Friday, November 2, 2012

Harbinger Group Inc, Spectrum Brands, and Philip Falcone’s next LightSquared

Harbinger Group Inc, Spectrum Brands, and Philip Falcone’s next LightSquared

I really have to say the more I look into this the more it looks to me like Falcone got his hand caught in the cookie jar.  In this report I will highlight some fillings and market assumptions I find to be a problem.  I have put in bold and underlined the relevant points in the paragraphs to save time.

I suggest you read my first write up on HGI, SPB, and F&G first.  

I’ll jump back and forth but a couple highlights scattered within:

  • A fully disclosed rigged game; insiders have absolute control, motives counter to shareholders, almost zero fiduciary duty owed to equity holders, players with history of self dealing, and the comical disclosure about destroying documents.
  • What could/will start the domino affect and lead to collapse of house of cards.
  • Is Falcone to Fidelity and Guaranty Life like Jon Corzine was to MF Global?

Whats Harbinger worth?  Nothing.

Harbinger Group Inc urgently needs to be reclassified: 

Its outrageous the regulators have allowed Falcone to get away with running this as a “diversified holding company".  This has all the markings of another MF Global and regulators should never have allowed it to get near this big.

From Fillings,

Investment Act:

We may suffer adverse consequences if we are deemed an investment company under the Investment Company Act and we may be required to incur significant costs to avoid investment company status and our activities may be restricted.

We believe that we are not an investment company under the Investment Company Act of 1940 (the “Investment Company Act”) and we intend to continue to make acquisitions and other investments in a manner so as not to be an investment company. The Investment Company Act contains substantive legal requirements that regulate the manner in which investment companies are permitted to conduct their business activities. If the SEC or a court were to disagree with us, we could be required to register as an investment company. This would negatively affect our ability to consummate an acquisition of an operating company, subject us to disclosure and accounting guidance geared toward investment, rather than operating, companies; limit our ability to borrow money, issue options, issue multiple classes of stock and debt, and engage in transactions with affiliates; and require us to undertake significant costs and expenses to meet the disclosure and regulatory requirements to which we would be subject as a registered investment company.
In order not to be regulated as an investment company under the Investment Company Act, unless we can qualify for an exemption, we must ensure that we are engaged primarily in a business other than investing, reinvesting, owning, holding or trading in securities (as defined in the Investment Company Act) and that we do not own or acquire “investment securities” having a value exceeding 40% of the value of our total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis. To ensure that majority-owned investments, such as Spectrum Brands Holdings, do not become categorized as “investment securities,” we may need to make additional investments in these subsidiaries to offset any dilution of our interest that would otherwise cause such a subsidiary to cease to be majority-owned. We may also need to forego acquisitions that we would otherwise make or retain or dispose of investments that we might otherwise sell or hold.

Like Daniel Drew in the old Erie Railroad...

The Harbinger Parties hold a majority of our outstanding common stock and have interests which may conflict with interests of our other stockholders and the holders of the notes. As a result of this ownership, we are a “controlled company” within the meaning of the NYSE rules and are exempt from certain corporate governance requirements.
The Harbinger Parties beneficially own shares of our outstanding common stock that collectively constitute a substantial majority of our total voting power. Because of this, the Harbinger Parties, subject to the rights of the holders of Preferred Stock, exercise a controlling influence over our business and affairs and have the power to determine all matters submitted to a vote of our stockholders, including the election of directors, the removal of directors, and approval of significant corporate transactions such as amendments to our amended and restated certificate of incorporation, mergers and the sale of all or substantially all of our assets, subject to the consent and board representation rights of our Preferred Stock. Moreover, a majority of the members of our Board were nominated by and are affiliated with or are or were previously employed by the Harbinger Parties or their affiliates.

So there would be no problem with say, a director being short the stock? 

Our officers, directors, stockholders and their respective affiliates may have a pecuniary interest in certain transactions in which we are involved, and may also compete with us.
We have not adopted a policy that expressly prohibits our directors, officers, stockholders or affiliates from having a direct or indirect pecuniary interest in any investment to be acquired or disposed of by us or in any transaction to which we are a party or have an interest. Nor do we have a policy that expressly prohibits any such persons from engaging for their own account in business activities of the types conducted by us. We have engaged in transactions in which such persons have an interest and, subject to the terms of the indenture and other applicable covenants in other financing arrangements or other agreements, may in the future enter into additional transactions in which such persons have an interest. In addition, such parties may have an interest in certain transactions such as strategic partnerships or joint ventures in which we are involved, and may also compete with us.

(For a better idea of how this would work I suggest you read Perry Corp and OTC Swaps)

Here is a filling from 2006 with David Maura (Current Board of Director of Spectrum Brands), where he’s a consultant for a Harbinger fund which is short the company he’s on the board of.  No problem with conflict of interest?

Mr. Maura is a consultant to the Harbinger Capital Partners Master Fund I, Ltd. (the "Master Fund"). He serves as a director of Salton, Inc. ("Salton") as the designee of the Master Fund. The Master Fund owns Series A Voting Convertible Preferred Stock of Salton that is convertible into 2,647,067 shares of common stock. As of the date hereof, the Master Fund also has a short position of 709,560 shares of Salton common stock. Mr. Maura disclaims beneficial ownership of the Salton common stock owned by the Master Fund.

Here was a case brought against Spectrum in 2005 for inflating earnings by means of acquisitions.  The case was dismissed, which is a shame because it’s exactly what they are doing today.

Chart from the filling showing the insiders dumping on the bullshit revenue claims.

Another director selling stock at the high was Kent J Hussey who later became CEO of Spectrum from 2007-2010

World Famous CDO manager & Harbinger

This really caught my attention because I’ve written about this guy before.  Not only has this Donald J Puglisi been involved with a bunch of Chinese frauds but he was also involved with many of the worst CDO's back during the housing collapse.   Looks like he’s handling 3 of Falcone's funds/SPV’s.  .  My guess is that these are some special purpose vehicle used by Falcone to create short exposure, but I have no idea nor if they are related to HGI, F&G Life etc.  Interesting nonetheless.

Name of General Partner, Manager, Trustee, or Director

Here is a write up I did on him.

Harbinger Capital Investment Adviser Disclosure-

When I read the following I was imminently reminded of a MF Global disclosure about Corzine and his fiduciary duties to MF.

Our officers and directors may become aware of business opportunities which may be appropriate for presentation to us as well as the other entities with which they are or may be affiliated. Due to our officers’ and directors’ existing affiliations with other entities, they may have fiduciary obligations to present potential business opportunities to those entities in addition to presenting them to us, which could cause additional conflicts of interest. For instance, Messrs. Falcone and Asali may be required to present investment opportunities to the Harbinger Parties. Accordingly, they may have conflicts of interest in determining to which entity a particular business opportunity should be presented. To the extent that our officers and directors identify business combination opportunities that may be suitable for entities to which they have pre-existing fiduciary obligations, or are presented with such opportunities in their capacities as fiduciaries to such entities, they may be required to honor their pre-existing fiduciary obligations to such entities. Accordingly, they may not present business combination opportunities to us that otherwise may be attractive to such entities unless the other entities have declined to accept such opportunities. Although the Harbinger Parties have agreed, pursuant to the terms of a letter agreement with certain holders of our Preferred Stock, to, subject to certain exceptions, present to us certain business opportunities in the consumer product, insurance and financial products, agriculture, power generation and water and mineral resources industries, we cannot assure you that the terms of this agreement will be enforced because we are not a party to this agreement and have no ability to enforce its terms.
Compare that to the 2nd paragraph located here.

I can’t seem to think of a reason for the disclosure below unless it was to hide something.
Section 6.10                      Maintenance of Books and Records; Cooperation. 
...”Such records may be sought under this Section 6.10 for any reasonable purpose, including to the extent reasonably required in connection with the audit, accounting, financial reporting, tax, litigation, federal, foreign, or state securities disclosure or other similar needs of the party seeking such records.  Notwithstanding the foregoing, any and all such records may be destroyed by a party if such destroying party sends to the other party hereto written notice of its intent to destroy such records, specifying in reasonable detail the contents of the records to be destroyed; such records may then be destroyed after the 60th day following such notice unless the other party hereto notifies the destroying party that such other party desires to obtain possession of such records, in which event the destroying party at requesting party’s expense shall transfer the records to such requesting party and such requesting party shall pay all reasonable expenses of the destroying party in connection therewith.”

“Purchaser shall use commercially reasonable efforts (at Purchaser’s expense) as soon as is reasonably practical following the applicable Closing Date, to delete all such software from any of the Equipment on which it is installed, except as otherwise provided in the Transition Services Agreement.”

Teetering on the Edge of Death:

Subsidiary F&G Life insurance & Increase in Interest Rates

A rise in interest rates, in the absence of other countervailing changes, will increase the net unrealized loss position of F&G Holdings’ investment portfolio and, if long-term interest rates rise dramatically within a six- to twelve-month time period, certain of F&G Holdings’ products may be exposed to disintermediation risk. Disintermediation risk refers to the risk that policyholders may surrender their contracts in a rising interest rate environment, requiring F&G Holdings to liquidate assets in an unrealized loss position.

This isn’t going to be good for annuity sales!

Change in Tax Policy
Beginning in 2013, distributions from non-qualified annuity policies will be considered “investment income” for purposes of the newly enacted Medicare tax on investment income contained in the Health Care and Education Reconciliation Act of 2010. As a result, in certain circumstances a 3.8% tax (“Medicare Tax”) may be applied to some or all of the taxable portions of distributions from non-qualified annuities to individuals whose income exceeds certain threshold amounts. This new tax may have a material adverse effect on F&G Holdings’ ability to sell non-qualified annuities to individuals whose income exceeds these threshold amounts and could accelerate withdrawals due to additional tax.

Credit Agencies:  I do not understand how shortening duration could be seen as a positive.  How much lower are rates going to go 5 years into an easy money cycle?

            From Credit Agency A.M Best,

A.M. Best also notes the substantial progress that has been made in de-risking FGL's investment portfolio while also shortening the duration and strengthening its asset liability management profile. With the improvement in asset quality, the market value of FGL's investment portfolio has increased to the point where it was in a net unrealized gain position of $939 million as of June 30, 2012.

To affirm the rating of Fidelity & Guaranty Life is so outrageous it’s funny.  With a piece of garbage like HGI acting as the backing behind FG&L, and “capital strengthening” due to things like “bargain purchases” and other accounting gimmicks these analysts must be in outer space.

Fri, Oct 19 2012   Fitch Ratings has affirmed the 'B' Issuer Default Rating (IDR) and 'B/RR4' debt ratings of Harbinger Group Inc. (HRG), with a Stable  Outlook.--$500 million 10.625% senior secured notes at 'B/RR4'
TEXT-Fitch affirms Harbinger Group ratings with outlook stable
TEXT-Fitch affirms Fidelity & Guaranty Life Insurance Co

How does a “recently formed” Bermuda-based reinsurance company all of a sudden is reinsuring 3 billion in obligations?  I can’t find a single thing on FrontStreet anywhere nor how much capital they have.  I emailed the goofballs over there and they have not returned my emails as of yet.

Harbinger F and G

Harbinger F and G is the holding company for our recently acquired annuity and life insurance businesses and our proposed reinsurance business. F and G Holdings, through its insurance subsidiaries, is a provider of annuity and life insurance products in the U.S., with approximately 790,000 policy holders in the U.S. and a distribution network of approximately 300 independent marketing organizations (“IMOs”) representing approximately 25,000 agents nationwide as of March 31, 2011. At April 3, 2011, the pro forma carrying value of F and G Holdings’ investment portfolio was approximately $17.5 billion.

Front Street, an indirect wholly owned subsidiary of Harbinger F&G, is a recently formed Bermuda-based reinsurer, which has not engaged in any significant business to date. As contemplated by the terms of the F&G Stock Purchase Agreement, on May 19, 2011, a special committee of our Board (the “Special Committee”), comprised of independent directors under the rules of the NYSE, unanimously recommended to the Board for approval, (i) a reinsurance agreement (the “Reinsurance Agreement”) to be entered into by Front Street and FGL Insurance, pursuant to which Front Street would reinsure up to $3 billion of insurance obligations under annuity contracts of FGL and (ii) an investment management agreement (the “Investment Management Agreement”) to be entered into by Front Street and Harbinger Capital Partners II LP (“HCP”), an affiliate of the Harbinger Parties, pursuant to which HCP would be appointed as the investment manager of up to $1 billion of assets securing Front Street’s reinsurance obligations under the Reinsurance Agreement, which assets will be deposited in a reinsurance trust account for the benefit of FGL Insurance pursuant to a trust agreement (the “Trust Agreement”). On May 19, 2011, our Board approved the Reinsurance Agreement, the Investment Management Agreement and the Trust Agreement (collectively, such agreements and the transactions contemplated thereby, the “Front Street Reinsurance Transaction”).

Okay we have Philip Falcone handling the money, pamphlets baiting people in under the premise THEY CAN’T LOSE....... I wonder how this is going to turn out. 

Selling Fish food and inflated stock certificates is one thing but I’m completely baffled with how in the world the insurance regulators signed off on Falcone buying a life insurance division with 15 billion in assets and liabilities, AND THEN LETTING HIM ACT AS INVESTMETN ADVISOR.

Harbinger Group Inc –A Disease

Harbinger Group Inc or “HGI”  (Symbol HRG), is shameless in its growing reliance on debt financed acquisitions as a means of staying alive.  Using the same accounting schemes it used 5 years ago and got busted for (although acquitted), one really has to question the audacity of these corporate bandits.

“HRG uses the value of its portfolio investments as collateral for its own debt. HRG has pledged its Spectrum shares as part of the collateral for its 10.625%, $500 million notes.”

“To secure funds, Harbinger Capital Partners Master Fund I, Ltd., which owns 50.9% of HRG on a fully diluted basis, has also pledged all of its shares in HRG together with securities of other issuers. If there was a foreclosure or sale of the HRG shares pledged as collateral, it would be a change of control of for both HRG and Spectrum. The change would not only accelerate all of Spectrum's and HRG's debt and preferred stock, but would cause Spectrum to be unable to use its net operating losses, which could negatively affect cash flows. Spectrum would need a waiver on its term loan and revolver, and might also need a waiver on its notes, as it is required to offer to repurchase those instruments.”

Harbinger Group Inc is the sickest in the group:

Subordinated Debt:

HRG's debt and preferred stock are structurally subordinated to the claims on cash flows and assets from existing and future debt holders at SPB and F&G Life.

Here is a list of its debt issues incase your interested,

It’s passed the point of turning back, the collapse is near.  The question I have is who’s holding the bag when this turkey bites the dust?

Our ability to dispose of equity interests we hold may be limited by restrictive stockholder agreements and by the federal securities laws.
Our ability to make payments on our financial obligations will depend upon the future performance of our operating subsidiaries and their ability to generate cash flow in the future, which are subject to general economic, industry, financial, competitive, legislative, regulatory and other factors that are beyond our control. We cannot assure you that we will generate sufficient cash flow from our operating subsidiaries, or that future borrowings will be available to us, in an amount sufficient to enable us to pay our financial obligations or to fund our other liquidity needs. If the cash flow from our operating subsidiaries is insufficient, we may take actions, such as delaying or reducing investments or acquisitions, attempting to restructure or refinance our financial obligations prior to maturity, selling assets or operations or seeking additional equity capital to supplement cash flow. However, we may be unable to take any of these actions on commercially reasonable terms, or at all.

In addition, the shares of Spectrum Brands Holdings we received in the Spectrum Brands Acquisition and the shares of F&G Holdings we acquired in the Fidelity & Guaranty Acquisition are not registered under the Securities Act and are, and any other securities we acquire may be, restricted securities under the Securities Act. Our ability to sell such securities could be limited to sales pursuant to: (i) an effective registration statement under the Securities Act covering the resale of those securities, (ii) Rule 144 under the Securities Act, which, among other things, requires a specified holding period and limits the manner and volume of sales, or (iii) another applicable exemption under the Securities Act. The inability to efficiently sell restricted securities when desired or necessary may have a material adverse effect on our financial condition and liquidity, which could adversely affect our ability to service our debt.

“Financing covenants could adversely affect our financial health and prevent us from fulfilling our obligations.”

We have a significant amount of indebtedness. As of April 3, 2011, on a pro forma basis our total outstanding indebtedness (excluding the indebtedness of our subsidiaries, but including the initial notes) was $500 million. As of April 3, 2011, the total liabilities of Spectrum Brands Holdings were approximately $2.8 billion, including trade payables. As of March 31, 2011, the total liabilities of F&G Holdings were approximately $19.2 billion, including approximately $14.8 billion in annuity contract holder funds and approximately $3.8 billion in future policy benefits. Our and our directly held subsidiaries’ significant indebtedness and other financing arrangements could have material consequences.
Any of these risks could impact our ability to fund our operations or limit our ability to expand our business, which could have a material adverse effect on our business, financial condition, liquidity and results of operations.

They’ll lie up to the very end, just like last time.

November 11, 2008 we company pumping EBITDA...

"For the full year, revenue grew 5% due mainly to foreign exchange. Sales were up 1% excluding foreign exchange. Consolidated adjusted EBITDA was $281.3 million for the year, up slightly over last year. Of note, our largest business unit, global batteries and personal care exceeded our expectations for annual adjusted EBITDA delivering year-over-year growth of 12.4% for fiscal 2008."

3 Months Later....

Spectrum Brands Files for BK in Febuary 2009

Spectrum Brand's old common stock has been extinguished and no financial distribution will be made to holders of the old common stock.

Well thats all I got in me for now.  There is so much here its insane.  I plan on getting into the merger with Stanley Black and Decker next.  Feel free to email me with any questions.

Donny Shekels

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