund Harbinger is suing Charles Ergen and Ergen's EchoStar Corporation and Dish Network for doing naughty things to muck up LightSquared's bankruptcy process. This is praise from the master; you might recall then-SEC enforcement director Robert Khuzami saying last year that Falcone's own gated-fund-borrowing-and-short-squeezing shenanigans "read like the final exam in a graduate school course in how to operate a hedge fund unlawfully." My take at the time was that those shenanigans seemed (1) definitively nasty but (2) not so definitively illegal, and I guess I'll go with the same answer for Ergen's manipulations? Man, Fraud Graduate School is easy.

The best thing to do is to assume that everything in Harbinger's complaint is true, because the story is better that way. If you do, then the story goes:

  • Ergen, as chairman of Dish Network, wanted to get LightSquared's valuable yet murderous wireless spectrum cheap.
  • He saw his opportunity in LightSquared's bankruptcy.
  • He decided to gain control of LightSquared by buying up a ton of its senior debt.
  • The credit agreement provided that that senior debt was not transferable to "any Disqualified Company," which included LightSquared competitors (like Dish) and their subsidiaries.
  • So Ergen set up a hedge fund called Sound Point, which he personally controlled, but didn't tell anyone he controlled it.
  • And Sound Point went around buying up all the LightSquared debt without telling anyone it was controlled by Ergen, and stonewalling anyone who asked.
  • Sound Point also entered into some trades in the debt but then held up closing those trades, leaving the selling parties - which included Jefferies, Harbingers' bankers - with LightSquared credit exposure that they thought they'd gotten rid of. It did this with the nefarious purpose of putting those sellers (and Jefferies) at their exposure limits to LightSquared, which meant that they couldn't get involved in the LightSquared exit financing facility that Harbinger was trying to set up.2
  • Meanwhile Dish lobbed in a lowball bid for LightSquared's spectrum assets, and immediately leaked that bid to the press to make everyone else think that those assets weren't worth much, depressing the bidding and making financing harder to come by.
  • And, finally, as the controlling debtholder, Sound Point pushed through a plan of reorganization "that would displace Harbinger and put [Dish] in control of the spectrum assets."

Parts of the complaint feel a bit shaky, as a matter of logic3 and/or of law.4 The thrust of the complaint is that all of LightSquared's other creditors were on board with Harbinger's plan, but Sound Point/Dish/etc. sneakily prevented those creditors from providing that financing by refusing to settle trades. Trades where those creditors were selling their LightSquared debt. Were they getting out of LightSquared debt at a loss in order to free up credit limits to lend LightSquared more money? Sure, maybe! Or maybe they were getting out of LightSquared debt to, y'know, get out of LightSquared? The complaint is sort of overstuffed with people saying "you know Phil, I really wanted to provide financing for your plan, but with these hung trades I just can't, it's a freak tragedy but there it is." It's possible some of them didn't really mean it.5

But never mind that! It's better if you just believe everything, because where that leaves you - me, anyway - is just: meh, all of this sounds roughly fair. Ergen bought up the debt sneakily using a structure that circumvents the intent but not the letter of the credit agreement. He dragged his feet settling those trades in order to make it harder for LightSquared to get an exit facility from the selling creditors. He played hardball on his bid for the spectrum assets, and used his position as LightSquared's biggest creditor to push through a plan that favored him.

That all sounds ... mean? Sharp-elbowed? Cowboy-y? Like something Phil Falcone would do? All of the above! Harbinger wants the bankruptcy court to disallow all of Sound Point's bankruptcy claims - basically denying it a vote in LightSquared's bankruptcy - plus at least $4 billion in damages.6 Just for, basically, being mean and sharp-elbowed and Falconesque. That sounds less plausible.

Harbinger Capital Partners v. Charles W. Ergen et al. [via Bloomberg Law]
Billionaires’ Battle Over LightSquared Breaks Into the Open [DealBook]
Harbinger Capital Sues Dish's Ergen Over Move on LightSquared Debt [WSJ]

1.Put another way:

The fight has the feel of a cowboy-style showdown between two billionaires who have built their reputations on savvy investments.

I would watch a Western about a cowboy who built his reputation on savvy investments. I suppose he'd end up getting shot by a cowboy who built his reputation on his quick draw? Or I guess on herding cows? Anyway.

2.There's also a claim that Sound Point delayed some settlements to make it hard for LightSquared to know who its debtholders were and who to negotiate with, but this really makes no sense. Because once those trades closed Sound Point would be the debtholder, and LightSquared would have to negotiate with Sound Point, and Sound Point would tell them to fuck off. As in fact it did once those trades closed.

3.Like, I mean, if you could lower the price of something just by offering to pay less for it, that would be a more popular strategy, no?

4.The credit agreement that forbids "Disqualified Companies" from buying the LightSquared debt excludes competitors and their subsidiaries, but of course Sound Point is not a subsidiary of Dish or EchoStar: it's a hedge fund controlled by Ergen. Who is the Dish chairman, yes, but who is not a subsidiary of Dish. He's a guy, not a subsidiary. There is a lot of tendentious and somewhat silly argument on this point, complete with dueling organizational charts, in some of which I guess Ergen is in fact a subsidiary of his own company, but basically it looks like Harbinger drafted the provision wrong and got hosed. (On the other hand Harbinger thinks, but cannot prove, that "Dish itself, at Ergen's command, may have funded all or part of Sound Point's acquisition of the Loan Debt," which seems like a closer call to me though they don't emphasize it.)

5.Or, like: when Sound Point became the biggest holder of the loan, it "was able to gain control of the Ad Hoc Secured Group, run out the clock on the exclusivity period, and scuttle negotiations among the Ad Hoc Secured Group, LightSquared, and Harbinger, thereby preventing Harbinger from proposing and implementing a plan that would have kept its controlling equity interests intact." So, sure. But then it "also caused the other members of the Ad Hoc Secured Group to enter into a plan support agreement supporting the Sound Point Plan, which prohibited them from engaging in, continuing, or otherwise participating in any negotiations regarding any alternative plan." Umm. How did Sound Point "cause" the other creditors to agree not to negotiate with Harbinger? Sort of sounds like they, y'know, agreed.


WHEREFORE, Plaintiffs demand judgment against Defendants, jointly and severally, as follows:
A. Either (i) equitably disallowing Sound Point’s claims in their entirety; or alternatively and at a minimum, (ii) equitably disallowing Sound Point’s claims to the extent that payment upon those claims would result in Defendants’ realizing a profit from their wrongdoing;
B. Compensatory damages in an amount to be proven at trial, but not less than $2 billion;
C. Punitive damages in an amount to be proven at trial, but not less than $2 billion;
D. Costs and fees, including attorneys’ fees;
E. Pre- and post-judgment interest, to the maximum extent permitted by law; and
F. Such other and further relief as this Court deems appropriate.