By Cecilia Kang,
Philip Falcone’s street fighter instincts and penchant for ultra-risky investments helped catapult him into the gilded club of Wall Street’s elite.
But his winning streak ended in Washington, where the founder of Harbinger Capital Partners and former professional hockey player has been bodychecked by regulators.
LightSquared, Harbinger’s $3 billion investment, fell into bankruptcy last week after a dramatic inside-the-Beltway battle to create a wireless network that would compete with titans AT&T and Verizon Wireless.
The company was an ambitious bet on unproven technology, and it ran into major technical hurdles. Devices on the proposed network were found to interfere with the Global Positioning System crucial to military and aviation safety. But Falcone’s plan to turn junk airwaves into a goldmine could have worked, observers say, if he had come prepared with a far more low-tech set of tools: The political and lobbying skills needed to close a deal in the nation’s capitol.
“Doing business with Washington, D.C., is very risky, even when you have an incredible idea that can save an industry from a rapidly growing threat,” said Jeffrey Kagan, a telecom and tech analyst. “Do it the right way and you win. Do it the wrong way and you are LightSquared.”
GPS makers say Falcone’s venture was doomed from the start and that the company is now blaming a vast lobbying conspiracy for problems that stem more from its own lack of due diligence.
“Sometimes the truth does prevail in Washington,” said Jim Kirkland, vice president of GPS maker, Trimble. “Suggesting that lobbyists blocked LightSquared ignores the massive technical evidence of interference that led government GPS users, including the Defense Department and the Federal Aviation Administration, to conclude that LightSquared’s proposal was not technically feasible.”
Either way, LightSquared’s debacle is a cautionary tale in Washington, where vast fortunes are made and lost at the hand of regulators.
From his perch on Park Avenue, Falcone was more than a world removed from Washington.
The hard-charging financier, known to use hockey metaphors in strategy sessions, came from the secretive hedge fund world. There, investment plans are cooked up with extremely complicated financial models, kept sealed under lock and key. But when dealing with regulators, meetings and plans become public — particularly at the Federal Communications Commission. Savvy businesses manage their lobbying much like a political campaign, with talking points to convince lawmakers and regulators that the business is good for the country, too.
Falcone and executives at Reston-based LightSquared were caught off guard by the firestorm over the issue of interfering with the GPS system. A four-star Air Force general and aviation officials testified at hearings that planes could drop out of the sky if the network were launched as planned.
Falcone also underestimated the resolve of Republican opponents who branded him as a rich crony of the Obama administration and suggested that he had curried special favors for the fledgling satellite venture.
“I was shocked at how far this got and to the direction it is taking now,” Falcone said in a recent interview. “I knew some of our competitors would step in. But I didn’t expect how regulators would respond to that pressure.”
Falcone is a long-time political donor to both parties. In July 2009, his wife, Lisa, a Manhattan socialite, promised to host a Democratic Party fund-raiser. The couple kicked in the maximum amount for individual donors. That decision would cast Falcone as another business tycoon trying to buy influence in the Obama White House.
“Phil Falcone has never even shaken the hand of the president. Ever. Period. But that fact didn’t matter once word got out that he and his wife Lisa donated to Democrats,” said a person close to Harbinger who was not authorized to speak on the record.
Ultimately, though, the man accused of greasing the wheels in Washington couldn't gain enough traction to close the deal.
Some inside LightSquared were frustrated that Falcone’s Harbinger was slow to respond to the accusations of political favoritism. Adding fuel to the fire, Falcone was separately under scrutiny by securities regulators for a $100 million loan he took from Harbinger to pay off personal loans and taxes.
But worse, perhaps, he was rarely seen around town. Unlike JPMorgan’s Jamie Dimon or Google Chairman Eric Schmidt, LightSquared didn’t have a commanding executive who sat on administration advisory committees or worked the cocktail-and-benefits circuit.
The former chief executive of LightSquared, Sanjiv Ahuja, split his time between New York and Reston, and ran other businesses. It was hard to keep track of when executives met with regulators or were in town.
“Phil is from a world where people sit in front of computer terminals analyzing their investments and operate in complete secrecy. He didn’t want to go after opponents even though they had launched an all-out public assault,” said one person close to LightSquared and Harbinger who was not authorized to speak publicly.
The company eventually fought back, spending $1 million on lobbying in the first quarter of this year compared to $350,000 during the same period of 2011. Falcone came down to Washington more frequently and met with government officials. But all of that came too late; by last summer, LightSquared had become a political outcast and the once friendly FCC appeared to turn its back on the venture. The agency declined to comment for this story.
FCC as rainmaker
The FCC has long drawn opportunists looking for big bets with steep risks. Falcone was first lured in 2006, when he began to pour billions of dollars into “resource plays” like iron ore, oil and broadcast spectrum — where supplies are finite but demand is only growing.
The FCC has been a kingmaker for billionaires like Craig McCaw, who in the early 1980s won cellular licenses in an FCC lottery. He landed McCaw Cellular in major U.S. markets and in 1994 sold it to AT&T for $11.5 billion.
In the 1980s and 1990s, Morgan O’Brien formed Nextel by stitching together radio frequencies used by taxi drivers and delivery workers to build a nationwide network. In 2004, he sold it to Sprint for $35 billion.
In 1999, Dish Network founder Charlie Ergen successfully lobbied for laws that required local broadcasters to put their channels on satellite television. Now, the billionaire and former professional Las Vegas gambler is asking the FCC to turn his satellite airwaves into a LightSquared-like competitor. Some analysts speculate he has bought some of LightSquared’s debt and may try to take over the firm.
Then there are the remarkable failures. Former FCC chairman Reed Hundt, with the backing of one of Silicon Valley’s most successful venture capitalists, John Doerr, failed in 2007 to launch a commercial network that would be shared with public safety officials.
It was just the kind of risk that attracted someone like Falcone. He was enjoying the frothy rewards of his landmark 2006 bet that subprime mortgages would default. His wager against conventional wisdom about the real estate market would catapult Harbinger’s value to a peak of $26 billion.
With that, the youngest of nine children from Chisholm, Minn., hit pay dirt. Falcone, with chin-length floppy hair, and his striking wife of equally humble beginnings were suddenly gossip column fodder. They famously paid $49 million for an Upper East Side town house previously owned by former Penthouse publisher Bob Giuccione.
Harvard-educated and ambitious, Falcone went after ever bigger deals, investing in an iron-ore mining company in Brazil. And in 2010, Harbinger took over SkyTerra, a troubled satellite firm with airwave licenses. SkyTerra had gained FCC permission in 2004 to became a major land-based network that could serve as many as 260 million customers. Harbinger had the money to turn that vision into a reality.
“Investing in spectrum is not for the faint of heart,” said Walter Piecyk, an analyst at BTIG Research. “It not only requires significant capital as a ticket of entry but also requires patience to wait for an inevitable larger buyer and in many cases more funding to satisfy buildout requirements. If that wasn’t enough, interested spectrum buyers must navigate the not so subtle hand of a perpetually changing leadership at regulatory agencies.”
In November 2010, LightSquared asked the FCC if it could add to the kinds of devices that would run on the network. It wanted to operate run-of-the-mill cellphones and tablets that didn’t require satellite services.
Within weeks, the FCC said yes — on the condition that any interference problems were worked out. That decision set off the massive battle with GPS makers including Trimble and John Deere, whose tractors and other precision equipment rely on sensitive location technology. They said the new plans turned any small concerns about interference into a major problem.
LightSquared has said the firm tried several times to negotiate technical fixes with GPS makers. Even so, opposition swelled. Sen. Charles Grassley (R-Iowa) launched an investigation of the FCC, demanding internal documents on what he called a fast-track waiver for LightSquared. Why, he and other lawmakers asked, did the agency in charge of communications technology support a multibillion-dollar idea without fully vetting the technical problems?
“The FCC didn’t do its homework,” said Roger Entner, founder of Recon Analytics, a telecom research and consulting firm. “In its eagerness to quickly create additional competition in the market, it didn’t recognize the potential interference and that this would blow up in its face.”
FCC Chairman Julius Genachowski, a former campaign bundler for Obama, rejected the request by Grassley, saying the lawmaker’s Senate judiciary subcommittee doesn’t oversee the agency. With that, Falcone’s LightSquared had become tangled in a political battle. Opponents in Congress even held up confirmation of two FCC nominees in protest.
The GPS industry demanded further review. In February, the Commerce Department said its own tests showed devices would crowd out some precision GPS technology used by the military and airlines. In February, the FCC said “there was no practical way to mitigate potential interference at this time.” It said it would “vacate” its permission granted one year earlier. It would go even further, suspending parts of a waiver given years earlier to run LightSquared as a terrestrial network.
Investors bailed. Weeks later, Sprint Nextel, a key partner, canceled its deal to build out a network with LightSquared. Debt holders called for Falcone to resign.
Now in bankruptcy, with its staff reduced by half, no chief executive and still no fix to the GPS issue, LightSquared has few options left.
Last week, LightSquared asked the FCC to swap its troubled airwaves for others. The company could sue the FCC, saying the agency improperly put key operating permissions on ice.
With his wealth and reputation on the line, Falcone is putting his head down for a long fight to somehow revive LightSquared.
As he put it: “One of the things I learned in hockey is that the game’s not over until the buzzer sounds at the end of the third period. And until that buzzer sounds, you keep on playing as hard as you can.”