The New York–based firm invests in loans backed by such property — and with that in mind in 2016, it bought loans that Fortress Investment Group had made to Phil Falcone, the big-living former billionaire who a decade before had sat astride the world of hedge funds.

Melody thought the loans were money good — so good that it extended Falcone more credit the following year. After all, a huge art collection and a trove of diamond, ruby, and emerald jewelry, along with two multimillion-dollar New York residences and Falcone’s hedge fund, Harbinger Capital Partners, were pledged as collateral

But when Andres Scaminaci, a Melody managing partner, tried to collect after the loans went into default, he says Falcone turned belligerent. 

The onetime hedge fund mogul “threatened repeatedly to tie Melody in court for years if Melody were to start enforcement proceedings,” Scaminaci said in an affidavit accompanying a lawsuit Melody filed in New York State Supreme Court in February of this year. Melody claims Falcone owes it $65.9 million.

Melody went to court after learning last fall that Falcone had sold two paintings (including a Warhol) that were part of the collateral backing the loans. Instead of delivering the proceeds from the sale to Melody as promised, the money went into a Connecticut bank account held by Falcone. Once there, it was subject to a restraining order issued by the City of New York — another of Falcone’s many creditors.

Falcone doesn’t deny he owes Melody the money. He claims that he already paid the lender $60 million and is working on the additional $65.9 million. “I presented [Scaminaci] with a refinancing plan that he didn’t accept — and now we’re going back and forth,” Falcone says.

“It’s not like I’m not doing things. It’s not like I haven’t taken measures. You can only do so much, and looking at the things that I need to do and continue to do, there’s no question I think I will solve them all,” he tells Institutional Investor in a 75-minute interview from his $30 million dollar Hamptons home — one of two backing the Melody loan — where he and his family are hunkered down during the coronavirus pandemic.

The Melody debt is big, but when Falcone says “solve them all,” he isn’t talking about just that. He means the veritable mountain of problems he faces these days. A rancorous fight with one of his former lawyers has led to a $13.5 million arbitration award; he still owes the City of New York $2.69 million; and a jet servicing company recently won an arbitration award in New York State Supreme Court for more than $800,000 — for total outstanding claims against him of more than $80 million. 

There’s more. Falcone’s biggest investment has been in limbo for ten years, creating hundreds of millions of dollars in losses. On another front, shareholder activists are trying to take control of the publicly traded holding company Falcone now heads, HC2 Holdings, arguing that he is running it into the ground. And to top it off, regulators are probing HC2’s insurance subsidiary.

To hear Falcone talk, he’s simply had a string of undeserved bad luck. “There’s a whole sequence of events here that, quite frankly, was really unfortunate for me personally,” he says.

But those who remember him as the hedge fund standout who ran afoul of the Securities and Exchange Commission years ago can be forgiven for wondering: Is Phil Falcone up to his old tricks? And can he survive these battles without filing for bankruptcy?

In recent years, as his financial situation has worsened, Falcone has largely faded from public view. But in 2008, when the financial crisis made stars out of hedge fund managers who profited from doom, few shone as bright as the man who was then the CEO of Harbinger Capital Management. 

Falcone, who grew up poor in Minnesota’s Iron Range and made it to Harvard on a hockey scholarship, seemed to embody the American dream. In 2007 his hedge fund’s returns more than doubled following a prescient short on subprime mortgage securities. Assets soared to $26 billion, and he personally earned $1.7 billion. 

The good times, however, were short-lived. 

After its 2007 gain of 119 percent, in 2008 the flagship Harbinger Capital Partners fund posted a loss of 29.26 percent, leading many investors to flee. By January 2009, Harbinger’s assets under management had plummeted to $7 billion, even though Falcone refused to give some investors their money back.

The next year the SEC opened an investigation. On June 28, 2012, it filed fraud charges against Harbinger Capital Partners and Falcone. Details about that case, which recently spilled out as part of the New York State Supreme Court arbitration award for Falcone’s former lawyer Matthew Dontzin, are revealing.

Dontzin, whose most famous client may be Third Point founder and CEO Dan Loeb, is considered a hedge fund fixer, and that seems to be exactly what he did for Falcone — who nonetheless refused to pay him for much of his legal work. After a years-long dispute, the arbitrator in the case earlier this year ruled in favor of Dontzin and froze Falcone’s assets.

The SEC had charged Falcone with a number of serious offenses, as detailed in its initial release: “Falcone used fund assets to pay his taxes, conducted an illegal ‘short squeeze’ to manipulate bond prices, secretly favored certain customers at the expense of others, and . . . unlawfully bought equity securities in a public offering, after having sold short the same security during a restricted period,” the release said.

In 2009, Falcone owed federal and state authorities $113.2 million in taxes. But instead of paying them with his own money, he borrowed from the Harbinger Capital Partners Special Situations Fund — from which he had earlier suspended investor redemptions, according to the SEC. 

Another SEC charge concerns behavior dating all the way back to 2006 — before Falcone was famous — and involves a type of market manipulation that securities lawyers say is hard to prove and is almost never pursued. The SEC alleges that from 2006 through early 2008, Falcone and two Harbinger investment management entities manipulated the market through a series of distressed high-yield bonds by orchestrating an illegal short squeeze. According to the SEC, that meant constricting the supply of the bonds, through large purchases or other means, pushing up the price artificially and forcing short-sellers to cover.

Before the charges were even filed, Falcone’s lawyers at Paul Weiss — a prominent law firm with expertise in white-collar defense — told Falcone that the SEC was insisting he admit to a fraud charge and agree to a cease-and-desist order as part of any settlement, says the recently unsealed arbitration award to Dontzin. 

Most consent decrees require the defendant simply to pay a big fine, neither “admit nor deny” the charges, and promise never to do the alleged behavior again. But post–financial crisis the SEC was, at least temporarily, taking a tougher stance. 

“Falcone recognized the impact that a personal admission of fraud would have on him and his businesses and adamantly rejected the offer” and turned to Dontzin, a “more aggressive litigator,” arbitrator Caroline Antonacci wrote in her final award.

Dontzin eventually negotiated a number of concessions from the SEC. Instead of admitting to fraud, Falcone had to admit only to “reckless” conduct. Instead of a lifetime bar on running a hedge fund, the SEC agreed to a five-year bar, after which time Falcone could reapply to open his hedge fund to new money. (He has not done so.) He was able to keep his favorite investment in a spectrum company called LightSquared and could continue managing the remaining assets in his hedge fund. 

The SEC originally wanted to forbid Falcone from being an officer of a publicly traded company, but it backed off on that demand. 

In 2013, Falcone paid the SEC $18 million to settle the charges. Within a few years, by orchestrating a reverse merger of a publicly traded company, he became the CEO of HC2 Holdings.   

If, considering the charges, it seems to most like a pretty good outcome, Falcone doesn’t think so. He believes that Dontzin should not be getting what’s called a success fee, because the settlement hobbled him. 

“Are you aware of what I’m dealing with and what I’ve dealt with?” asks an exasperated Falcone, who thinks he has been singled out unfairly. “I was probably the one and only person that had to admit to something.” 

Despite the SEC bar on raising new capital, Harbinger Capital Management still exists — largely in runoff mode, with a few investors stuck in two illiquid positions. 

One is the Grand-Ho Tram casino resort in Vietnam, which doesn’t appear to be worth much because locals aren’t allowed to gamble and tourists have been scarce. 

The other is Ligado Networks, the successor to spectrum company LightSquared, which went bankrupt in 2015.  

At year-end, Harbinger’s regulatory assets under management were worth $484 million, a 30 percent decline from the previous year, according to the firm’s latest filing with the SEC. Falcone’s stake in the funds comes to about $55 million, it says in the filing, although what that would be worth if he had to sell his holdings is another matter.

Even Falcone admits that Ligado/Lightsquared has been an albatross. And when not blaming the SEC, Dontzin, or New York State, he says this investment is the main reason for his financial woes.

“I’ve gotten hit on all of this because of my commitment to one company, and that was Ligado/Lightsquared, where I have the bulk of my capital tied up in that entity. I’ve been fighting for ten years on this,” he notes.

After originally investing about $700 million of his own money in LightSquared, Falcone believes that stake is worth something north of $50 million today.

“I tend to take risks when I invest, there’s no question about it,” he says, shrugging.

Falcone is still hoping the bet will pay off. 

He thinks the company eventually will be worth between $11 billion and $15 billion, but says it has $8 billion to $9 billion of debt. Falcone now owns about 45 percent of the company, which according to his best-case estimates would put his stake at a value of a little more than $3 billion.

“I do believe that we’ll be worth a lot of money,” he says. “That ‘lot of money’ is quite a wide range.”

However, such a rosy future depends, for starters, on the company getting a license from the Federal Communications Commission. The problem is that the FCC withdrew the company’s initial license and has refused for the past decade to grant another one. 

In a promising development, last week FCC Chairman Ajit Pai proposed a draft order to approve Ligado’s license. But it’s not a done deal: Both the Pentagon and congressional leaders have come out in opposition, saying it will harm the military.

And so, with two investments worth a questionable amount of money and only six employees, it may seem surprising that Harbinger Capital is still located on two floors in a prime midtown Manhattan location — 450 Park Avenue, abutting 57th Street. Other tenants at the ritzy address include law firms Jones Day and Cleary Gottlieb, as well as Dow Chemical.

The luxurious office appears to be costing HC2 a bundle — and is at the center of the activist battle to pry the company from Falcone once and for all.

MG Capital founder Michael Gorzynski, a former Third Point analyst and the activist who is taking on Falcone, has many complaints about the man’s management of HC2. 

But he particularly likes to point to a $4 million “service agreement” that HC2 has paid to Harbinger annually, largely to occupy the office space that still has Harbinger’s name on the door. (The amount came to $2.5 million last year.) To Gorzynski that’s a bit rich for the small-time holding company with a market cap hovering around $100 million, its stock trading near penny stock levels, at $2 per share.

HC2, he says, “may as well stand for Harbinger Capital 2.”

Falcone denies the activist’s assertions. “They are misguided. They’re misinformed. They have made accusations that are not even close to being true, and I feel like it’s more of a personal attack than anything,” he says. “There’s no money that comes to Phil Falcone, zero.”

But there’s no doubt HC2 is an activist’s dream target. During the six years Falcone has served on its board, according to a letter Gorzynski wrote on January 27 announcing his activist intent, the company’s share price has fallen by more than 35 percent while the S&P 500 has doubled. When Gorzynski and a few others who together own 5 percent of the shares said in late January they would run a proxy contest to kick out Falcone’s handpicked board, the stock quickly doubled, peaking on February 12. (As market sentiment has turned bearish amid the coronavirus pandemic, it has fallen back.)

One of HC2’s main problems is its huge debt load. In late 2018 it issued $470 million in senior secured notes with an interest rate of 11.5 percent — a shockingly high rate that Falcone says was simply because of unfortunate market conditions at the time. 

Gorzynski says the fault lies with Falcone. “We identified the primary source of value destruction: Mr. Falcone and his directors,” he tells II. “The facts really speak for themselves when you look at how they’ve presided over bad investments, mounting debt, inappropriate expenses, and an overall culture of excess.”

He adds: “Mismanagement and self-dealing [have] finally pushed the company to the brink of financial ruin.”  

Falcone, whose voting shares are only between 3 and 5 percent of HC2’s total, says he agrees with the activists about reducing the company’s debt and cutting overhead. He claims to be working on such matters. 

“Those things are basic. They’ve been in the works for some time,” he says.

The former hedge fund manager used the HC2 shell to buy a number of diverse companies, including 210 broadcasting stations and a life sciences segment that Falcone thinks are its future.

“There’s real value in the assets, and we’re doing a number of things from the top on down to extract the value,” he says. “Why do you think [Gorzynski] wants to step in? Because there’s value in the assets.”

HC2 recently booked a gain when it sold Global Marine Group, which installs, maintains, and repairs submarine communications cable. Falcone says that’s one reason the stock has jumped—not the activists’ efforts.

Then there’s HC2’s insurance company, Continental General. But it’s not the activists who are focusing on that. 

It’s regulators in the state of Texas.  

Continental General holds $4 billion in assets, more than half bought in 2018 from Kanawha Insurance, the parent company of Humana’s long-term health care insurance business, which pays for nursing home care for its policyholders.

There are now growing questions as to whether that $4 billion is being invested wisely or used as a piggybank for Falcone’s personal interests.

Given his past run-ins with regulators, Falcone acknowledges he isn’t supposed to be managing that money.  

“Mr. Falcone shall not have any role in the day to day operations or management of Kanawha or CGIC [Continental] pre- or post-merger,” states the final decision and conditional order of the proposed acquisition of Kanawha by Continental, a Texas domestic insurance firm.

Earlier this year, HC2 announced it was planning to sell Continental, a move that stunned analysts who noted that Falcone had been touting the business as recently as November.

“When he announced the decision to sell the insurance business, that was quite shocking to me,” says Sarkis Sherbetchyan, an associate analyst in the research division of B. Riley FBR.  

Falcone had big plans for taking millions of dollars out of Continental via fees and dividends, but recently told investors that insurance regulators are balking at such a hefty payout, making the business less attractive.

What Falcone did not tell investors on a March 16 analyst call was that the Texas Department of Insurance has told Continental that “a limited scope exam would be conducted [and] would focus on corporate governance, related party activities, affiliated agreements and investment activities,” according to the insurance firm’s 2019 annual report.

Falcone insists it is an “informal exam,” not an investigation. 

But questions remain. For example, documents in a Delaware Chancery Court lawsuit brought by minority shareholders of DBM Global, HC2’s largest subsidiary, reveal that HC2 bought DBM shares for $31.50 to $44.50 in 2017 and then sold them to Continental in February 2018 for prices up to $132.21 — a hefty markup, with the profits going upstream to the parent.

Another red flag concerns an $11.5 million loan Continental made to Arcot Finance, a jewelry lending business headquartered at the same Park Avenue address as Harbinger and HC2. 

When asked about the close connection, Falcone brushes off the concerns. The business plan was “to buy and sell, I guess, stones or high-quality diamonds, or lend against them. They’ve been subsequently closed down because it turned out it wasn’t as profitable as they expected,” he explains. Continental now classifies the Arcot bonds as “other than temporarily impaired.”

Falcone takes no responsibility for the botched endeavor. “People come to me with ideas, then I pass them on to the insurance individuals that are managing the portfolio,” he says. 

Whether that’s true or not, one thing is certain: Falcone needs all the money he can get, especially as he says HC2 is his only source of income. Even his compensation at the company, where he earned $11.5 million in 2018, is subject to a wage garnishment order from the City of New York, according to an order filed in New York State court in August 2019. Last year Falcone’s compensation dipped to $600,000 as the company lost $31.5 million. 

Under the circumstances, it looks like something has to give.  

Over the past decade, Phil and Lisa Marie Falcone became the poster couple for the new Gilded Age, their nouveau riche lifestyle fueled by a debt binge.

In 2008, fresh off his big year, the hedge fund manager paid $49 million for the Upper East Side limestone mansion formerly owned by Penthouse founder Bob Guccione; he spent millions to renovate it, adding a swimming pool, a spa, and a movie theater. Falcone later built his Hamptons home in the tony village of Sagaponack at a cost of what he says was $25 million to $30 million. He also paid $39 million for a villa compound on St Bart’s, where his wife redecorated and renamed its bedrooms after such famous designers as Hermès, Louis Vuitton, and Christian Dior.

As is de rigueur for moguls, Falcone also amassed an art collection with works by such artists as Claude Monet, Pablo Picasso, Andy Warhol, Camille Pissarro, and Edgar Degas. Lisa Marie, a former model, still attends New York society’s biggest event — the annual Met Gala — decked out in pricey designer gowns. At one point she was on the board of the New York City Ballet.

If the Falcones seem enamored of the trappings of wealth, Phil Falcone doesn’t deny it. 

“I came from nothing where I grew up. I never experienced that wealth,” he says of his hardscrabble upbringing. “I mean, did I buy certain things? Sure. I wanted to enjoy it.” The youngest of nine siblings, Falcone grew up in a single-family house with three bedrooms. He told a congressional committee in 2008 that his father never made more than $15,000 a year and his mother worked in a shirt factory. 

“As they say, you never see a U-Haul following a hearse,” he quips.

Falcone continues defending his lavish spending spree. “What are you going to do, put it in the bank for your kids?” he asks. (The Falcones famously bought a pet pig for one of their daughters. It has since died.)

The high times were fun while they lasted.

In 2018, Falcone lost the use of his leased Gulfstream jet and was sued for $21 million by the lessor, Wilmington Trust, in New York State court, settling for an undetermined amount. To satisfy some of his debts, Falcone sold the former Guccione mansion for $77 million and the St. Bart’s property for an estimated $57.4 million. 

The Upper East Side townhouse where Falcone, his wife, and their twin teenage daughters now live — which they bought for $10.37 million in 2004 and includes a wine cellar and a dining room with a gilded coffered ceiling — was recently taken off the market after the asking price had been lowered from $39 million to $29.5 million.

Falcone has repeatedly told creditors his problem is illiquidity, not poverty, and begged them to wait. In a deposition in his arbitration with Dontzin, Falcone said that in 2018 he had told the New York attorney general, who had accused him of tax fraud, that he had a net worth of $300 million. 

Some observers are skeptical. “Falcone seems to have run aground at this point,” says Gary Lutin, chairman of the Shareholder Forum, which has been working with the DBM Global minority shareholders who are suing the parent.

“He’s got four different parties grabbing for his assets, and he says he doesn’t have any money. You don’t see four aggrieved people fighting over assets and nobody initiating bankruptcy,” points out Lutin, who has met with Falcone in person at the deluxe Park Avenue office, where modern art graces the walls. 

Lutin calls Falcone a “smooth talker.” 

Creditors, however, seem to have tired of the smooth talk that’s kept them at bay for years. Says one: “There may be a time where we may have to force him into bankruptcy because he won’t pay.”

Falcone says that won’t be necessary — that he plans to pay them all back. “I have a bit more assets than I do have liabilities,” he says, noting that he is “working through different avenues. I wouldn’t say it’s a fluid process in this market.”

He adds, “There’s still jewelry, there’s still art. There’s still homes.” Should the investment in Ligado finally pan out, Falcone’s financial burdens would also be eased. (He told II that he doesn’t think he’ll have to sell either of his two remaining homes.)

It’s all fodder for the activists who say Falcone’s “apparent financial distress and legal issues” are worrisome. Gorzynski says he believes those issues have put “pressure on [Falcone] and distracted him from his role leading the company.”

“I’m not losing sleep over it,” retorts Falcone — which may come as no surprise to the creditors who’ve been trying for years to get the money owed them. 

Falcone, for his part, says simply: “The important thing is that I can multitask. It’s not like this just started two weeks ago. It’s not like I’m having a heart transplant. Seriously. You’ve got to put things into perspective.”

After all, it’s only money — and, according to many adversaries, not his own.

© 2020 Institutional Investor LLC.