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.


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Dr. No's picture

The only thing better than a rags-to-riches story is a riches-to-rags.  No doubt BoA gave him a floater (prime+%).  I will be anxious to see the payments on that loan if 5 years.

firstdivision's picture

Wow, it is such a slow news day.  Kind of too quiet.

RobotTrader's picture

Wonder what kind of trading mistakes he made.

He must have been short stocks the last 2 months.

Gaston's picture

Yeah, But the FED taught him, Short this market if you dare....

Sam Malone's picture

Full quotes by off-the-record sources...

This whole situation strikes me as a convenient way for GS, Blackstone, et al to shift the attention away from the fact that they stuck with a losing bet for so long. It's easier to say you're disgusted with someone's ethical behavior than try to answer why you lost 15 pct YTD backing a loser.

Robslob's picture

If everybody would just quit buying stocks this market would crash? 

doolittlegeorge's picture

absolutely huge story.  fascinating investigation by current AG and soon to be Gov. Cuomo into "the hedgie who ran GM" too.  There's the "long arm of the law."  Then there's "the short stick" of it, too.  "The age of the States" is well underway.

Cognitive Dissonance's picture

Reportedly this was one of the pieces of "art" they pledged. It's a family self portrait painted last Christmas by a distant relative of Van Dog. :>)

Phil is the bulldog with the Ace of Spades up his paw.


Robslob's picture

Sweet...I have the same picture from my college days.

Worth $200,000,000 for sure...calling BofA today to see if I can get the same rate/deal!

Arius's picture


$200,000,000 in old or new dolars?

RobotTrader's picture

If Falcone would have only bought Ford, he would have "made this year", and new investors would be clamoring to jump into his funds.

Especially since the government has a vested interest in powerjacking this sector in advance of the GM IPO.

Samsonov's picture

You mean all he had to do was listen to Jim Cramer and he'd be fine?

RobotTrader's picture

Heck, he could have bought Tesla just 10 days ago.....

Investors cannot wait to buy this stock even though the company is losing millions each year.

But hey, its in that auto sector, so it must be bought by the POMO monkeys, no matter how dire the economy is or how poor the company's finances are.

Oh regional Indian's picture

Elon Musk is a made man. Al Gore and others are tied up with Tesla.

They will be made to succeed, even if .giv ends up buying all their production for th eforthcoming war effort.

That is the only reason this stock is up.

Makes one want to scream!



shortus cynicus's picture

Tesla must be down because of rear earth metals - always this evil Chinese.

USA must bomb them, but i assume there is chinese embargo on exporting metals

used for bombs made for China, so, so bombing is not an easy task today.

Beatscape's picture

Is he short gold and AAPL as a paired trade since 2008?? 

Robslob's picture

If this is true look for the market to crater the day after GM IPO...yeah!

DavidC's picture

You guys are brilliant and priceless (no pun intended given the subject of your post)!


Sespian's picture

BofA: "The pawn shop for the bourgeoisie."

slaughterer's picture

From BAC PR office: "Phil's precious collection will soon be brightening up the Ken Lewis memorial cigar room..." (/sarc)

animalspirit's picture

Lightsquared's SkyTerra-1 satellite started communicating today.


11,900 watts of transmitting power -- something nobody else has, not even close.  I'd pawn my artwork for that bet too!

Clycntct's picture

I read the release. Sounds impressive.

Is this the new base for robust mobile broadband?

Cognitive Dissonance's picture

It's the new base for a robust mobile microwave oven.

Of course, all the artifical electromagnetic radiation we swim around in on a daily basis is entirely harmless. My government assures me of this. 

Ricky Bobby's picture

+10 Scatter X-ray is actually good for you cause I know Big Sis has only our well being at heart.

Buck Johnson's picture

I knew that he must have had all his money tied up in that fund.  Why borrow 113 million dollars to pay taxes if he had the money on hand, no this fund is going to implode and implode big time.  If a man can take out 113 million dollars for taxes, then say I've paid back maybe half and then still need to get a loan from BoA for 5 years, when is he going to pay back the rest of the money to the investors for the taxes and the loan.  He can't and he won't, because he's dead broke and that satellite deal (when are these investors going to realize that this has destroyed alot of people setting up) sucked up so much money on top of him shorting the stock market.  Bet this guy is going to get frog marched in front of the cameras real soon.

And as you said last week, this may be harbringer of things to come.

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