Harbinger $1.5 billion racketeering suit tied to LightSquared control

By Caroline Salls

Pittsburgh, July 10 – Harbinger Capital Partners LLC filed a civil racketeering lawsuit against Charles W. Ergen and related entities in connection with LightSquared Inc.’s Chapter 11 bankruptcy case that seeks in excess of $1.5 billion in damages, according to a filing with the U.S. District Court for the District of Colorado.

The full amount of damages, plus interest, costs and attorneys’ fees, are to be determined at trial. The suit said damages exceeded $1.5 billion on four counts and $500 million on two counts.

The defendants include Ergen, Dish Network Corp., L-Band Acquisition LLC, SP Special Opportunities LLC, Sound Point Capital Management LP and Stephen Ketchum. In addition to Harbinger, the plaintiffs are HGW US Holding Co. LP, Blue Line DZM Corp. and Harbinger Capital Partners SP Inc.

Harbinger said the suit arises from an allegedly illegal scheme involving mail and wire fraud, bankruptcy fraud, tortious interference and abuse of process by Ergen, his company Dish and their confederates “aimed at stripping Harbinger of its valuable contractual rights to control LightSquared and to make critical decisions during LightSquared’s Chapter 11 proceedings.”

Harbinger said it acquired those rights through its multibillion dollar investment in LightSquared.

According to the complaint, the defendants carried out the scheme in an effort to enable Ergen, Dish and enterprise member EchoStar Corp. to acquire LightSquared’s valuable wireless spectrum assets “at fire sale prices.”

By the time the full nature, scope and goal of the defendants’ scheme came to light, Harbinger said it was too late for it or the bankruptcy court to prevent the loss of Harbinger’s rights under its stockholders’ agreement with LightSquared.

RICO violation

As a result, Harbinger is alleging that the defendants violated the federal Racketeering Influenced and Corrupt Organization Act (RICO) and the Colorado Organized Crime Control Act (COCCA). Harbinger said it is looking to recover the damages it suffered as a result of the defendants’ alleged misconduct.

Harbinger said Ergen and his fellow enterprise members surreptitiously obtained a majority of LightSquared’s senior secured debt in breach of the governing credit agreement to gain control in LightSquared’s bankruptcy proceeding; made grossly undervalued bids for LightSquared assets to gain the support of the secured creditors it would repay; and, in a ploy to remove the obstacle presented by Harbinger’s desire to maximize the value of the estate, misrepresented the adequacy of those bids.

By opposing the bids, the defendants claimed that Harbinger was in breach of its fiduciary duties, even though they knew that Harbinger’s assessment of LightSquared’s value “was entirely consistent with valuations they themselves had prepared and later withheld from production.”

As a result of the Ergen enterprise’s allegedly fraudulent conduct, Harbinger said the bankruptcy court had no choice but to put an independent special committee in place to make all of LightSquared’s major decisions, stripping Harbinger of its control rights under the stockholder agreements to appoint and remove directors, chair committees and make key management decisions.

Harbinger said the scheme was perpetrated with the substantial assistance of the defendants’ banker Ketchum and his recently created investment management fund Sound Point.

In addition, Harbinger said Sound Point knowingly created a front, SP Special Opportunities, and used Ergen’s funds to secretly purchase a majority position in the LightSquared LP debt.

The purchase of that debt would allow Harbinger’s control to be blocked and force a Dish-sponsored bid to acquire LightSquared’s assets at a discount and repay Ergen at a profit, according to the lawsuit.

Sale interference

Concerned that Harbinger would be successful in raising enough financing to pay off LightSquared’s creditor constituencies and avoiding a sale, Harbinger said the Ergen enterprise “moved swiftly to remove Harbinger from the equation.”

Harbinger said Ergen, through L-Band, made an unsolicited and nonbinding bid for LightSquared’s assets on May 15, 2013, which was “purposefully timed to interfere with Harbinger’s financing efforts,” that was for far less than what Ergen knew to be the true value of the assets.

Harbinger said Ergen never planned for the bid to succeed.

As soon as LightSquared’s exclusivity ended, Harbinger said an informal secured group proposed a plan of reorganization placing Dish as the stalking horse bidder committed to purchase the company’s spectrum assets for $2.2 billion.

This plan required the secured group to abandon negotiations for any alternative plan “even though defendants secretly planned to cancel that bid and drive the price even lower,” Harbinger said.

LightSquared is a Reston, Va.-based wholesale-only 4G-LTE network integrated with satellite coverage. The company filed for bankruptcy on May 14, 2012 in the U.S. Bankruptcy Court for the Southern District of New York under Chapter 11 case number 12-12080.

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