Falcone Continues To Syphon Cash, This Time Pledging Artwork As Collateral For BofA Loan

Tyler Durden's picture

One of the biggest hedge fund "fall from grace" stories last week, was that of Phil Falcone fund Harbinger, which has seen major redemptions from key LPs including Goldman Sachs and the New York State pension fund after his withdrawal of capital from a locked up fund made headlines (having made headlines previously in March, although with a 5 month delay). Today, via Reuters we learn that Mrs and Mr. Lisa Marie Falcone continue to have key major cash needs, after posting some of their "fine art" as collateral for a secured five-year loan from Bank of America public records show. And while "the two-page document does not specify the amount the
couple borrowed, the terms of the financing package or exactly
what the "certain items of fine art" posted as collateral are" neither is the "uses of funds" disclosed, the amount is hardly paltry and is surely needed for more than mere renovations of the couple's $49 million town house, which just happens to be Bob Gucciones's Fifth Avenue former stomping ground. Regardless, ongoing scrutiny and an unwelcome public spotlight will make Harbinger's future ever more problematic: already the fund has lost nearly 75% of its value, peaking at $26 billion in 2008, and now down to just $7 billion. As the fund is down 15% YTD, the only money coming in is from the 2% management fee: a paltry $140 million which has to 
cover overhead and expenses, and a far cry from the billions Falcone made a few years ago.

More from Reuters:

In email exchanges with Reuters on Sunday, Falcone expressed surprise about the controversy over the loan he took last year. He said he borrowed from the Harbinger Special Situations Funds to help pay taxes and has paid back more than half of the $113 million. The rest should be be paid off sometime in the next few months, he said.

But several of Falcone's investors, all of whom declined to be identified, said the loan from the fund has been a source of concern for months. What bothered them most was that Falcone only disclosed the loan in March, five months after arranging it.

"You can't treat the fund like a personal piggy bank to pay taxes," said one investor. "I don't know that there is really anything illegal about it, but it is certainly disgustingly immoral and shows a complete lack of fiduciary care."

Other investors fumed that they found out about the loan by reading the fine-print footnotes in the financial statement.

The 2009 year-end financial statement for the Special Situations Fund, sent to investors in March, said the loan would be "used to solely to discharge the borrower's U.S. federal, state and local income tax derived from management of and investment in the Harbinger Funds," one investor said.

And the personal "piggy banking" may be the least of Phil's concerns - since (allegedly) most all of his net worth is tied into the fund, comprising $2 billion of the $7 billion in AUM, the fund's recent and surprising gamble on a global communication play may backfire, leading to far greater capital personal losses than what a sundry of LP redemptions may demand. And since the fund is concentrated in extremely illiquid holdings, it may soon be forced to sell of its most liquid assets (disclosed previously on Zero Hedge) just to satisfy redemption requests, lest it be forced to unwind its quasi-private equity investments. Which begs the question: how long before the fund start gating investors:

Of the roughly $7 billion managed by Harbinger's six funds, about $2 billion is Falcone's money, according to investors. As of the end of 2009, Falcone told investors that his equity stake in the Special Situations Fund was $234 million.

The Wall Street Journal reported the federal investigation into the loan late on Friday. The paper also reported that authorities are probing if Falcone gave preferential treatment to some clients by letting them withdraw money from his funds.

"Many (investors) are very displeased," said one client. "If they find he treated some LPs preferentially, he is done."

The news of the investigations comes at a time several high profile clients, including Goldman Sachs Group (GS.N), Blackstone Group (BX.N) and the New York State Retirement Fund have already told Harbinger they want out.

Some investors say they now worry about the chance Falcone may "gate" or freeze all redemptions from his flagship fund, having already restricted clients' desired exits elsewhere.

As we speculated earlier, Harbinger may simply be a harbinger of what happens to hedge funds that become so big they are forced to morph into private equity companies, or tie their fate to that of the general economy. Some prominent contemporary names comes to mind. As always, should such a strategy backfire, these hedge funds, which do not have the strict lock up requirements of PE firms, risk going from having billions in AUM to zero pro forma for gating issues. Of course, unless the Managing Partner is stupid enough to have the bulk of their own personal wealth locked in as well, we doubt mane will shed a tear over such possible adverse developments.