About a month ago we observed some rather unpleasant disclosures in the public vehicle of Phil Falcone's publicly traded entity, Harbinger Group, f/k/a the infamous Zapata Corp of George H.W. Bush fame. Back then we observed that "Harbinger Group., Inc appears to be a shell for an investment company with $141 million of cash and short-term investments on the books, and no operations, and is currently being assimilated by Falcone in an elaborate scheme for his Spectrum Brands shares, which would bring his total holding in Zapata from 51.6% to 94%." It is this same company that has now gotten the increasingly more troubled satellite mogul-cum-hedge fund manager in court. Reuters reports that a lawsuit has been filed against Philip Falcone which charges that the investor took advantage of his position in engineering a stock swap between his hedge fund and a small publicly traded company that he also controls.
Harbinger Group Inc, a holding company with little more than $100 million in cash on its balance sheet, is paying too much for the assets of Spectrum Brands Holdings Inc, which sells pet care products and small appliances like the George Foreman grill, the lawsuit charges.
Falcone already owns the majority of Harbinger Group.
Now he is planning to increase his stake to 94 percent from 51.6 percent by swapping 120 million newly issued shares of Harbinger for about 27.8 million shares of Spectrum Brands, a large holding in his hedge funds.
"HGI is vastly overpaying for the acquisition of assets from its majority and controlling shareholder," according to the suit, which was filed by Harbinger Group investor Alan Kahn in Delaware Chancery Court on Tuesday. Kahn sued Falcone, other directors and Harbinger Group itself.
The key contention in the suit is that Falcone basically took advantage of a fair value disconnect as part of the exchange to sell to himself the balance of the company at a substantial discount:
Contending that the price for the exchange is unfair, the lawsuit said that Falcone's Harbinger Capital Partners proposed the exchange when Harbinger Group's "common stock was trading at roughly a 25 percent discount to its liquid assets."
Sure enough, the defense is already on the scene:
A spokesman for Falcone and Harbinger Group called the suit "meritless" and said the defendants will seek to have it dismissed. "This transaction was reviewed at Harbinger Group by an independent committee of directors advised by outside financial and legal advisors. The conclusion from this process was that the transaction was in the best interests of the shareholders," Jeff Zelkowitz said.
While we are confident that this suit will quietly go away, on the off chance it does not it would be interesting to see what discovery is presented in court, as relates to the blurb from the 10-Q that originally caught our attention, namely the following:
The Harbinger Parties and their affiliates routinely cooperate with governmental and regulatory examinations, information-gathering requests (including informal requests, subpoenas, and orders seeking documents, testimony, and other information), and investigations and proceedings (both formal and informal). The Harbinger Parties and their affiliates are currently cooperating with informal investigations with respect to particular investments and trading in securities of particular issuers.
In light of the recent dragnet against hedge funds, which for now is going nowhere quick, is Harbinger merely yet another of the funds to be soon implicated in the rapidly escalating investigation against expert networks? Then again, judging by the firm's to-date "success" with taking over the satellite communication medium, we are fairly certain that not a whole lot of money was spent by the firm in "expert discussions" over the firm's recent all out onslaught in this most recent, and so far painfully costly, strategic venture.