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Harbinger Capital Sues Apollo Over LightSquared PDF Print E-mail
Wednesday, 03 January 2018 08:41

Hedge fund Harbinger Capital (Phillip Falcone) claims Apollo Global Management concealed major problems with its plan to build a multibillion-dollar mobile network, inducing Harbinger to invest $2 billion and buy out Apollo’s interest in a company doomed to fail.

In a complaint filed just before Christmas in New York County Supreme Court, Harbinger Capital sued Apollo Global Management, the former owner of SkyTerra, and Apollo-appointed directors of the company for fraud, misrepresentation and breach of fiduciary duty. Harbinger is represented by Marc Kasowitz of Kasowitz Benson Torres in New York City.

According to the Dec. 21 complaint, in a “massive fraud,” Apollo induced Harbinger “to invest nearly $2 billion in SkyTerra when defendants knew, but concealed, that SkyTerra’s planned telecommunications network, which defendants had touted as revolutionary and extremely profitable, had severe, material defects which prevented it from being built as planned.”

SkyTerra, and its successor LightSquared, planned to build a multibillion-dollar satellite-based network that would have been able to compete with AT&T and Verizon’s 4G networks.

The alleged defects include problems with the electromagnetic spectrum initially assigned to SkyTerra by the Federal Communications Commission, which was adjacent to the spectrum already in use by GPS makers.

The FCC revoked the conditional approval of this spectrum assignment in 2012 after it discovered that SkyTerra’s planned network would interfere with GPS signals – an issue SkyTerra allegedly knew, but concealed from the FCC and from Harbinger.

Just four months after the FCC revoked its approval, the Securities and Exchange Commission filed securities-fraud charges against Harbinger founder and billionaire Phil Falcone stemming from an unrelated conspiracy to manipulate bond prices. Falcone was banned from the securities industry for five years and agreed to pay over $10 million to settle the charges, but was allowed to remain as managing director of Harbinger Capital.

Harbinger first blamed its massive losses on Garmin and other GPS makers, but a federal judge ruled in 2015 that Harbinger could not sue the GPS companies for allegedly bankrupting the now-defunct LightSquared.

LightSquared settled with Garmin and two other GPS makers months later. The terms of the settlement are not public, but Harbinger believes the settlement is evidence of Apollo’s fraud.

“The Harbinger Funds were able to discover the truth only after the company, having just emerged from bankruptcy, suddenly dropped a lawsuit that it had brought against a number of GPS companies concerning the interference issues – a lawsuit that it had previously touted as meritorious and valuable – and settled it on such unfavorable terms that they suspected that the issue might not be blamed on the GPS companies,” the 80-page complaint states.

Harbinger says it performed its due diligence before investing, but like the FCC, lacked the technical expertise to uncover the interference problem it claims SkyTerra, controlled by Apollo, actively hid.

“In April 2008, based on these false statements and concealments, the Harbinger Funds were fraudulently induced by Apollo to enter into the [shareholder purchase agreement] with the Apollo Funds to purchase Apollo’s entire interest in SkyTerra,” according to the lawsuit.

Only after LightSquared entered into its “extraordinary” settlements did Harbinger go back through the company’s patent applications and discover that Apollo knew about the interference issues very early on, the complaint states.

“These test results – which were not discussed in the patent itself, never disclosed any company filings, and never shared with the Harbinger Funds or the public – provided for the very first-time evidence that defendants had secretly known since 2001 that GPS overload issues would prevent the deployment of defendants’ much-touted ATC network,” it claims.

In response to the complaint, Apollo spokesperson Charles Zehren said, “We believe the suit lacks merit, and we intend to defend ourselves vigorously.”