After years of financial difficulties that included an expensive loan owned by prominent hedge fund investors, problems for LightSquared escalated in February when the Federal Communications Commission said that the network would interfere with the GPS used by airlines, the military and others. Soon thereafter, LightSquared faced an exodus of wireless partners like Sprint ( S) and Leap Wireless ( LEAP) and calls by its creditors to enter bankruptcy, wiping out most of Harbinger's $2.9 billion investment. Earlier in the year, the company's CEO Sanjiv Ahuja resigned and it cut 45% of its staff to preserve cash, as it worked on a survival strategy.

In April, reports indicated that Falcone was still resisting calls from large creditors like Carl Icahn to enter bankruptcy. LightSquared had until the end of April before creditors call a breach of covenants on a $1.6 billion loan that would have put it in default; however those agreements were extended until 5 p.m. today and couldn't be renegotiated once more.

In his April Reuters interview, Falcone said that as LightSquared considered a bankruptcy, he believed his hedge fund's investment might not be wiped out on the remaining value of the company's spectrum assets. Those assets will now be part of the company's bankruptcy plan.

In its now iced partnership with Sprint, LightSquared was to pay $9 billion and give an additional $4.5 billion in credits to Sprint to build out the network, which was expected to compete with the nationwide coverage offered by AT&T ( T) and Verizon ( VZ). After walking away from LightSquared in mid-March, Sprint agreed to return $65 million in prepayments to LightSquared that the nation's third leading wireless carrier made under a 11 year-wireless service agreement that started in June 2011.

In March, Wells Fargo analyst Jennifer Fritzsche wrote in a note that the partnership break between Sprint and LightSquared will benefit Clearwire ( CLWR) as the carrier bolsters its smartphone services to better compete against Verizon ( VZ) and AT&T ( T).

For more on Sprint and wireless carrier shares, see why the iPhone is causing telecom hangups and who's on a slow walk to bankruptcy.

-- Written by Antoine Gara in New York

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