Falcone Takes Stand in LightSquared Case

NEW YORK (Dish) -- Philip Falcone detailed a roughly year-long effort to discover who was assembling a blocking position in secured debt of LightSquared during Thursday testimony in a New York bankruptcy court.

LightSquared and Falcone's Harbinger Capital Partners LLC charge that Charlie Ergen's stealth acquisition of LightSquared's secured loans violated a credit agreement and impaired its reorganization. The plaintiffs want to subordinate close to $1 billion in claims that the Dish Network (DISH) chairman holds, among other possible relief.

Lawyers for Ergen and Dish contend that LightSquared's restructuring problems stem from management's inability to reach a deal with the Federal Communications Commission and from unattractive terms that Falcone has offered to creditors.

In May 2012, just before LightSquared sought bankruptcy protection in the U.S. Bankruptcy Court for the Southern District of New York, an entity called SP Special Opportunities LLC purchased nearly $250 million worth of secured debt from Carl Icahn. The purchase caught notice, and speculation arose about who acquired the position.

"We were trying to turn over every rock that we could," Falcone said, adding that he reached out to bankers, reporters and telecom executives to determine who was purchasing the debt.

Falcone thought Dish could be the purchaser, but testified that he believed a number of parties could have been behind the trades.

Ergen-controlled Echostar Corp. was on a list of competitors that LightSqaured's creditor agreement barred from purchasing the secured debt. The company later added Dish to the list. The debtor has argued that Ergen's purchases violate the agreement.

Falcone at one point thought that Cablevision Systems (CVC) could be involved, because the Dolan family is close to Steve Ketchum of Sound Point Capital Management, who brokered the trades.

Other candidates included Carlos Slim Helu, Sprint (S), AT&T (T) or a large private equity firm.

Falcone tried to smoke out Dish corporate development executive Tom Cullen with an e-mail congratulating him on the debt purchase. Falcone also reached out to bankers with ties to AT&T, such as Greenhill & Co.'s Gil Ha and Omar Jaffrey of Tap Advisors and Melody Capital Partners.

E-mails show that Falcone told a Reuters reporter that Ergen had purchased debt from Icahn. Falcone testified that he did not actually know at the time that Ergen was the buyer. He was trying to obtain information from the reporter, he said, rather than plant a story.

"I was digging for information," Falcone testified. "An article doesn't do me much good."

The hedge fund manager said he had never experienced a bankruptcy in which the debtor could not identify the largest unsecured creditor.

"We didn't know who we were dealing with," Falcone said, preventing LightSquared from negotiating a reorganization plan since its advisers could not identify the holder of the crucial block of claims. Falcone said the uncertainty also complicated efforts to negotiate an investment from another telecom.

Ergen and Dish have suggested in pleadings that Falcone knew who was behind the trades, and that the Harbinger executive thought the news could help the reorganization. In an e-mail to a creditor, Falcone noted that Dish's involvement "[m]ay bring in another strategic."

LightSquared chairman and CEO Doug Smith said in another e-mail that "the Charlie bid was helpful" because it brought attention to LightSquared's assets.

If the debtor wanted to get to the bottom of the issue, the defendants add, it could have obtained information from Dish through a so-called bankruptcy Rule 2004 examination.

LightSquared's most valuable asset is its wireless spectrum portfolio. The company's biggest problem is that the Federal Communications Commission has not given it clearance to deploy wireless broadband service over the wavelengths, because of complaints of interference with GPS systems.

Ergen and Dish have argued that the regulatory uncertainty and Falcone's demand that Harbinger hold onto the equity are the real problems that have plagued the bankruptcy.

Falcone testified that he did not offer to give the secured creditors a majority position in LightSquared's equity as part of a reorganization plan, but suggested he might have if negotiations had continued.

Throughout the case, creditors have argued that Falcone was burning LightSquared's cash in a futile effort to obtain FCC approval.

"I always believed it wasn't the right time to sell the company," Falcone testified. He called a $2 billion bid for some of LightSquared's assets from a unit of Dish "exceedingly low." Dish later raised the bid $2.22 billion, but has since terminated the offer.

Dish's withdrawal complicates the argument that Ergen and the company are conspiring to purchase LightSquared. A group of creditors has said it will attempt to enforce the sale agreement.

Ergen has spent about $700 million from a family trust to buy LightSquared debt. Dish does not guarantee the funds if Ergen loses the suit.

Likewise, Falcone has hundreds of millions of dollars at stake in LightSquared.

"If I lost the money," he said, "it wouldn't change my lifestyle."

The litigation over Ergen's debt purchases is part of a larger hearing that will also include consideration of competing plans to reorganize LightSquared.

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