LightSquared claims DISH CEO fraudulently purchases $1B USD in debt to drive a sale at a lower price

LightSquared's long and sordid history of government bribes ( campaign donations), engineering incompetence, and allegations of fraud has grown uglier yet again.

I. LightSquared, Creditors Battle in Bankruptcy Court

Most company's don't have a satellite in orbit.  Fewer still have a mega-satellite in orbit.  And quite possibly only LightSquared launched such a huge and expensive satellite without committing to even elementary engineering due diligence.

Now with its satellite floating useless due to inteference issues and founder Phillip Falcone facing fraud charges from U.S. federal securities regulators a potential spectrum deal with DISH Network Corp. (DISH) is on the verge of full collapse.  The plan could scuttle LightSquared's hopes of resurrecting itself out of the bankruptcy it entered into last May.

LightSquared is giving up a two-thirds of its spectrum to try to convince regulators to let it use the final third. [Image Source: LightSquared]

The LightSquared bid boondoggle is complicated situtation.

Almost from the start LightSquared -- including its original finance firm, Phillip Falcone's Harbringer Capital Partners -- opposed the deal.  They felt the $2.2B USD bid undervalued the spectrum and they were also unhappy with the idea of breaking off smaller chunks of spectrum to sell to U.S. Bancorp (USB) and Mast Capital Management LLC -- two lesser bidders.  LightSquared felt a troubled assets investment worth $4B USD, led by Fortress Investment Group LLC (FIG) would be a better path out of bankruptcy.

Confusingly, though it was LightSquared that enabled the bid by proposing a spectrum padding scheme to the Federal Communications Commission that could solve the interference issues.

While it was unclear how the FIG-backed LightSquared would use the spectrum, from a technical perspective the plan would be similar to AT&T, Inc.'s (T) strategy for solving an interference-plaguged block of spectrum of its own, adding several megahertz worth of unused spectrum space on either side of the block.  The LightSquared plan would cut the company's 15 MHz block of spectrum down to just 5 MHz, leaving the 10 MHz that were causing the GPS inteference unused.  Losing two-thirds of the company's spectrum would be a blow, but even 5 MHz of spectrum in useful LTE-compatible bands is worth a lot these days.

But creditors had little faith in the FIG investment and pushed forward in U.S. Bankruptcy Court in Manhattan to accept the rival bid from DISH.  DISH seemed to be fans of that plan, that would repay creditors $1.8B USD, as well as leave LightSquared with several hundred million dollars to restructure and regear its business.

Creditors were keen on the deal as it would allow LightSquared to pay back the $1.8B USD it owed them; plus it would leave several hundred million for LightSquared to pursue new projects and ventures. Creditors have implied that they may sue DISH if it pulls out, according to The Wall Street Journal.

II. Whose Side is DISH On?

DISH was allied with the creditors while it was pursuing a bid, but now it seems to be rethinking that plan, offering little insight yet into why it's pulling out. 

One possible reason why DISH may be pulling out comes from yet another confusing twist.  DISH CEO and founder Charlie Ergen reportedly purchased $1B USD of LightSquared's debt, according to a complaint filed by LightSquared.  LightSquared claims Charlie Ergen did this in an effort to lock down the spectrum and buy it at a cheaper cost by playing the deal from both sides.  LightSquared has called the debt purcahse fraudulent and is trying to get the bankruptcy judge to declare that purchase invalid.

Charlie Ergen
LightSquared has accused DISH CEO Charlie Ergen of fraudulently purchasing its debt.
[Image Source: AllThingsD]

A DISH spokesperson called this filing "a desperate measure."  Yet, something has DISH spooked enough that it's reportedly considering dropping its bid anyways.

The Wall Street Journal reports:

DISH is expected to disclose its letter of termination of the bid as soon as Thursday morning, one of the people said.

Rachel Strickland, a lawyer for DISH and its chairman, Charlie Ergen, said in court Tuesday she doesn't think DISH breached the contract. On Tuesday, the parties said in court DISH hadn't formally terminated the agreement to buy LightSquared's assets.

In other words the deal isn't totally dead yet, but it sounds like DISH is positioning itself for a pullout.  This latest twist emerged in the courtroom as Judge Shelley C. Chapman carried out initial hearings about the creditors' plan to emerge from bankruptcy backed by the DISH bid.

Philip Falcone
Philip Falcone, one a venture capital wizard, lost nearly half his fortune and is facing fraud charges over the LightSquared mess.
[Image Source: Jacob Kepler/Bloomberg/Getty Images]

One pressing question if DISH does pull out is why it chose to do so.  Perhaps the pullout comes simply due to the On the other hand, if LightSquared is still struggling with intereference issues it had claimed its plan would solve, that would likely impact the FIG investment proposal as well.

Source: The Wall Street Journal

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