(Bloomberg) — Harbinger Group founder Philip Falcone wasted corporate assets in a bid to keep control of the investment firm after agreeing to a five-year ban on working in the securities industry, an investor contends in a lawsuit.
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Falcone, whose hedge funds faced a wave of redemption requests after he accepted the ban as part of a settlement with the U.S. Securities and Exchange Commission, added two board seats to help secure a more than $400 million cash infusion from Leucadia National Corp., according to a complaint by Haverhill Retirement System, a Harbinger shareholder, filed yesterday in Delaware Chancery Court.
The latest claims against Falcone come as hes trying to steer his wireless broadband provider LightSquared Inc. out of bankruptcy and close a long battle with Dish Network Corp. Chairman Charlie Ergen for control of the company.
Leucadia, run by Jefferies Group LLC Chief Executive Officer Richard Handler, agreed last week to buy 23 million preferred securities from Harbinger for $253 million. Last year, Falcones hedge funds sold Leucadia $158 million in Harbinger shares as the billionaire worked to raise cash to meet redemption requests.
The new directors positions, filled by Leucadia designees, give public shareholders less of a voice on Harbingers direction and amount to a misuse of corporate assets, the Massachusetts-based pension fund said in yesterdays complaint. Haverhill claims Falcone and other Harbinger directors violated legal duties to minority investors.
Personal Crisis
Falcone effectively used company assets to bail himself out of a personal financial crisis and maintain de facto control over HGI despite a shrinking equity stake in the company, the fund said.
Eric Andrus of RLM Finsbury, a spokesman for Falcone, didnt immediately respond after regular business hours yesterday to phone and e-mail messages seeking comment on behalf of Falcone and Harbinger about Haverhills suit.
Falcone, who became a billionaire by betting against the U.S. housing market in 2006, was accused by SEC officials of improperly borrowing money from his funds to pay personal taxes and giving preferential treatment to some clients when returning their money.
The bar from the securities industry will allow Falcone, 51, to liquidate his hedge funds under the supervision of an independent monitor, the SEC said. He and his firm also will pay an $18 million fine as part of the settlement.
Under the agreement, Falcone will continue to serve as chief executive officer of Harbinger, a $1.28 billion public holding company he controls.
Abuse Of Power
Falcone didnt give up any seats on Harbingers board when he created the new positions for Leucadias representatives, the pension funds lawyers noted in the suit.
The expansion of the board to add two Leucadia appointees reduced the percentage of independent HGI directors to a mere 30 percent of the board seats, diluting public stockholder representation without any corresponding benefit to the company or the public stockholders themselves, the funds attorneys said.
Falcones actions amounted to an abuse of power and directors failed to serve as a proper check on the companys founder, the pension funds lawyers added.
