The Deal: LightSquared Hearing Focuses on Dish Maneuvers

NEW YORK (The Deal) -- After Dish Network (DISH) withdrew a $2.2 billion bid for a group of LightSquared's assets, debt purchases by the satellite TV company's chairman Charlie Ergen were the focus of a Thursday bankruptcy hearing.

At the hearing, a lawyer for the bankrupt telecom suggested that the abrupt bid withdrawal, as well as the way Ergen went about acquiring his debt stake, were tactical moves meant to impede the reorganization to the benefit of Dish.

Judge Shelley Chapman began an extended hearing Thursday that will consider competing plans to reorganize LightSquared and a lawsuit that the debtor brought against Ergen because of his purchases of secured debt.

The hearing marks the culmination of legal wrangling between Ergen and LightSquared backer Philip Falcone over the troubled telecom.

The parties debated whether Ergen made a legitimate investment in LightSquared's secured as an individual, or whether he violated debt terms by purchasing the securities, maneuvers that David Friedman of Kasowitz Benson Torres & Friedman LLP, representing Falcone's Harbinger Capital Partners LLC, termed "Ergenomics."

After a few failed attempts to line up financing, LightSquared has proposed a reorganization plan with funding from Fortress Investment Group LLC, JPMorgan Securities LLC, Melody Capital Advisors LLC and Harbinger Capital Partners. Chapman will consider the debtor's plan later in January.

Dish and EchoStar, (SATS) which Ergen also chairs, are among a group of competitors that LightSquared's credit agreement prohibited from buying secured debt.

Ergen spent $700 million to $800 million purchasing debt through a family trust in the name of his daughter, for which Ergen and his wife are trustees.

Ergen holds about $1 billion in face value of secured claims against the company. LightSquared and Harbinger Capital Partners have argued that Ergen's claims should be subordinated or otherwise reduced.

LightSquared counsel Matthew Barr of Milbank, Tweed, Hadley & McCloy LLP told the court that when LightSquared's credit agreement "closed a door" to Dish acquiring the debt, Ergen "created a window" by making the purchases himself.

Barr questioned Dish's motivation for withdrawing its bid just before the hearing. He suggested the company may have wanted to force a committee to "run" to Dish to reopen negotiations, to lower the price or to bring LightSquared "to the brink" of liquidiation.

Ergen enlisted Dish officers to help him make the purchases, the debtor said, reflecting a coordinated effort between the parties.

By acquiring a blocking position in secured debt, LightSquared argued, Ergen deterred investors or potential buyers from getting involved in the case.

Investors at a road show would ask, "Why should we waste our time on this? Doesn't Charlie have this all sewn up?" LightSquared chairman and CEO Doug Smith told the court.

LightSquared said that Ergen's debt purchases also hampered creditor talks. The purchases came during the bankruptcy, and some were "hung" trades that had delayed closings. Because it wasn't clear who owned the claims, LightSquared said, it was not able to hold deal talks.

From May 2012 to May 2013, Falcone also thought that Carlos Slim, AT&T  (T) or Cablevision Systems (CVC) could have been purchasing the debt, Friedman said.

LightSquared proposed a "low cost option" to AT&T, Verizon Wireless, Sprint (S)  and T-Mobile US. (TMUS) For an equity investment that could help LightSquared reorganize, the telecom partners would gain access to LightSquared's spectrum in the future.

Minutes from a LightSquared board meeting, read during the hearing, stated that other telecoms would have interest in talks after the Federal Communications Commission gave LightSquared permission to use its spectrum to provide wireless broadband service.

Lawyers for Ergen and Dish attributed LightSquared's difficulties in reorganizing to its inability to win regulatory approval to provide service on its spectrum and to unattractive terms that Falcone proposed to outside investors.

"You can't just punish somebody because you need a fix," Ergen counsel Rachel Strickland of Willkie Farr & Gallagher LLP told the court.

Ergen asked Dish officers to explore whether the company could make the investment as part of his fiduciary duty to the company, she said.

He pursued the investment on his own when lawyers told him Dish could not purchase the securities.

When Ergen made the purchases, she said, Dish was focused on other telecom targets, such as MetroPCS Communications Inc., Sprint and Clearwire Corp.

Dish took three months to consider making a bid for LightSquared when Ergen raised the proposal last year, counsel for the satellite TV company said, indicating that it was not acting in unison with Ergen as part of a conspiracy. Dish did not backstop the agreement, a lawyer for the satellite TV company told the court. Ergen holds the risk if the deal goes bad.

"His wife and his daughter may be mad," he said, but Dish is not providing any "downside protection."

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