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A Brash Bettor Stumbles

Shortly after noon on Nov. 14, a Russian-made rocket blasted off from Baikonur Cosmodrome, the Soviet-era launch site that catapulted Sputnik 1 into orbit.

The slim Proton Breeze M carried a commercial satellite called SkyTerra 1 and, with it, the ambitions of one of the world’s richest hedge fund managers, Philip A. Falcone.

SkyTerra 1 will usher in a new era of 4G broadband communications, insists Mr. Falcone, who watched the launch via the Internet from his Upper East Side home — alone.

“I didn’t want my family to see my reaction in case things didn’t go as planned,” Mr. Falcone said.

Writer Lisa Falcone and businessman Philip Falcone attend NY TIMES Party at the C5 Resturant at The Royal Ontario Museum.
Vito Amati | WireImage | Getty Images
Writer Lisa Falcone and businessman Philip Falcone attend NY TIMES Party at the C5 Resturant at The Royal Ontario Museum.

But even as his satellite orbits overhead, Mr. Falcone seems to be losing altitude. Federal authorities are examining whether he used his giant hedge fund as a personal piggy bank to pay a personal income tax bill. They are also investigating whether his money management firm, Harbinger Capital Partners, gave preferential treatment to certain clients.

Alarmed by the investigations and uneasy about Mr. Falcone’s 4G ambitions, investors like Goldman Sachs, the Blackstone Group and New York State’s public pension fund have asked to withdraw money from Harbinger.

Meanwhile, Mr. Falcone has been selling investments. He has unloaded stakes in Citigroup and The New York Times Company and a $650 million investment in Inmarsat, a British satellite company.

All of this has led to speculation in the hedge fund community that Mr. Falcone and his firm are confronting a cash squeeze. If more investors withdraw money, the whispers go, Mr. Falcone could be in trouble.

Nonsense, said Mr. Falcone in an interview in his office. “The last thing I’m thinking about in the morning is whether I have a cash-flow problem,” he says.

Such assurances aside, the developments represent quite a turnabout for Mr. Falcone, who burst onto the scene three years ago after making a winning bet against the subprime mortgage market. He and his wife, Lisa Maria, promptly stormed New York society, ruffling some well-coiffed feathers along the way.

Throwing money around as only newly minted billionaires can, the Falcones bought a mountaintop villa in St. Barts and the Penthouse mansion of Bob Guccione on the Upper East Side. A leggy brunette who grew up in Spanish Harlem, Ms. Falcone turned heads with a Prada sensibility and her pet pig, Wilbur.

Amid the galas and charity auctions, the couple also stirred controversy by disregarding the unwritten rules of moneyed New York. Like the time Ms. Falcone, in an iridescent minidress, interrupted the speaker at a 2009 gala for New York’s new High Line park and pledged to match a $10 million grant by Barry Diller and his wife, Diane Von Furstenberg.

“When she did the thing at the High Line, it put some noses out of joint,” said David Patrick Columbia, the editor of newyorksocialdiary.com.

Slouched over a chair in a conference room at Harbinger’s spartan Midtown offices this week, Mr. Falcone, 48, hardly looked worried. He wore a rumpled white shirt, opened two buttons down. Beaded bracelets, made by his two daughters, peaked out from his French cuffs.

“I’m not getting out of the hedge fund business. The business has been very good to me,” Mr. Falcone insisted. “We’ve gone through rough patches before and we’ll go through them again.”

At the same time, however, Mr. Falcone spelled out a new, emerging vision for himself and his firm: He wants to build a public company that will protect him from the whims of flighty investors.

Through the Harbinger Group, a publicly traded company that once processed fish oils, Mr. Falcone plans to acquire numerous companies as long-term investments. He intends to transfer into this company his hedge fund’s majority stake in Spectrum Brands, which makes the George Foreman grill.

“I do have a vision for this thing, and it will be a big part of my future,” Mr. Falcone said.

And yet Harbinger is shrinking — fast. At its apex in mid-2008, the firm controlled nearly $26 billion. Today, after a roller-coaster ride in the markets and withdrawals by investors, that figure has dwindled to around $8 billion. Its flagship fund is off 15 percent this year, but was up 45 percent in 2009 and down 27 percent in 2008.

Mr. Falcone’s relationship with some of his investors began to sour in late 2008 when he told nervous investors that he would limit withdrawals to 70 percent of the request in cash and put other, hard-to-sell investments into a separate account that he has been slowly selling and giving the proceeds to investors. Today, that account is worth about $1 billion.

But while Mr. Falcone’s investors had their money locked up in some of his funds, he found a way to clear that hurdle and free up cash to pay a personal income tax bill.

Investors in his Special Situations Fund have not had access to their money since Lehman Brothers went bankrupt in the fall of 2008. Lehman was the fund’s broker and held its assets. The fund is being wound down and investors are receiving proceeds from the sales of securities.

But a little more than a year ago, Mr. Falcone took a $113 million personal loan from the fund, a move that was vetted by his lawyers, he said.

Mr. Falcone said a big chunk of his personal wealth is tied up in his own funds. “It’s not like I have $113 million in my checking account,” he said, chuckling.

Still, Mr. Falcone said he might think twice about taking such a loan given the unwelcome attention the transaction has received.

No-fun periods

“In 20/20 hindsight, I regret being in this position,” he said, leaning forward on the sleek black conference table and clasping his hands together. “This has not been a fun process.”

Regulators from the Securities and Exchange Commission and the United States attorney’s office in Manhattan are asking whether Mr. Falcone disclosed the loan to investors quickly enough. The loan was disclosed in a letter to investors this spring.

Mr. Falcone declined to comment on any regulatory or legal inquiries into the loan, but a spokeswoman said the firm had received a broad subpoena for information and that it was cooperating.

Mr. Falcone was also mum on the existence of another personal loan, this one backed by his personal art collection for an undisclosed amount, according to a document filed with the New York Division of Corporations.

But the combination of the two loans raised more questions in the hedge fund world.

“One of the core tenets of due diligence is looking at how the manager handles his own money. With a fund this size and enormous personal wealth, why are you borrowing off an art collection?” asked Brad Balter at Balter Capital Management, which specializes in hedge fund investing. Mr. Balter is not an investor in Harbinger.

Mr. Falcone’s brash bet taking is also worrying some investors. About 40 percent, or $3 billion, of the $8 billion Mr. Falcone manages is concentrated on his wireless broadband bet, a venture called LightSquared.

Noting the broadband gamble dwarfs the subprime bet that made him famous, Mr. Falcone said the high concentration in the fund was partly because of investor redemptions and a rising valuation for LightSquared itself.

But Mr. Falcone insists LightSquared could be the solution to overloaded wireless networks — and Harbinger’s own recent troubles. He plans to build a satellite-and-terrestrial network that will stretch across the country, a high-risk move that analysts say might cost $5 billion to build and $2.5 billion a year to operate.

Mr. Falcone conceded that LightSquared is an unusual type of investment for a hedge fund but declined to say whether he would transfer his investment to his publicly traded Harbinger Group.

For a man who traffics in personal and professional excess, Mr. Falcone has adopted a rather grounded outlook on the ups and downs of hedge funds, including his own.

“You can’t go through this business and think every day is going to be a winning day,” he said.

“These periods are never fun.”