Harbinger Capital Partners yesterday filed a lawsuit against Charles Ergen and DISH Network seeking as much as $4 billion in damages, alleging that Ergen’s acquisition of senior debt of LightSquared and subsequent actions to influence the company’s Chapter 11 proceedings to position DISH to acquire the company on the cheap constituted “civil racketeering” under applicable RICO laws, “involving mail and wire fraud, bankruptcy fraud, tortuous interference, and abuse of process.”
RICO, which stands for Racketeering Influenced and Corrupt Organization Act, was originally designed to be used against organized crime, but it has been used over the years, particularly its provisions providing for a private civil cause of action, in the context of alleged corruption and white-collar criminal cases.
The suit was filed in federal court in Colorado. In addition to Ergen and DISH, named defendants include hedge fund manager Stephen Ketchum and his investment company, Sound Point Capital, which allegedly operated as a front man in Ergen’s acquisition of LightSquared’s senior lender claims in order to hide Ergen’s involvement.
“Defendants’ conduct was, as the bankruptcy court overseeing LightSquared’s Chapter 11 cases found, an affront to the Chapter 11 process, in which defendants abused the bankruptcy proceedings, withheld crucial evidence, and engaged in a ‘troubling pattern of noncredible testimony,’” the lawsuit alleges. “Defendants wrongfully and deceptively created chaos in the bankruptcy proceedings so that Harbinger would lose control of the LightSquared board to which it was contractually entitled.”
As laid out in the lawsuit, Harbinger explained that it had spent billions of dollars in developing LightSquared’s wireless services network, and that to protect this investment it had entered into a stockholders’ agreement with the company and other shareholders that gave Harbinger “expansive protections and management rights … including the ability to appoint and remove a majority of directors and committees, chair all committees, and make material management decisions.” Harbinger asserted that this power over the company’s management “represent a significant premium independent of, and incremental to, the value of Harbinger’s equity alone.”
The suit said that Ergen and the businesses he controls, EchoStar and DISH, “have been on a continuing quest to acquire additional spectrum assets and for years have coveted the spectrum assets held by LightSquared.”
And after LightSquared filed for Chapter 11 on May 14, 2012, the complaint alleges, “defendants saw their opportunity.”
The alleged RICO scheme, as sketched out in the complaint, involved Ketchum’s investment company, Sound Point, creating a front company, SPSC, to “use Ergen’s funds to secretly purchase a majority position in the [senior bank debt of LightSquared] that would allow [Ergen] to block Harbinger’s control over LightSquared and force a DISH-sponsored bid to acquire LightSquared’s assets at a discount and simultaneously repay Ergen at a profit.”
Ergen, through SPSO, ultimately purchased roughly $844 million of the senior debt.
At the same time as Ergen was acquiring the debt through the latter half of 2012, the complaint asserts, Harbinger was seeking to raise financing and negotiate a reorganization plan with its creditors. In connection with this effort, Harbinger in early 2013 entered into an agreement with LightSquared creditors to extend the exclusive period during which only LightSquared could file a reorganization, agreeing that if negotiations were unsuccessful the company would explore a sale of assets (see “LightSquared reaches deal with lenders, nets exclusivity extension,” LCD, Feb. 14, 2013).
The complaint alleges that in the wake of this agreement Ergen was concerned that Harbinger would successfully obtain the financing for a reorganization plan. According to the complaint, Ergen believed that if Harbinger lost control of the company’s board, “LightSquared would cave to the influence of powerful creditor constituencies, now dominated by SPSO, who favored a quick payout over a plan that realized LightSquared’s true value.”
“Desperate to fulfill [its] scheme,” the complaint asserts, Ergen and DISH “moved quickly to remove Harbinger from the equation.”
To accomplish this, according to the suit, Ergen on May 15, 2013, made a bid to purchase LightSquared through an entity through an acquisition entity named LBAC (L-Bandwidth Acquisition Corp.) that, “while sufficient to pay off in full the holders of [LightSquared debt], including Ergen, was for far less than what Ergen knew to be the true value of the assets, and was a bid Ergen never intended to succeed.”
The suit alleges that after making the bid, Ergen next leveraged his influence with other LightSquared lenders to cause the group to charge LightSquared with failing to properly consider the LBAC bid and to fulfill its fiduciary duties to creditors (see “LightSquared ignored $2B Dish bid, broke agreement, lenders say,” LCD, June 19, 2013).
“Unbeknownst to the parties and the bankruptcy court, however, defendants were withholding critical documents that conclusively established that defendants knew full well that the LBAC bid represented a mere fraction of LightSquared’s true value, and thus that Harbinger properly had opposed the transaction,” the complaint states.
Other holders of the senior debt, meanwhile, were eager for a “quick payout,” and as soon as the company’s exclusivity period terminated filed their own proposed reorganization plan calling for the company to sell its assets to the highest bidder, with DISH serving as a stalking-horse bidder with a $2.2 billion bid. Among other things, the lenders proposed plan required lenders to terminate negotiations on any alternative plan, even though, in the words of the complaint, “defendants secretly planned to cancel that bid and drive the price even lower.”
To eliminate Harbinger’s role in the company, according to the suit, Ergen and DISH, “now supported by the hoodwinked ad hoc secured group [comprised of senior lenders other than Ergen], forcefully argued that LightSquared could not be trusted to fairly conduct an auction with Harbinger at the helm. Defendants sought to create the impression that Harbinger’s interests — to maximize the estate’s distributable value – conflicted with the estate’s interests, which, defendants asserted, would be served by embracing the stalking horse bid.”
That resulted in the bankruptcy court ordering the appointment of a special committee “imbued with complete power over the LightSquared operations that mattered most, including decision making related to a sale or reorganization of LightSquared and actions related to regulatory approval.”
But according to the suit, unknown to his fellow senior debt holders, Ergen never intended to go through with the deal, and after the special committee was appointed, LBAC cancelled its stalking-horse bid, “giving a pretextual decision for the cancellation.” (see “Dish could drop $2.2B LightSquared bid tonight, ahead of trial,” LCD, Jan. 7, 2014).
Among other things, the complaint asserts, the financial advisor for the ad hoc secured lender group in the case (comprised of senior lenders other than Ergen) “later testified that absent defendants’ machinations it likely would have reached a consensual plan of reorganization with Harbinger.”
Regardless, the complaint states, “With plan negotiations in shambles, defendants still in control of the [senior lender debt], and LightSquared’s quickly evaporating financing pressing it ever closer to the forced liquidation that defendants had always envisioned, Harbinger resigned from its now worthless board seats to explore alternative ways to salvage its billions in investments in the company.” As was widely reported, Philip Falcone and four other Harbinger-appointed directors resigned from the company’s board on June 12.
In wrapping the RICO allegations around the case, the complaint alleges that in implementing this scheme Ergen and his co-defendants “tortuously interfered with Harbinger’s rights under the stockholders’ agreement, committed bankruptcy fraud and abuse of process, and obstructed justice by withholding critical evidence that conclusively established that LightSquared’s assets were so valuable that Harbinger would have abandoned its fiduciary duties by not opposing [Dish’s] low stalking horse bid.”
Further, the complaint alleges, Ergen and other defendants “provided false testimony and made numerous misrepresentations” to the bankruptcy court concerning Ergen’s acquisition of LightSquared senior debt claims and LBAC’s stalking horse bid.
“Abusing the judicial process to corrupt the legal rights of others is part of Ergen’s modus vivendi,” the suit alleges, adding, “Practices of the kind defendants utilized here have led numerous courts in case after case to sanction Ergen’s companies for spoliation, contempt, and even perjury.”
Many of the facts alleged in the suit mirror the facts of a prior Harbinger lawsuit against Ergen in bankruptcy court litigated earlier this year regarding whether Ergen and SPSO’s purchase of the LightSquared debt claims were fraudulent efforts to evade the debt indenture prohibition against competitors owning the debt. At issue in that case was whether Ergen’s purchases were made on his own behalf as a personal investment, or whether they were made on behalf of DISH. That said, it’s worth noting that some of the allegations in Harbinger’s current lawsuit refer to allegedly false testimony provided in that trial.
The bankruptcy court ruled in that case that while Ergen’s later purchases of LightSquared debt were clearly on behalf of DISH, his earlier purchases via SPSO did not technically violate the debt indenture, but were clearly an “end run” around them that showed a lack of good faith. Bankruptcy Court Judge Shelley Chapman ruled, as a result, that while this conduct was not egregious enough to disallow Ergen’s claims in the case, it was enough to equitably subordinate them is any eventual reorganization plan.
At the same time, however, Shelley refused to confirm LightSquared’s reorganization plan because it treated Ergen’s entire claim differently than other senior lender claims.
Since then, the company has settled on a new reorganization plan that would repay Ergen partially in cash, and partially with an unsecured promissory note (see “LightSquared plan due July 14; confirmation hearing set for Aug. 25,” LCD, July 8, 2014).
Meanwhile, with respect to the Colorado case, under federal court rules, the named defendants in the lawsuit are required to answer the complaint within 20 days. As a practical matter, of course, such responses are frequently significantly delayed as parties get their arms around a case. Responses generally take the form of a factual response to the complaint’s allegations, known as an “Answer,” or a motion to dismiss the complaint on any number of procedural or legal grounds. – Alan Zimmerman