Phil Falcone’s Net Worth is $1.1 Billion. He is a Hedge Fund Manager, a former Harvard hockey star Philip Falcone scored $1.7 billion by betting against subprime mortgages in 2007 but has since lost much of that on an ill-conceived investment in a satellite/cellular communications network called LightSquared. The $3 billion project received a potential death blow in February when the Federal Communications Commission found it would interfere with GPS navigation systems. Falcone’s also facing a Securities and Exchange Commission probe of Harbinger Capital, where assets have shrunk to about $4 billion as investors clamor to withdraw their cash. The youngest of nine kids, Falcone grew up in Chisholm, Minn. Money was tight: His father was a utility superintendent, and his mother worked for 80 cents an hour at a shirt factory. Falcone majored in economics at Harvard and started on the junk bond desk at Kidder, Peabody & Co in 1985 after an injury ruined his professional ice hockey career (he now invests in NHL’s Minnesota Wild). Up until LightSquared’s biggest wipeout, he was losing his entire investment in troubled plastics maker AAB Manufacturing, an event he credits for having “had a profound impact upon my success as a hedge fund manager.” Wife Lisa Maria is on the board of the New York City Ballet.
It’s a classic tale—man conquers Wall Street; wife enters New York society; the knives come out—only this time with more money, more bitchiness, and more questions. Is billionaire hedge-fund king Philip Falcone in financial free fall, or will his latest bet make him far wealthier? Is Lisa Maria Falcone the city’s most avid social climber, or just being herself? Bethany McLean profiles a couple whose conspicuous consumption may be the least interesting thing about them.
PARTNERS IN CLIMB Left, Lisa Maria Falcone on the rooftop of the Jungle City recording studio. Right, Philip Falcone, with his hockey gear, in his office at Harbinger Capital Partners. Read More about hedge fund wife Lisa Marie
To get to the Manhattan trading floor of Harbinger Capital Partners, the hedge fund run by Philip Falcone, you walk up an exposed curving staircase to what feels like the deck of a spaceship hovering 31 floors above Park Avenue. Falcone’s glass-walled office sits off to the side, and from this captain’s chair, with New York City seeming so still and quiet down below, you would never guess that Falcone, 48, is under siege. But, oh, he is. A few months ago, Falcone says, he almost took off the Ganesh charm—the elephant-headed Hindu deity that represents good fortune—that he wears around his neck. “I thought, You have got to be kidding,” he says. “I get very superstitious.”
Falcone’s is a classic rags-to-riches story. The question now is whether it will end in ignominy worse than rags. Born in a small, fading iron-ore mining town in northern Minnesota, he made his escape to Harvard. That led to a career on Wall Street, which led to a successful hedge fund. By then Falcone was very, very rich. But rich turned into unimaginably, inordinately rich when, starting in late 2006, he began to put in place an enormous bet that subprime mortgages would default. When they did, Harbinger made some $10 billion, and in 2007, Falcone took home $1.7 billion. At its peak, Harbinger managed $26 billion.
Suddenly, Falcone was one of the biggest, best-known, and most highly paid hedge-fund managers in the world. And if you believe the tabloid stories, he began acting the part. In mid-2008, when other rich New Yorkers were retreating from conspicuous consumption, he and his wife, Lisa Maria—who, with a childhood spent in Spanish Harlem, has her own rags-to-riches tale—bought the 25,725-square-foot, 27-room mansion right off Fifth Avenue that had belonged to Penthouse founder Bob Guccione. “Let them eat cake” is how one person characterizes that purchase. The couple promptly embarked on a reported $10 million renovation, which included enlarging the existing swimming pool and adding a gym, a sauna, a steam room, a private movie theater, and not one but two walk-in closets for Lisa Maria. Meanwhile, they lived in another town house in the neighborhood, the one they’d bought back in 2004 for $10.3 million. It housed, among other eyebrow-raising accoutrements, a Vietnamese potbellied pig that, I’m told, became part of the household because Lisa Maria wanted their twin girls, Carolina and Liliana, now six, to act out E. B. White’s Charlotte’s Web one Halloween—and they needed a pig to play the part of Wilbur. There were also lavish birthday parties for the twins. At one, Alicia Keys, who is a friend of Lisa Maria’s, sang; at another, the walls were painted with murals from The Wizard of Oz, and midgets served the children.
Then there was what many saw as the Falcones’ attempt to crash New York society. They did everything “short of grabbing the sun and physically shining it upon themselves” is how New York magazine put it after Lisa Maria began showing up at all the right places, from the 2007 American Friends of Versailles Tour (where tickets cost as much as $50,000 per couple) to the Central Park Conservancy hat lunch. The Falcones gave money to the institutions favored by society, such as the American Museum of Natural History and the New York City Ballet, and Lisa Maria joined the latter’s board. Both Falcones joined the board of the High Line, the public park opened in 2009 on a former elevated railbed on Manhattan’s West Side.
But rather than gain acceptance they, especially Lisa Maria, seemed merely to offend people. There are her appalling public statements. “I do what I want,” she told one reporter. “God gave me something that I’m better at than anyone else,” she said to another. “And that’s being me.”
And there are her clothes. “It’s not Carolina Herrera!” as one person who knows her well says. She’s often photographed wearing something that’s either feathered, shiny, skin-baring, shockingly expensive, or all of the above. And that might be on an average day. “She drops her daughters off at school wearing billions of dollars of clothes!” says a parent whose children attend Brearley, the exclusive Upper East Side all-girls school where the Falcones’ twins also go. Says one observer, “She never fits in.”
The most notorious moment came at the 2009 gala for the High Line, for which the New York social world turned out in force. As Joshua David, the co-founder of the Friends of the High Line, which raised the money to make the park a reality, praised I.A.C. chairman Barry Diller and his wife, designer Diane von Furstenberg, for donating $10 million, Lisa Maria Falcone, wearing a ruffled gray Roberto Cavalli dress with a plunging neckline and sky-high Christian Louboutin peep-toe heels, jumped up, grabbed the microphone, and announced that she and Philip would give $10 million in addition to the $1.4 million they’d already pledged. It didn’t go over well in some quarters. “I don’t like ostentatious displays of money,” says one person who was there, summing up the general disdain.
Perhaps it’s fitting, then, that the purchase of the Guccione house seemed to mark the beginning of the end of Philip Falcone’s ability to work investing magic. Today, he manages only about $7 billion—roughly a quarter of the assets that he did at the peak. Last year, a popular financial blog named him one of the worst hedge-fund managers of 2010. And to many of his remaining investors’ great ire, roughly half of the money he has left is invested in a highly controversial, extremely risky private company—meaning he can’t easily sell, and investors can’t get their money back for the time being. The company, which Falcone has named LightSquared, is attempting to build a multi-billion-dollar satellite-based network to supply nationwide 4G wireless broadband service, in competition with AT&T and Verizon Wireless. “It is literally pie-in-the-sky stuff,” a former Harbinger investor says. “Cue the ‘Mission Impossible’ theme,” wrote a trade publication. Others have called it Falcone’s “riskiest trade ever” or “the bet of his life.”
Add in very public defections by employees, a lawsuit from a former partner, Howard Kagan, at Harbinger, and another bitter lawsuit, brought by Nacco, a small-appliance and industrial firm, which lost a takeover battle to Harbinger, and you can see why Falcone is losing his faith in Ganesh.
And that was all before federal authorities—the Securities and Exchange Commission and the Justice Department—started looking into a $113 million loan that Falcone took from his funds in the fall of 2009 to pay his taxes. His investors didn’t find out about it until the spring of 2010, and at that point they couldn’t get their money out of his funds. According to Reuters, there are also ongoing investigations by the S.E.C. into possible short selling and market manipulation abuses by Harbinger. “He [Falcone] has a reputation for being stubborn, volatile, and aggressive, and now the word on the Street is that, well, maybe you can’t trust him, either,” says one hedge-fund investor. “He lives by his own set of rules,” says another. “Dangerous, hockey player, high-life guy.” A fund manager sums him up this way: “A roll-the-dice, put-everything-on-red kind of guy.”
Falcone may be caught in what an observer says is a “death spiral” for a hedge-fund manager, because as soon as investors can get their money, they will take it and run. Goldman Sachs reportedly plans to pull its $120 million from Falcone’s fund. “These businesses, all they are is client trust. The money can vanish overnight,” says a former Falcone investor. “Once you ding a guy’s reputation, and there’s the perception that he broke that trust, it is virtually impossible to get it back.”
But if the Falcones’ story is the perfect morality tale about new money in New York, The Great Gatsby updated for the hedge-fund era of lottery-like instant mega-wealth, it’s also more nuanced. More than one friend—and both Philip and Lisa Maria have friends who are ardent defenders—pleads with me to be fair. Are the Falcones simply misunderstood? “I think he’s a heck of a lot more rational and way more honest than people give him credit for,” another investor who knows Falcone well tells me.
Nor is this a story where the ending has already been written. While Philip Falcone’s big bet on LightSquared is a long way from a sure thing, it is not completely crazy. If it works, it will leave him far richer and far more important to the American economy than he ever would have been as a mere trader of paper.
“I’m the girl from Harlem and he’s the boy from Chisholm, and now we’ve got all this stuff,” says Lisa Maria. “If you want to get to know us, take the time.”
One of Lisa Maria Falcone’s favorite images of her husband comes from his mother, who said that as long as the lights were on at the ice rink she always knew where Philip was—and she always knew he’d be coming home when the lights went dark. Even as a child, he’d be playing hockey when it was 20 or 30 below zero outside. Nothing was handed to him. “And this is the guy that people are saying what about?” Lisa Maria asks me. “When I hear people bashing Philip, I think, But he’s the American Dream!”
Philip grew up in the town of Chisholm, Minnesota, about 100 miles from the Canadian border. It’s part of what’s known as the Mesabi Iron Range—“the Range” to locals. It’s cold, tough, iron-ore mining country, which has been struggling since the American steel industry began to decline in the 1980s. (I grew up in the neighboring town; Falcone and I joked about the kind of trouble you’d get in if you dared to drive a foreign car around that area.) He was the youngest of nine kids, with a dad who started fading from the picture when Philip was young and a mom who worked in the local shirt factory.
Phil was a smart, inquisitive kid, but ironically, at least in light of the way he’d later be portrayed, he was “never a risktaker,” recalls his friend Mark Baron, who grew up a block away and played hockey with Phil from as far back as they can both remember. “I was the daredevil with the motorcycle who did crazy stuff. Phil wouldn’t get on the back of my motorcycle.”
The Range has long produced top hockey players, and East Coast schools routinely scout there. “It’s known for hardworking kids, honest players, tough kids, with a good work ethic,” says Ronn Tomassoni, who was Falcone’s hockey coach at Harvard.
Falcone was not a physical, aggressive player but rather a “headsy”—i.e., smart—one, recalls Baron. A fiercely competitive streak showed in his eyes, not in his words. Val Belmonte, who recruited and also coached him at Harvard, recalls that Falcone was the rare player who behaved in practice exactly as he did in a game. “You knew what you were going to get out of him,” Belmonte says. “He was always on the ice first, never diddling, always working.”
After graduation Falcone played professionally for a year in Sweden, until he got hurt, and then he decided to try Wall Street. “Hey, Neil, I’m going for broke,” he told his friend and fellow Harvard hockey player Neil Sheehy. “I figure if I don’t make it, I can go back to Chisholm and pump gas.”
The year was 1985, and with a degree in economics, Falcone got a job at Kidder Peabody in the fairly new field of junk bonds. His starting salary was $20,000. It was a different world back then, one of hard-core traders who hadn’t necessarily graduated from college, who would blow cigar smoke in your face, and who might send a junior employee all the way to Philadelphia for a Philly cheesesteak for lunch. “Less political, more honest, less BS” is how Falcone sums it up.
In 1991, Falcone and a friend from Harvard pooled their cash and pledged everything they had—including personally guaranteeing bank loans—to buy a New Jersey-based hairbrush manufacturer. “I thought, I can do that,” Falcone says about running a business. The first blow came when he found out that the inventory had been badly miscounted; the final one came when their largest customer declared bankruptcy. “I was 27 and one lender started asking about my personal collateral. [He asked,] ‘Do you have artwork?’ ” recalls Falcone. “I said, ‘I have a Bobby Orr poster in my bedroom!’ ” Falcone says his bank accounts were frozen and his electricity shut off. “I realized I had to start all over, and that was fine,” he says. He didn’t cut his last check to creditors until 1997.
Falcone returned to bond trading on the Street, and in 2001, Harbert Management Corporation, a family-run, Alabama-based money-management firm, gave him $25 million to start a hedge fund that would trade “distressed” debt, meaning the bonds of companies in or close to bankruptcy. Falcone did very well, in no small part by taking an enormous position in an Australian iron-ore company called Fortescue, which soared in value. By the end of 2006, he had $5 billion in assets under management.
And then came the trade that made his fortune: subprime mortgages. Falcone says it took him eight or nine months to understand the complex ways in which subprime securities were constructed and to investigate all of the underlying loans. He made a first, small trade in late 2006; by mid-2007 he had a $15 billion “short” position. It was, as he says, a “very, very, very big position”—more than three times the assets he had, meaning he had borrowed money, a lot of it, to make the trade. “Once I get a conviction, I move big and quickly,” he says.
“When did you know it was going to work?” I ask him.
“When I put the trade on,” he says with a small smile.
Falcone has always had an eye for expensive clothes. Sheehy, who jokingly calls Falcone “Phashion Phil,” recalls that after they drove east together to Boston for Phil’s freshman and Sheehy’s sophomore year, Falcone headed to the upscale, preppy stores, such as the Harvard Shop and the Andover Shop. “A tie was $100!” marvels Sheehy. “Where we came from, a tie is $5. I just shook my head.”
But, that indulgence aside, it’s hard to find anyone who really knows Falcone who says that he cares about the big life that big money can buy. In 2008 he bought a 40 percent stake in the Minnesota Wild hockey team, and when he goes to games, he gathers his old Chisholm crew around him; his cabin on northern Minnesota’s Side Lake is really a cabin, not a compound. He is not the “showy type,” says a local. In person, there’s not a hint of Master of the Universe about him. Although, as a former employee says, Falcone is “super-intense,” his voice is surprisingly soft, almost meek. I’m told he can have quite a temper, but “It was, like, wow” or “It’s, like, ahhhhh” is about as worked up as I saw him get. He’s not verbally slick, and he’s not a salesman. His life, say his friends, revolves more around his children than his social standing. Unlike many other dads in his position, he takes them to their after-school activities, and “he wants to be home eating dinner with them at six P.M.,” says one friend. “I’ve never tried to let money define me, but some have defined me because of the money I’ve made,” Falcone says. “I don’t think they know me well enough to do that.”
Read More about Hedge Fund Top Earners and Losers
And yet, Falcone has let the money be a very public part of his life. To some the explanation is simple: Lisa Maria Velasquez. As a friend of Philip’s tells me, “He likes the insanity.”
They met in 1992, at a group dinner at a Park Avenue restaurant with Wall Street guys and gorgeous girls. “Legs as long as Manhattan and a mountain of plastic” is how one person who knows the Falcones describes Lisa Maria. They were married in 1997. She likes to tell people that in the early years, which were when Falcone’s hairbrush company was falling apart, they slept on an air mattress and had no money. “Their relationship is specific and unique to them,” says a friend.
To Read More about Other Hedge Fund Wives
In many ways they aren’t an obvious match; you might well overlook Philip in a crowd, but you’d never miss Lisa Maria. But, Lisa Maria says, when she first visited Chisholm, she was struck by the similarities between how she and Philip had grown up. “Both our moms collected knickknacks because there was no money to collect anything else,” she says. But whereas Falcone’s background is straightforward small town, hers is murkier. Her father, a busboy, wasn’t around much, either. She has described her mother to others as a “rageaholic” and an “alcoholic”; she found out only later that her “mother” was actually an aunt. She has still never met her birth mother. She describes the woman who raised her, who has since passed away, more kindly to me, saying that she was very protective and sent her to the nuns after school to learn to crochet, which is where, she says, her interest in distinctive fashion began. (“I like one-of-a-kind pieces, the ones that stores are scared to buy because no one is going to buy them,” she explains.) She says she was scouted for modeling in her late teens.
Both her friends and her enemies make the same point about her: What you see is what you get. “There is no fakeness there,” says one person. “You know people who don’t know how to keep their mouths shut? What they say is what they believe? That’s her.”
Parents whose children are in school with the Falcones’ twins say that she is as comfortable talking to the nannies in Spanish as she is hanging out with Madonna, Ed Norton, and other Hollywood types at the Falcones’ high-profile Christmas parties. (Magician David Blaine, who is a friend, could be spotted doing card tricks at the last one.) “She has no sense of status,” says a friend, who notes that parents of her children’s friends whose names are decidedly not bold-faced are as welcomed by the Falcones at their parties as celebrities are.
As with her husband, for all her considerable chutzpah, there is a surprising shyness about her. When I meet her, she’s wearing a slouchy wool hat, black leggings, high-tops, and a big black leather vest and white T-shirt over a long-sleeved black shirt. At a distance, she could pass for a teenager.
Variations on the comments that seem so obnoxious in print are far less so in person. “I am great at one thing, and one thing only. I hate to say it, but that’s being myself,” she says. “And that’s what people don’t like about me.” If she doesn’t have an Ivy League education, she is street-smart and surprisingly self-deprecating. “I never got criticized in Harlem,” she says. “Then I came to this side. It’s, like, Wow. Why aren’t you embracing me? Is it that Philip and I are the Beverly Hillbillies?”
In 2008, Lisa Maria started a film-production company called Everest Entertainment. While that may have been the cause of considerable eye rolling among her critics, she’s done quite well. Or as producer John Sloss says, “She’s a bigger-than-life character, but what she’s done has been prudent and thoughtful.” She hired a highly regarded movie producer named Tom Heller, and Everest has released three quirky but substantive indie films: Mother and Child, 127 Hours, and Win Win, with Paul Giamatti, which came out in March. She reads all the scripts and says, “I stick to what I really believe.” This year, when 127 Hours was nominated for six Oscars, Lisa Maria wore to the award ceremony an elegant, one-shouldered column dress that was designed by her longtime friend Zaldy Goco.
Some of Lisa Maria’s friends suggest that the resentment she inspires is nothing more than the bitterness that old money always feels toward new money—particularly when the new money eclipses the old money by many multiples—maybe mixed with a little latent racism. “She grew up 40 blocks from where she lives now in very different circumstances,” says a friend.
But others say there’s a side to her I didn’t see, and that she can be disruptive and crude. That image of her was reinforced in a very public way in early 2010, when a former housekeeper for the Falcones named William Gamble sued, alleging, among other things, that Lisa Maria, while “visibly inebriated,” had “assaulted” him and pushed her hand down his pants, at the same time complaining he wasn’t effeminate enough. (“These made-up claims are pure nonsense,” says Orin Snyder, the high-powered Gibson Dunn lawyer whom the Falcones hired to defend the lawsuit.)
I’m also told that she hasn’t been accepted in New York society because, while she flaunts her wealth, she hasn’t actually tried to make friends. As a result, “she alienated people,” says one observer.
There are also rumors of tensions in the Falcones’ marriage, which were stoked when Lisa Maria told a reporter who had met her in Philip’s office, “This is our office. Eighteen years and no prenup means family office.” Was she sending a message?
With me, though, the Falcones are remarkably protective of each other. If it’s true that Lisa Maria is the cause of their extravagant lifestyle, her husband doesn’t throw her under the bus. He tells me that the purchase of the town house—which they call the Milbank house, after its 1920s owner, financier Jeremiah Milbank, rather than the Guccione house—was a joint decision. In their penurious days they lived in the same area, he says, and they used to try to peek in the door when people were coming and going and would say to each other, “Can you imagine? Someone lives there.” So, he continues, “when it came up for sale, something came over me, wanting to own it.” He adds, “I never looked at it as trying to prove a point or wanting people to know that I was buying it.” By the way, he says, it was a great purchase: Just four months later, someone offered them 50 percent more than what they had paid.
As for the High Line incident, Philip says that was also a joint decision. “They were looking for matching donations. Lisa looked at me, and I said, ‘It’s your event.’ So we got up and said we’ll match. How that is wrong, I just do not understand. I just do not. It left me with a bitter taste.”
Lisa Maria, for her part, says that she wanted to make sure that Friends of the High Line co-founder Joshua David knew on his big celebratory night that the High Line would have all the money it needed. “If you don’t give, you get bad press,” she says. “If you do give, well, you did it at the wrong time. That’s why they have you there—to give! Is there an etiquette book on how to donate money? If so, I’d love to buy it so I do the right thing!”
Lisa Maria’s friends insist that the portrait of her storming the gates of society is wrong—that she doesn’t care—and she says much the same thing. “I don’t go where I’m not invited. As much as people criticize me, they want me there. It gives attention to them.” She adds, “If I wanted to be famous, I’d have my own reality show. They hate me enough already.”
In her telling, her life is mostly about her children. “Our world revolves around them,” she says. “I put them to bed at eight. I go to every activity.” She tells me that she had been invited to “Blake’s” dinner the previous night at La Grenouille—meaning Blake Lively’s dinner to celebrate her appointment as the new face of Chanel—but she didn’t go, because her daughters were fighting.
Of course, that doesn’t square with the pictures of her out on the town, dressed to the nines. “She does many things to say, ‘I am here,’ ” says David Patrick Columbia, the editor of the Web site New York Social Diary. “O.K., there you are. Why?” He says that the rules of the game for breaking into New York society aren’t that complicated, but she simply refuses to play by them. “It’s her shadow that she’s following around,” he says.
On Christmas Eve 2008, Philip Falcone sent an e-mail to his investors. They already knew it had been a bad year, and indeed, Falcone’s main fund, which had returned a remarkable 160 percent from January of 2007 to July of 2008, had, in a stunning reversal, finished the year down 27 percent. Now he told them that he was going to limit the amount of money they could take out—a controversial move known in the industry as “gating” the fund—and move some investments into a separate pool (called a “side pocket”), where investors would have no immediate access to their money. It was easy to think that his prior success had just been dumb luck and that the moment of truth had come. But in the hedge-fund world, that’s not Falcone’s reputation: he’s thought of as smart, if extraordinarily aggressive, by his peers.
In truth, Falcone did what he had always done: sniffed out new opportunities, then took huge positions; he continued to invest billions into stuff in the ground (i.e., commodities such as iron ore) and stuff in the sky (satellite spectrum, which, roughly defined, is what you need to send wireless communications). In Falcone’s mind, these were similar in that there’s a limited supply and skyrocketing demand, thanks to China (in the case of commodities) and data-heavy mobile devices like smartphones and iPads (in the case of spectrum).
Both are volatile investments. Commodity prices can and do swing wildly; buying satellite spectrum, more than one person tells me, is a game for people whose tolerance for risk is as high as that of the old-time Texas wildcatters. Efforts to develop successful satellite businesses have destroyed many. (Motorola sank more than $5 billion into a company called Iridium, which filed for bankruptcy in 1999.) “All sorts of people get excited by satellite,” says Tim Farrar, a longtime industry analyst, about outsiders who want to break into the business. “Most who are in this business say, ‘Oh, there’s another sucker!’ ”
Which also explains why there were, and still are, opportunities to acquire spectrum cheaply by making investments in “distressed” satellite companies. In 2004, Falcone began to buy stock in a telecommunications firm called SkyTerra, at prices up to $40 a share or more, and by the end of 2008, Harbinger also lent SkyTerra some $500 million. By 2009, Harbinger owned about 70 percent of the company. While other hedge funds were making similar plays on spectrum, Falcone was in far bigger than anyone else. “I know lots who go in, but not lots who go all in,” says one industry expert. By the end of 2008, SkyTerra’s stock had plummeted to less than $5 a share. And as the global economic environment turned to panic in mid-2008, with the collapse of the financial industry, commodities, which had been on a tear, also began to plummet.
Falcone says he never expected either investment to go straight up in price. He was in for the long term, and in his view, despite the huge size of his positions, the investments weren’t risky, because he’d done his homework. What he didn’t foresee was investors’ pulling their money from his fund: “We were victims of our own success,” he says, meaning that thanks to its great performance Harbinger was now a huge part of many investors’ overall portfolios, and they wanted to pare back. And as the world became ever scarier, many people simply wanted cash. During the first half of 2008, even as Harbinger was still soaring, Falcone says, investors asked for some $7 billion of their money back. By the end of 2008, they’d asked for $9.5 billion to be returned.
He was—and still is—shocked. “I would be hard-pressed to think of another fund that had that level of redemptions—and the bulk were before the market fell apart,” he says. “How do you manage money with all of that? You have to sell.” Many of the commodities investments that he was forced to abandon at low prices in order to get investors their money have subsequently shot back up.
As he talks about this, he almost puts his head in his hands. “If I’ve made one mistake, and I’ve made more than one, it was not having the right terms for my thought process,” he says, by which he means that investors could demand their money back in 90 days, while he had a much longer time frame. Initially, he gave the money back. He still insists that the “gate” he eventually put on the fund saved his investors a great deal of money in the long run by preventing forced liquidation
There were more curveballs, including what Falcone calls “the worst day of my life.” Heading into the disastrous fall of 2008, he had a huge short position—one of the largest short positions anyone on the Street can remember—in Wachovia, the large bank that had accumulated a massive book of subprime mortgages. He was right—in theory. But when the U.K. and then the U.S. temporarily banned short-selling certain financial stocks, Wachovia’s shot from $9 to $18. He had to cover part of his position and says that he lost $1 billion—in just one day. “I thought, Pumping gas in Chisholm isn’t so bad!” he recalls. (Overall, he did make money on Wachovia, but a lot less than he would have.)
But that’s not the whole story. There’s a sense that the boy from Chisholm got a little bit careless with other people’s money once he had his own fortune and that he didn’t do his homework as carefully as in the early years. While Falcone tells me he’s an independent thinker—“I like to make my own mistakes,” he says—when he had $26 billion to invest, he began to rely on others for ideas. “When he sticks to his knitting, he’s fabulous,” says a person who knows him well. “When he asks others for advice, he’s horrible.” Some of his investments, such as fitness-center chain Bally’s, filed for bankruptcy; others, like his foray into The New York Times, were high-profile losers.
Indeed, Falcone’s movement into media landed him in the headlines back when he was still regarded as an investing god. In late 2007, Harbinger, which was working with another hedge fund called Firebrand Partners, run by a New York University marketing professor named Scott Galloway, began buying shares in the New York Times Company. By that spring, Harbinger had spent a reported $500 million building an almost 20 percent stake in the company and was given two seats on the board.
To industry observers and Times insiders alike, it was always a mystery as to what Harbinger’s real game plan was. The little that was known about the proposals seemed simplistic and unlikely to add much value in the short term, and there was speculation that the hedge funds were, in fact, going to push for a sale of the company, even though the ownership of the Times—it is controlled by the Ochs-Sulzberger family through a separate class of shares—would have made that difficult unless the family cooperated. But the Times was, for a short period, desperately in need of cash. In early 2009, the company did a sale-leaseback of its headquarters, and also got a loan from the Mexican industrialist Carlos Slim Helú.
Falcone now concedes that his real play was just that. He (and he says there were other investors waiting in the wings) thought that, given the Times’s need for cash, there was an opportunity to force the family to sell. But not only did the Times raise cash on its own, the ability of prospective buyers like Harbinger to raise financing for big deals turned sour as the financial crisis got into full swing.
By late 2009, Falcone was selling his shares—most at less than half the price he had originally paid. “If I could do it all over again, I probably wouldn’t do it,” he says today of his investment in the Times. “I’m not afraid to admit when I make a mistake, and that was not one of my best trades.”
It became a vicious circle: as Harbinger’s performance worsened and investors wanted more money back, Falcone had to sell more. (The gate and the side pocket simply prevented investors from taking all their money at once.) Investments that he couldn’t readily sell, either because the companies were private or because his positions were so huge, became a larger and larger percentage of his remaining assets—which, in and of itself, caused yet more investors to want out. Some, who hadn’t really understood Falcone’s investment style until they couldn’t get their money back, were, put simply, mad as hell. Making matters worse was that while Falcone was living high on the money he’d made in 2007—hedge-fund managers are paid based on year-end numbers—investors who had left their money in the fund had seen their gains evaporate.
But even some of those who liked Falcone wanted out. Says one investor who asked for his money back, “There are managers who are complete crap. Falcone isn’t one of them. At the end of the day, I liked him.” But he adds, “Our investment was coming down to one big bet,” meaning the satellite business. Whether it was the right bet or the wrong bet was almost beside the point: many big investors in hedge funds are themselves stewards of other people’s money, and they don’t feel like they can put it all on red.
It got even worse. In mid-2008, Falcone terminated Howard Kagan, who, one outsider says, was responsible for some bad investments. (Others say Kagan had previously made a lot of money for Harbinger, but nothing performed well in 2008.) In April 2009, Kagan sued, alleging that Falcone had failed to pay him $63 million. Kagan said he was owed his money as of the day he left, when Harbinger was still making a fortune; Falcone has contended that he should be paid based on 2008’s performance, which is after things turned sour. Around the same time, Harbinger was also sued by Nacco, which had lost a bidding war to Falcone over another appliance maker; Nacco alleged, among other things, that a Harbinger consultant had benefited from nonpublic information.
Today, Falcone says that he’s “learned some very big lessons. I always give people the benefit of the doubt. Maybe that’s my Midwest roots. I think some of the mistakes I’ve made have been giving people too much rope. I trust people because that’s the way I want to be viewed.”
Maybe so. But there is one thing that makes others question whether Falcone is really as trustworthy as he claims, and that’s the $113 million loan he gave himself from his fund—at a time when his investors weren’t able to get their own money out. “Unbelievably sleazy” is how one hedge-fund manager describes it, and that perfectly sums up the view of Falcone’s peers.
Falcone does have an explanation: an unexpected tax bill. Managers who keep their own money in their fund, as Falcone does, frequently take a distribution to pay their taxes, which are often considerable. Another way for managers to raise cash is to get a loan (against their assets) from a bank. Falcone says he didn’t take enough of a distribution, because the amount he owed for 2008 had been calculated incorrectly by his advisers, and by late 2009, when he found out, no banks were lending sizable sums to hedge-fund managers. The I.R.S. doesn’t take “I don’t have the cash” as an answer. “It was a perfect storm of epic proportions,” he says. He went to a top law firm, which advised him that a Harbinger fund could make a loan to him on terms that were favorable to the fund’s investors. And so, he borrowed the $113 million to pay his taxes. Falcone points out that the loan was more than fully backed by his own money in the fund, which in turn was pledged to investors. “I have always kept the bulk of my money, and I mean the bulk of my money, in the fund. How can anyone possibly say my interests aren’t aligned with theirs?” he asks
But many of his peers are not impressed by this explanation. “I would never in my wildest imagination have thought that you borrowed from a gated fund,” says a hedge-fund-industry veteran. “You pledge your kids first.” And Falcone says he now gets his mistake. “It was permissible, but I wouldn’t advise another fund to do it!” he says. “The negative aspect of what’s going on now is that my integrity is being questioned.”
On the one hand, his anguish is understandable. After all, it’s not like he is Bernie Madoff. “Phil doesn’t stab you in the back; he doesn’t cheat you; he is straight up,” says someone who works with him. Adds a friend, “He feels misunderstood by the media. He doesn’t get it. It’s not like he’s on trial for insider trading.”
True. But neither did Falcone sell his possessions, much less pledge his kids, in order to avoid taking the loan. Overall, the job of a hedge-fund manager isn’t supposed to be just to make investments that you believe are great. It’s also to manage risk, and to understand your access to capital and how that might change. And part of managing something as fraught with emotion as other people’s money is to understand that it is other people’s money, and that the perception of you and your choices matters.
Does Falcone have a shot at resurrection? He settled the lawsuit with Nacco on the eve of the trial, for $60 million, without admitting guilt. “I wanted to cross something off my list and move on,” he says. The Kagan suit is ongoing. There is no resolution yet to the government investigations, although Falcone has paid back the loan, using the distributions Harbinger has made to all its investors.
But his investors still haven’t gotten all their money out, and it’s not clear what Falcone’s funds will have left when everyone who wants out is out. Some people think his future as a hedge-fund manager is in question, except for managing his own money, but Falcone isn’t so sure he wants to be a hedge-fund manager anymore. In fact, he’s attempting to create something like Warren Buffett’s Berkshire Hathaway with a publicly traded company called the Harbinger Group Inc.—it’s listed on the New York Stock Exchange, meaning you can buy shares—which he wants to use as a vehicle for long-term investments. “You take your lumps and get your bruises. You get knocked down. The key is getting back up,” Falcone says. “I’m already standing. I’m 48. It’s not even the second period of my career, and I’ve had a pretty good first period.”
But the thing that either makes or breaks his reputation—is he just a guy who puts everything on red or actually a visionary?—is going to come down to the success or failure of that satellite investment. In 2010, he completed the buyout of SkyTerra, renaming the business LightSquared. The deal had to be approved by the Federal Communications Commission, which regulates the use of both satellite and ground-based, or terrestrial, spectrums, and in order to get the F.C.C.’s approval, Falcone had to agree to a “use-it-or-lose-it provision”: he promised to have a network that will serve 100 million people by the end of 2012. His funds have invested some $3 billion in it, and he says he’s raised another $1.75 billion from outside investors. And he is a believer. “I think this could be bigger than subprime for me,” he says.
For all Falcone’s belief—which makes him, in this case, a damn good salesman—no one else is sure that it will work. “Field of dreams,” one industry analyst says, meaning that Falcone has to spend the billions to build a network before he has any customers, let alone profits. Not only that, but Falcone is making his bid for moguldom in an industry where the puzzle pieces are shifting dramatically—witness AT&T’s recent $39 billion bid for T-Mobile—and where the political landscape is as much of a hornet’s nest as New York society.
In theory, LightSquared makes all the sense in the world. With the explosion in mobile broadband devices like iPads, there is eventually going to be a shortage of the spectrum that’s needed to transmit all the data. That’s why AT&T is buying T-Mobile. Unlike the giants in this business—AT&T and Verizon Wireless—or the smaller players, like T-Mobile and Sprint, LightSquared isn’t going to sell its own phones, or have its own stores, but is rather going to offer its network on a wholesale basis to customers like Apple or Best Buy, such that if you bought an iPad, or a phone from Best Buy, you could use your device with what would look to you like Apple or Best Buy’s own network.
It’s indisputable that Falcone has accomplished a lot, and in some quarters he’s earned respect. “Falcone is at least taking a real point of view, and trying to do something real, something that will impact people’s lives,” says an industry investor. “My subversive side says, ‘Good for you.’ ” This person adds, “If he has the financial staying power, he’s going to make a lot of money.”
LightSquared has a respected C.E.O., Sanjiv Ahuja, who, as the former head of the European wireless company Orange, is a telecom guy. In November, the company launched its first satellite from Kazakhstan, and LightSquared says it has five customers, including Best Buy, signed up. Most important, in January, Falcone got a critical waiver from the F.C.C. Any devices that run off LightSquared’s network, be they iPads or phones, don’t have to be able to communicate with its satellite. Instead, LightSquared can build a terrestrial network, as AT&T and Verizon Wireless have. Building devices that can receive satellite signals is much more difficult than building devices that can receive terrestrial signals, so this greatly increases the appeal to customers of LightSquared’s network. But here’s the really key part: thanks to a provision in the F.C.C.’s rules, LightSquared doesn’t have to pay anything additional to use this terrestrial spectrum. (Falcone points out that LightSquared invested its billions in anticipation of the waiver; in addition, LightSquared has to build some 40,000 towers to make the terrestrial network operational.)
That’s where the controversy starts. Critics, including Ken Boehm, the head of a political watchdog group called the National Legal and Policy Center, point out that Falcone and Lisa Maria gave the maximum—$30,400—to the Democratic Senatorial Campaign Committee in the fall of 2009, while Sanjiv Ahuja gave the maximum to the Democratic National Committee in 2010. In a letter urging members of the House of Representatives to investigate the F.C.C.’s decisions, Boehm accuses Falcone of “shrewdly taking advantage of existing loopholes and [receiving] preferential treatment by the F.C.C.”
Falcone’s defenders point out that the F.C.C. is worried about a spectrum shortage and desperate to encourage competition—currently, AT&T and Verizon Wireless dominate the business. “He’s not gaming the rules,” says one industry investor. “He read where the F.C.C. is trying to go. The F.C.C. is abetting him with open eyes.” For his part, Falcone says, “We neither asked for nor received special treatment from the F.C.C.” (The Falcones say that their donations, and Ahuja’s, were unrelated to the F.C.C. matter, and that they have a history of contributing to both parties.) And it’s true that whatever Falcone is doing in D.C., he has nothing on a company as powerful as AT&T, whose chief lobbyist, James Cicconi, organized the delivery of 1,500 cupcakes to the F.C.C.’s headquarters when AT&T began talking to T-Mobile (a deal which also requires the F.C.C.’s approval).
Right after the waiver was granted, users of global-positioning-system technology began arguing that LightSquared’s satellite spectrum (which is adjacent to the G.P.S. spectrum), once augmented by a ground-based network, was going to interfere with their signal and might hinder all sorts of devices that rely on G.P.S., from child- and pet-tracking systems to navigation systems to military operations and aviation safety. “We believe from what we’ve seen thus far that virtually every G.P.S. receiver out there would be affected,” General William Shelton, the commander of the Air Force Space Command, told the House Armed Services Committee in a hearing in mid-March. Lawrence Strickling, the head of the National Telecommunications and Information Administration, an arm of the Commerce Department that advises the president on telecommunications issues, is arguing that the F.C.C. should defer the waiver it has granted LightSquared until the interference issues have been resolved. The F.C.C., for its part, has said that the waiver is conditional upon the G.P.S. issues being addressed; and LightSquared has said it will work with the industry to ensure there are no interference issues.
Read More about Lightsquared Battle
All of this controversy, of course, adds to the big source of doubt about LightSquared: Can Falcone continue to fund it? He still needs billions—Ahuja said at a recent conference that LightSquared would invest $14 billion over eight years—to build out a network. And most people think he needs a deal with a big customer, like Sprint, which is now the nation’s third-largest wireless carrier. There are constant rumors that such a deal, which might also give LightSquared access to Sprint’s existing network so that it could start selling its services today, is in the works. But if it doesn’t materialize, Falcone will have to fight to survive. And while he insists that LightSquared already has great value, most other observers say that it’s more of an all-or-nothing proposition—or, as it’s put to me, if you drown in the middle of the lake or three feet from the shore, it doesn’t really matter. There are other hedge funds who think Falcone won’t make it to the other side, and are waiting, vulture-like, to pick up LightSquared’s pieces in bankruptcy.
Nor may it be a coincidence that the G.P.S. controversy is escalating just as Falcone is trying to strike deals with customers. More than one person tells me that the issue is solvable and that hardball politics is being played by entrenched competitors who don’t want to see Falcone succeed. That’s certainly Falcone’s view. “A couple of big wireless companies would rather not see the market change at all,” he says. “So people have tried to make it exceedingly difficult for us. They’ve put lobbyists to work, and they’ve put out negative press about me. They make it look like we’ve received favors when that’s absolutely never been the case.” He adds, “When third-party forces are spewing negative information, it gives someone a reason to think twice” about investing. And he feels wronged: “It’s very disappointing. I don’t look at myself as someone who hits below the belt.”
He may be right, but it’s also the case that he’s given his critics plenty of ammunition. Ultimately, there’s an ever so slightly naïve quality to both Falcones, a naïveté that borders on the arrogance of “The rules don’t apply to me.” They have chosen to make their marks in worlds where perception matters, but they don’t want to make compromises. “I don’t want to change who I am and I don’t want my wife to change who she is,” Falcone says. “We’re both very passionate. I think there’s a lot to be said for that.” Lisa Maria, for her part, says, “Society has to accept all different kinds. I’m not going to not move my hands when I talk because that’s not done.”
I can’t decide if that naïve quality makes the Falcones likable or infuriating and ultimately delusional or maybe all of the above. But if LightSquared pays off, it probably doesn’t matter. Manhattan’s most controversial couple will be with us all for a long time.
Read More about Hedge Fund Real Estate