Harbinger Capital Partners head Philip Falcone suspected Charlie Ergen could be behind LightSquared senior debt purchases made by Sound Point Capital Management as early as May 2012 – but he also suspected AT&T, Cablevision, Carlos Slim or a big private equity firm, Falcone testified in bankruptcy court in Manhattan this morning.
Falcone took the stand on the fifth day of the trial to determine whether Ergen fraudulently acquired about $1 billion of senior debt in LightSquared in order to gain control among the company’s senior lenders and thwart reorganization efforts by Harbinger, the company’s majority equity holder.
The trial is an adversary proceeding, a subset of LightSquared’s Chapter 11 case, the outcome of which will help determine the next steps that the company and its lenders will take as they prepare to battle over three competing reorganization plans. LightSquared and Harbinger are seeking as much as $4 billion in damages from Ergen, and the elimination or subordination of his claims in the case.
A central question in the trial concerns whether and when Falcone and LightSquared knew that Ergen was behind the debt purchases made by SP Special Opportunities, the entity Ergen used to mask his trades. Stephen Ketchum, who testified on Wednesday (see “LightSquared lawyer stonewalled by Sound Point witness on day four,” LCD News, Jan. 15, 2014), heads Sound Point Capital Management, the hedge fund that carried arranged the trades on behalf of SPSO.
Ergen built up his $1 billion position in LightSquared’s senior debt over the course of a year, from May 2012 to May 2013. Shortly after he made his last trade, a Dish Network entity called L-Band Acquisition Corporation offered to acquire LightSquared’s spectrum for $2 billion, a price Falcone considered “extremely low,” he testified today.
“$10 billion and it’s all yours,” Falcone wrote to a Dish representative after the offer, according to an e-mail read aloud in court today.
Falcone’s e-mails came up repeatedly throughout the course of his questioning, as lawyers reviewed his correspondence with bankers, telecom analysts, and journalists. As early as Sound Point’s initial debt purchase, shortly before LightSquared filed for Chapter 11 protection on May 2012, Falcone speculated that Ergen was behind the purchase. Within days, however, his e-mails show he also speculated the buyer could have been Mexican billionaire Carlos Slim or other strategic investors.
“We talked to a couple people on the street, we talked to some reporters,” Falcone said of his effort to pull the veil off of Sound Point. “We were trying to turn over every rock we possibly could.”
LightSquared contends Ergen’s purchases thwarted the company’s efforts to raise the funds necessary to reorganize. The presence of an anonymous buyer with a controlling position in the senior debt scared away potential investors. Among other things, it scuttled an attempt by Jefferies to raise $2-3 billion in new financing, LightSquared lawyers have said.
On cross-examination, Ergen lawyer James Dugan, of Willkie Farr & Gallagher, suggested Falcone knew all along that Ergen bought the debt, and was in fact glad to see he was bidding.
“The Charlie bid is helpful, in that it attracted everyone’s attention,” Falcone wrote in a May 2013 e-mail to LightSquared CEO Doug Smith.
“You thought that was good news,” Dugan said.
“Having someone out there validating the value of the asset doesn’t make the bid good, but the process can be helpful,” Falcone replied.
Falcone also fielded questions throughout the day concerning FCC approval of LightSquared’s proposed spectrum use, the key to unlocking the company’s true value, he has long maintained. “If you talk to anybody, they’ll tell you LightSquared will get the FCC license,” Falcone said. LightSquared’s current proposed reorganization plan is premised on gaining FCC approval by the end of 2014, something Falcone said today he has “no reason to doubt.” On cross-exam, Dish lawyer Robert Giuffra, of Sullivan & Cromwell, pointed out that Falcone said he was sure of approval in 2012, when LightSquared filed for bankruptcy, and again in 2013.
Giuffra repeatedly emphasized that the specter of FCC approval caused Falcone and LightSquared to delay any progress in the Chapter 11 case. The spectrum LightSquared controls is an appreciating asset, Falcone testified. “In the beginning, I was very interested in assets with limited access,” he said of his first spectrum purchases in 2006, four years before he founded LightSquared. “I believed wireless spectrum was very valuable. I kind of considered it like beachfront property.”
“This spectrum is worth a lot of money,” Falcone said. “There are many believers who think this thing will get cleared,” he said of the FCC process.