(Updates with judge’s comment in fourth paragraph.)
Dec. 10 (Bloomberg) -- Charles Ergen lost a bid to end a lawsuit alleging he acted improperly in buying debt of LightSquared Inc., a bankrupt wireless-network provider that he has separately offered to buy to complement his Dish Network Corp. and EchoStar Corp.
U.S. Bankruptcy Judge Shelley Chapman in Manhattan today denied Ergen’s request to dismiss the suit brought by Philip Falcone’s LightSquared, allowing most of the claims to go to trial. She dismissed some counts in a related claim filed by Falcone’s hedge fund, Harbinger Capital Partners.
“Shouldn’t there be a trial where we can ask Mr. Falcone some of these questions?” Chapman said, referring to queries as to whether LightSquared or Falcone may have known Ergen was buying the debt.
LightSquared and Harbinger allege that Ergen formed a “secret special purpose vehicle,” SP Special Opportunities LLC, to make the debt purchases because he knew they were improper given that Dish and EchoStar compete with LightSquared. A clause in LightSquared’s credit agreement bars rivals from owning its debt.
Ergen has said his purchases of the debt were smart, not illegal.
LightSquared, backed by Harbinger, seeks to reorganize in bankruptcy by selling most of its spectrum assets in an auction led by a $2.22 billion bid from another entity controlled by Ergen. The auction is scheduled for tomorrow.
Chapman questioned today whether a clause in the $2.22 billion offer requires that SP Special Opportunities be repaid in full, and if so, whether that says anything about Ergen’s relationship with the entity that bought the debt and the one that’s offered to buy the company.
“Why does the bid of Dish care whether SPSO get its claim in full?” Chapman asked. “Dish has determined that it wants to pay $2.22 billion for the spectrum. It should care what happens to that money once it gets into LightSquared’s hands.”
Ergen first looked into whether Dish could acquire LightSquared debt in the fall of 2011, and an investigation then concluded that Dish was prohibited from buying LightSquared debt because it was a competitor, according to Harbinger’s complaint. Ergen, along with Dish Treasurer Jason Kiser, were acting as agents for Dish when they got SP Special Opportunities to buy LightSquared’s debt, Harbinger said.
Ergen bought LightSquared debt in secret because he wanted to acquire a large enough holding to block the approval of any reorganization plan not approved by Dish, Harbinger said. If Ergen wins the auction, he will effectively be paying himself back for the debt that he bought at a discount, according to Harbinger’s complaint.
“It is smart, not illegal, when investing in the debt of a distressed or bankrupt company, to be cognizant of bankruptcy voting thresholds and strategic considerations,” Ergen said in a court filing. “That’s how investors make money and protect their investments.”
A plan put forward by Harbinger is competing with three others, including one from a group of lenders who own most of the company’s debt. That group includes SP Special Opportunities.
LightSquared, based in Reston, Virginia, filed for bankruptcy in May 2012, listing assets of $4.48 billion and debt of $2.29 billion. U.S. regulators blocked the service after makers and users of global-positioning system devices, including the U.S. military and commercial airlines, said LightSquared’s signals would confound navigation gear.
The bankruptcy case is In re LightSquared Inc., 12- bk-12080, and Harbinger’s lawsuit is Harbinger Capital Partners LLC v. SP Special Opportunities LLC, 13-01390, U.S. Bankruptcy Court, Southern District of New York (Manhattan).
--Editors: Stephen Farr, Michael Hytha