united states district court southern...

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK

In re: HARBINGER CAPITAL PARTNERS FUNDS INVESTOR LITIGATION

Case No. 12-CV-1244-AJN ECF CASE

MEMORANDUM OF LAW IN SUPPORT OF THE HARBINGER DEFENDANTS’ MOTION TO DISMISS THE THIRD AMENDED COMPLAINT

PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP 1285 Avenue of the Americas New York, New York 10019-6064 (212) 373-3000 Counsel for the Harbinger Defendants

Case 1:12-cv-01244-AJN Document 66 Filed 10/25/12 of 31

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Table of Contents

TABLE OF AUTHORITIES .............................................................................................. ii

PRELIMINARY STATEMENT ......................................................................................... 1

FACTUAL ALLEGATIONS .............................................................................................. 2

A. The Harbinger Funds ............................................................................................... 2

B. The Confidential Offering Memoranda ................................................................... 3

C. The Investment in LightSquared ............................................................................. 4

D. Other Unrelated Matters Alleged in the Complaint ................................................. 7

E. Plaintiffs’ Purported Causes of Action .................................................................... 8

ARGUMENT ....................................................................................................................... 9

I. Legal Standard ....................................................................................................... 10

II. SLUSA Precludes the Purported Class Claims. .................................................... 10

III. Plaintiffs Fail to Plead Their Direct Claims with Particularity. ............................. 13

IV. The Purported Direct Claims Fail as a Matter of Law. .......................................... 15

A. Plaintiffs’ Breach of Contract Claim Should Be Dismissed. ..................... 15

B. Plaintiffs’ Remaining Direct Claims Are Barred as Duplicative. .............. 17

C. Duplicativeness Aside, Plaintiffs’ Direct Claims for Unjust Enrichment and Breach of Fiduciary Duty Should Be Dismissed. ........... 18

D. Plaintiffs’ Fraud Claim Should Be Dismissed. .......................................... 19

E. Plaintiffs’ Negligent Misrepresentation Claim Should Be Dismissed. ..... 21

F. Plaintiffs’ Unjust Enrichment Claim Should Be Dismissed. ..................... 22

V. Plaintiffs’ Derivative Claims Should Be Dismissed. ............................................. 23

A. Plaintiffs’ Derivative Breach of Fiduciary Duty Claims Under Delaware Law Should Be Dismissed. ............................................ 23

B. Plaintiffs’ Derivative Breach of Fiduciary Duty Claim Under Cayman Law Should Be Dismissed. .............................................. 24

CONCLUSION .................................................................................................................. 25


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TABLE OF AUTHORITIES

Page(s) CASES

ABF Capital Management v. Askin, 957 F. Supp. 1308 (S.D.N.Y. 1997) ...................................................................... 19, 23

Abu Dhabi Comm. Bank v. Morgan Stanley & Co., 651 F. Supp. 2d 155 (S.D.N.Y. 2009) ......................................................................... 20

Acito v. IMCERA Group, Inc., 47 F.3d 47 (2d Cir. 1995) ............................................................................................ 15

Agilent Techs., Inc. v. Kirkland, No. 3512-VCS, 2010 WL 610725 (Del. Ch. Feb. 18, 2010) ....................................... 22

Ashcroft v. Iqbal, 556 U.S. 662 (2009) ................................................................................................. 2, 10

ATSI Commc’n, Inc. v. Shaar Fund, Ltd., 493 F.3d 87 (2d Cir. 2007) .......................................................................................... 14

In re Beacon Assocs. Litig., 745 F. Supp. 2d 386 (S.D.N.Y. 2010) ......................................................................... 10

Chrysler Capital Corp. v. Hilltop Egg Farms, Inc., 514 N.Y.S.2d 1002 (3d Dep’t 1987) ............................................................................ 17

Cobalt Partners, L.P. v. GSC Capital Corp., 944 N.Y.S.2d 30 (1st Dep’t 2012) ............................................................................... 22

Crigger v. Fahnestock & Co., Inc., 443 F.3d 230 (2d Cir. 2006) ........................................................................................ 21

Dalton v. Educ. Testing Serv., 87 N.Y.2d 384 (1995) .................................................................................................. 17

Daly v. Castro Llanes, 30 F. Supp. 2d 407 (S.D.N.Y. 1998) ........................................................................... 13

Druck Corp. v. Macro Fund, Ltd., 290 F. App’x 441 (2d Cir. 2008) ................................................................................. 24

DynCorp v. GTE Corp., 215 F. Supp. 2d 308 (S.D.N.Y. 2002) ......................................................................... 22

F.W.J. Realty Corp. v. Cnty. of Suffolk, 901 N.Y.S.2d 674 (2d Dep’t 2010) .............................................................................. 16


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Feiner Family Trust v. Excelera Inc., No. 10 Civ. 3431, 2010 WL 3184482 (S.D.N.Y. Aug. 9, 2010) ................................. 12

Frota v. Prudential-Bache Sec., Inc., 639 F. Supp. 1186 (S.D.N.Y. 1986) ............................................................................ 14

Furia v. Furia, 498 N.Y.S.2d 12 (2d Dep’t 1986) ................................................................................ 15

Gale v. Bershad, No. Civ. A. 15714, 1998 WL 118022 (Del. Ch. Mar. 4, 1998) ................................... 18

Gardner v. Parker, [2004] EWCA Civ. 781, 2004 WL 1174334 (appeal taken from Eng.) ...................... 19

Goldman v. Metro. Life Ins. Co., 5 N.Y.3d 561 (2005) .............................................................................................. 18, 23

Grayson v. Imagination Station, No. 5051-CC, 2010 WL 3221951 (Del. Ch. Aug. 16, 2010) ....................................... 18

Greenman-Pedersen, Inc. v. Levine, 829 N.Y.S.2d 107 (1st Dep’t 2007) ............................................................................. 18

Guttman v. Huang, 823 A.2d 492 (Del. Ch. 2003) ..................................................................................... 24

Hampshire Equity Partners II, L.P. v. Teradyne, Inc., No. 04 Civ. 3318, 2005 WL 736217 (S.D.N.Y. Mar. 30, 2005) ................................. 13

Harsco Corp. v. Segui, 91 F.3d 337 (2d Cir. 1996) .......................................................................................... 15

Hydro Invs., Inc. v. Trafalgar Power Inc., 227 F.3d 8 (2d Cir. 2000) ............................................................................................ 22

Inversiones, S.L. v. Cementos Portland Valderrivas, S.A., 34 A.3d 1074 (Del. 2011) ............................................................................................ 24

Kalnit v. Eichler, 264 F.2d 131 (2d Cir. 2001) ....................................................................................... 20

Kaye v. Grossman, 202 F.3d 611 (2d Cir. 2000) ........................................................................................ 22

Keefe v. New York Law School, 897 N.Y.S.2d 94 (1st Dep’t 2010) ............................................................................... 16


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In re Kingate Mgmt. Ltd. Litig., No. 09 Civ. 5386, 2011 WL 1362106 (S.D.N.Y. Mar. 30, 2011) ............................... 11

Kramer v. Time Warner Inc., 937 F.2d 767 (2d Cir. 1991) ........................................................................................ 10

Krock v. Lipsay, 97 F.3d 640 (2d Cir. 1996) .......................................................................................... 19

Lasky v. Shearson Lehman Bros. Inc., 139 F.R.D. 597 (S.D.N.Y. 1991) ................................................................................. 14

In re Leslie Fay Cos., Inc. Sec. Litig., 918 F. Supp. 749 (S.D.N.Y. 1996) .............................................................................. 13

Lewis v. Rosenfeld, 138 F. Supp. 2d 466 (S.D.N.Y. 2001) ......................................................................... 13

Marino v. Grupo Mundial Tenedora, S.A., 810 F. Supp. 2d 601 (S.D.N.Y. 2011) ......................................................................... 18

Matsumura v. Benihana Nat’l Corp., 542 F. Supp. 2d 245 (S.D.N.Y. 2008) ......................................................................... 19

Md. Cas. Co. v. Cont’l Cas. Co., 332 F.3d 145 (2d Cir. 2003) ........................................................................................ 15

Merit Grp., LLC v. Sint Maarten Int’l Telecommc’ns Servs., NV, No. 08 Civ. 3496, 2009 WL 3053739 (S.D.N.Y. Sept. 24, 2009) ............................... 15

In re Merkin, 817 F. Supp. 2d 346 (S.D.N.Y. 2011) ................................................................... 11, 17

Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit, 547 U.S. 71 (2006) ................................................................................................. 11, 13

Parfi Holding AB v. Mirror Image Internet, Inc., 954 A.2d 911 (Del. Ch. 2008) ..................................................................................... 23

In re Parmalat Sec. Litig., 501 F. Supp. 2d 560 (S.D.N.Y. 2007) ......................................................................... 13

Redtail Leasing, Inc. v. Bellezza, No. 95 Civ. 5191, 1997 WL 603496 (S.D.N.Y. Sept. 30, 1997) ................................. 23

Romano v. Kazacos, 609 F.3d 512 (2d Cir. 2010) .................................................................................. 11, 13


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Rombach v. Chang, 355 F.3d 164 (2d Cir. 2004) .................................................................................. 13, 14

Rothman v. Gregor, 220 F.3d 81 (2d Cir. 2000) ......................................................................................... 10

S. Cherry St. LLC v. Hennessee Grp. LLC (In re Bayou Hedge Fund Litig.), 534 F. Supp. 2d 405 (S.D.N.Y. 2007) ......................................................................... 10

Salinger v. Projectavision, Inc., 972 F. Supp. 222 (S.D.N.Y. 1997) .............................................................................. 15

San Diego Cnty. Emps. Ret. Ass’n v. Maounis, 749 F. Supp. 2d 104 (S.D.N.Y. 2010) ......................................................................... 19

Tellabs Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007) ..................................................................................................... 20

Tooley v. Donaldson, Lufkin, & Jenrette, Inc., 845 A.2d 1031 (Del. 2004) .......................................................................................... 18

Tsilogiannis v. 53-11 90th St. Assocs., 739 N.Y.S.2d 633 (2d Dep’t 2002) .............................................................................. 18

VLIW Tech., LLC v. Hewlett-Packard Co., 840 A.2d 606 (Del. 2003) ............................................................................................ 15

Wynn v. AC Rochester, 273 F.3d 153 (2d Cir. 2001) ........................................................................................ 19

Zerman v. Ball, 735 F.2d 15 (2d Cir. 1984) ......................................................................................... 14

STATUTES, REGULATIONS, AND RULES

15 U.S.C. § 77r(b)(1)(A)-(B) ............................................................................................. 11

15 U.S.C. § 78bb .......................................................................................................... 10, 11

28 U.S.C. § 1332 ................................................................................................................ 10

6 Del. C. § 17-1002 ............................................................................................................ 23

Fed. R. Civ. P. 9(b) .................................................................................................. 2, 13, 15


Defendants Harbinger Capital Partners LLC; Harbinger Holdings, LLC; Harbinger

Capital Partners GP, L.L.C.; Harbinger Capital Partners Special Situations GP, LLC; and Philip

A. Falcone (collectively, the “Harbinger Defendants”), by and through their attorneys,

respectfully request that the Court dismiss the Third Amended Complaint (the “TAC”) with

prejudice.1

PRELIMINARY STATEMENT

The plaintiffs in this action are wealthy and sophisticated investors who purport to

represent a class of investors in certain Harbinger funds. Although their Third Amended

Complaint contains nearly 85 pages of wide-ranging allegations against the Harbinger

Defendants, their claims boil down to (1) a challenge to certain Harbinger funds’ investment in a

company called LightSquared, which is now in bankruptcy; (2) a recitation of the subject matter

of pending SEC actions against certain Harbinger Defendants; and (3) allegations that certain

Harbinger Defendants improperly settled a lawsuit related to an attempted merger.

While plaintiffs may be unhappy with these developments—especially the current status

of the LightSquared investment—their allegations do not support a viable cause of action. The

relevant contracts unambiguously gave the Harbinger Defendants broad discretion to make

investments like LightSquared. And plaintiffs do not adequately allege any fraud, or breach of

fiduciary duty, or negligent misrepresentation, because plaintiffs cannot point to any specific

misrepresentations or duties that were violated.

Plaintiffs’ claims also fail for other reasons. First, the class claims are precluded by

SLUSA because they involve allegations of fraud in connection with the purchase or sale of

1 The TAC also names Harbinger Capital Partners Special Situations Offshore GP, L.L.C. as a defendant, but that

entity has not been served with any complaint in this action. If service is made during the pendency of this motion, counsel for the Harbinger Defendants intend to assert all applicable arguments on its behalf.


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“covered securities.” Second, plaintiffs have failed to plead their claims—which, however

denominated, sound in fraud—with the particularity required by Rule 9(b). Third, all of

plaintiffs’ tort claims, including their fraud, negligent misrepresentation, and fiduciary duty

claims, are barred because they are duplicative of their contract claim. Fourth, even if they were

not barred, plaintiffs have failed to allege essential elements of their contract and tort claims.

The Court should dismiss the claims against the Harbinger Defendants, and because

plaintiffs have failed adequately to plead these claims on their fourth attempt, the claims should

be dismissed with prejudice.

FACTUAL ALLEGATIONS2

A. The Harbinger Funds

The Harbinger Defendants, based in New York, manage a number of private investment

funds. The seven funds at issue in this action (collectively, the “Funds”) are arranged in master-

feeder structures. Four of the Funds—nominal defendants Harbinger Capital Partners Fund I,

L.P. (“Fund I”) and Harbinger Capital Partners Offshore Fund I, Ltd. (“Offshore Fund I”), and

non-parties Harbinger Capital Partners Fund II, L.P. (“Fund II”) and Harbinger Capital Partners

Offshore Fund II, Ltd. (“Offshore Fund II”)—feed into nominal defendant Harbinger Capital

Partners Master Fund I, Ltd. (the “Master Fund”). (TAC ¶¶ 25-26, 40-41, 44.) Nominal

defendant Harbinger Capital Partners Special Situations Offshore Fund L.P. (the “Special

Situations Offshore Fund”) feeds into nominal defendant Harbinger Capital Partners Special

Situations Fund L.P. (the “Special Situations Fund”). (TAC ¶¶ 42-43.)

2 For purposes of this motion the Court must accept as true the factual allegations in the TAC. See Ashcroft v.

Iqbal, 556 U.S. 662, 678 (2009). Should the Court deny this motion and the case proceed, the Harbinger Defendants would dispute many of the allegations set forth in the TAC and summarized herein.


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Defendant Harbinger Capital Partners GP, L.L.C. (“HCP GP”) is the general partner of

Fund I and Fund II, which are both Delaware limited partnerships. (TAC ¶¶ 35, 25, 40.)

Defendant Harbinger Capital Partners LLC (“HCP”) is the investment advisor of the Master

Fund and the investment manager of Offshore Fund I and Offshore Fund II, all three of which

are Cayman exempted companies. (TAC ¶¶ 31, 26, 41, 44.) Defendant Harbinger Capital

Partners Special Situations GP, LLC (“Special Situations GP”) is the general partner of the

Special Situations Fund, which is a Delaware limited partnership. (TAC ¶¶ 36, 42.) Defendant

Harbinger Capital Partners Special Situations Offshore GP, L.L.C. (“Special Situations Offshore

GP”)3 is the general partner of the Special Situations Offshore Fund, which is a Cayman

exempted limited partnership. (TAC ¶¶ 37, 43; see Robinson Decl. ¶ 12.)4 Defendant Harbinger

Holdings, LLC (“Holdings”) is the manager of HCP GP, HCP, and Special Situations GP, and

the managing member of Special Situations Offshore GP. (TAC ¶¶ 32, 46, 47.) Finally,

Defendant Falcone is the managing member of Holdings. (TAC ¶ 38.)

Plaintiffs Lili Schad, Anil Bhardwaj, the Edward M. Armfield Sr. Foundation Inc., and

Dr. Randall Lang (collectively, “Plaintiffs”) invested in certain of the Funds. (TAC ¶¶ 27-30.)

B. The Confidential Offering Memoranda

The Funds (except the Master Fund, which does not accept investments other than from

its feeder funds) issued confidential offering memoranda (“COMs”) to potential investors. Each

COM explains the fund’s structure, its anticipated investment strategy, the management fees to

3 As noted above, Special Situations Offshore GP has not been served with any complaint in this action.

4 Citations to “Robinson Decl.” refer to the Declaration of Hector George Robinson in Support of Harbinger Defendants’ Motion to Dismiss Plaintiffs’ Third Amended Complaint.


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be paid from investments, and the mechanics of withdrawals. These descriptions are expressly

qualified by the actual terms of the relevant subscription agreements and formation documents.5

Each COM contains extensive risk disclosures. For example, the October 2007 COM for

Fund I (which contains disclosures similar to all of the COMs) warns:

IMPORTANT NOTICE: THE PARTNERSHIP IS A HIGHLY SPECULATIVE INVESTMENT AND IS NOT INTENDED AS A COMPLETE INVESTMENT PROGRAM. IT IS DESIGNED ONLY FOR SOPHISTICATED PERSONS THAT CAN BEAR THE ECONOMIC RISK OF THE LOSS OF THEIR INVESTMENT . . . AND THAT ARE IN A POSITION TO PARTICIPATE IN A LONG-TERM ILLIQUID INVESTMENT PORTFOLIO. . . . THERE CAN BE NO ASSURANCES THAT THE PARTNERSHIP WILL ACHIEVE ITS INVESTMENT OBJECTIVES.

(Ex. 1 at 10 (bold and italics in original).) A section titled “Certain Risk Factors” further

discloses risks associated with (among other things) volatility, limited liquidity, valuation,

distressed securities, investments in “special situations,” an “activist strategy,” and lack of

diversification. (Ex. 1 at 37-49.)

Plaintiffs invested in Fund I, Offshore Fund I, and the Special Situations Offshore Fund.6

(TAC ¶¶ 27-30.) Investments in these funds were made pursuant to subscription agreements

between the investors and the funds. (See TAC ¶ 253.)

C. The Investment in LightSquared

Among other investments made during the relevant period,7 the Funds purchased debt

and equity issued by SkyTerra Communications, Inc. (“SkyTerra”). (TAC ¶¶ 50, 52.)

5 (Ex. 1 (Fund I October 2007 COM) at i; Ex. 2 (Offshore Fund I October 2006 COM) at ii; Ex. 3 (Fund II April

2009 COM) at 1, 94; Ex. 4 (Offshore Fund II April 2009 COM) at vi, 1; Ex. 5 (Special Situations Offshore Fund October 2006 COM) at ii; Ex. 6 (Special Situations Fund December 2006 PPM) at ii.) Citations to “Ex.” or “Exs.” refer to exhibits attached to the Declaration of Daniel J. Leffell in Support of the Harbinger Defendants’ Motion to Dismiss the Third Amended Complaint.

6 The TAC does not allege that any Plaintiff invested in Fund II, Offshore Fund II, or the Special Situations Fund. (See TAC ¶¶ 27-30.)


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SkyTerra was a publicly traded company based in Virginia (TAC ¶ 50) whose business

involved the creation and operation of a voice and data communications network with both

satellite and terrestrial radio components. (Ex. 7 ¶¶ 3-4.) The Federal Communications

Commission allocates certain frequency ranges to such networks. (See Ex. 8 at 1 n.2.) Pursuant

to a 1989 FCC authorization, in 1996 SkyTerra began to operate a network using portions of the

L-Band, the frequency range from one to two gigahertz. (See Ex. 9 ¶¶ 2-3 & p. 1 n.2.)

In 2003, the FCC adopted rules that allowed certain reserved frequency ranges (including

the L-Band) to be “re-used” for terrestrial-only networks. (Ex. 10 ¶ 1.) The rules permitting

such “re-use” are known as the ancillary terrestrial component (“ATC”) rules. (See Ex. 9 ¶ 14.)

In November 2004 the FCC granted SkyTerra the authority to operate an ATC network for

certain users on portions of the L-Band. (See Exs. 11 ¶ 1 & 9 ¶ 4.)

The Funds purchased SkyTerra debt and equity, both in open-market transactions and

from various companies and investment firms. (See TAC ¶¶ 52-59.) In February 2008, Fund I

purchased more than 14 million shares of SkyTerra stock from a competing mobile satellite

company, TerreStar Corp., in which Harbinger funds held a 44.6% ownership interest.8

Harbinger then appointed two members of TerreStar’s eight-member board.9 On August 22,

2008, SkyTerra and the Funds applied to the FCC for approval of the Funds’ acquisition of

SkyTerra. (See TAC ¶ 57.) In September 2008, the Funds purchased more than 23 million

7 The Funds’ holdings also included mortgage-related positions (see TAC ¶ 49) and investments in consumer

products manufacturers (see TAC ¶¶ 110, 120), and other securities and instruments.

8 (Ex. 12; see also TAC ¶ 54 (alleging that “Harbinger purchased 14,407,343 shares of non-voting common stock of SkyTerra from another company”).)

9 (Ex. 13 at 3.)


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shares of SkyTerra stock from TerreStar.10 By that point, the Funds had become TerreStar’s

largest shareholder, holding about 49% of its common stock.11 On March 26, 2010, the FCC

approved the Funds’ acquisition of SkyTerra. (See Ex. 7 at 2.) Shortly thereafter, the Funds

closed on their acquisition of SkyTerra, thereby taking the company private. (See TAC ¶ 64.)

In July 2010 the company was re-launched as “LightSquared.” In November 2010

LightSquared applied to the FCC for certain technical modifications to its existing ATC

authorization. During the public comment period, the GPS industry asserted for the first time12

that GPS devices might be susceptible to “receiver overload” from neighboring transmissions

within LightSquared’s own allotted spectrum. (See Ex. 17 ¶ 54.) The potential for receiver

overload arose because legacy GPS devices improperly received signals from outside the GPS

spectrum. (See id.)

In January 2011, the FCC granted LightSquared’s application (TAC ¶ 67), but attached

conditions to address the receiver overload concerns recently raised by the GPS industry (Ex. 9

¶¶ 1, 39-43). The FCC order expressly noted that if “outcomes consistent with the purpose of the

[ATC rules] and the public interest” did not “actually materialize,” the FCC could “take further

action to modify LightSquared’s ATC authority.” (Id. ¶ 35.)

On February 14, 2012, the FCC proposed vacating the January 2011 order and modifying

LightSquared’s ATC authority (Ex. 18; see also TAC ¶ 75) and the next day issued a public

notice inviting comments on its proposal (Ex. 19). The FCC has not yet issued a final decision

10 (Ex. 14; TAC ¶ 58 (alleging that a “company sold 23,626,074 shares of [SkyTerra] non-voting common stock to

Harbinger”).)

11 (See Exs. 14, 15 at 28.)

12 In September 2012 House testimony, the Chiefs of the FCC’s Office of Engineering and Technology and the FCC’s International Bureau criticized the GPS industry for failing to raise this issue earlier despite “numerous opportunities” to do so (Ex. 16 at 2) going back to 2001. (Id. at 6-9.)


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with respect to the January 2011 order. The TAC alleges that, because LightSquared was unable

to generate revenues and was unable to resolve the FCC issues in its favor, “LightSquared’s

business began to unravel.” (TAC ¶ 90.) LightSquared and its subsidiaries filed for Chapter 11

bankruptcy on May 14, 2012. (Id. ¶ 99.)

D. Other Unrelated Matters Alleged in the Complaint

On June 27, 2012, the Securities and Exchange Commission filed a civil complaint

against, among others, defendants Special Situations GP and Falcone alleging violations of the

Securities Act and the Securities Exchange Act based on an alleged “short squeeze” of bonds

issued by a bathroom-fixture company called MAAX Holdings, Inc. (See TAC ¶ 110; Ex. 20

(complaint filed in SEC v. Falcone, et al., 12 Civ. 5027 (S.D.N.Y.)).) The SEC complaint

alleges that the “short squeeze” was carried out through investments by the Master Fund and the

Special Situations Fund.13 (Ex. 20 ¶ 4.)

The same day, the SEC filed a separate civil complaint against, among others, defendants

HCP and Falcone alleging violations of the Securities Act, the Securities Exchange Act, and the

Investment Advisers Act based (1) on a loan transaction between Falcone and the Special

Situations Fund in 2009, and (2) alleged “preferential treatment” of certain investors in Fund I

and Offshore Fund I. (See TAC ¶¶ 103-09; Ex. 21 (complaint filed in SEC v. Harbinger Capital

Partners LLC, et al., 12 Civ. 5028 (S.D.N.Y.)) ¶¶ 14, 16, 60-65.)

In addition, defendant Special Situations GP and certain non-party Harbinger entities

were defendants in a lawsuit initiated in 2006 related to the potential acquisition of Applica Inc.

by NACCO Industries, Inc. NACCO sued Applica and the Harbinger entities, alleging that the

Harbinger entities had, in 2006, improperly interfered with the potential acquisition. (See TAC

13 Also on June 27, 2012, the SEC instituted and settled an administrative proceeding against HCP relating to

violations of Rule 105 of Regulation M of the Exchange Act. (TAC ¶ 114.)


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¶ 122.) The matter settled in February 2011 for $60 million. (Ex. 22 (NACCO Industries, Inc.

8-K dated February 15, 2011); TAC ¶ 123.)

E. Plaintiffs’ Purported Causes of Action

The TAC asserts several theories of wrongdoing based on the factual allegations

summarized above. First, Plaintiffs allege that the Funds’ investment in LightSquared “deviated

from [the] objective” of “a diversified portfolio focused primarily on distressed debt and proper

risk management.” (TAC ¶ 130.) Plaintiffs allege that Falcone improperly pursued a “personal

vision” that “put his own interests ahead of his investors” (id. ¶ 131), and that the Harbinger

Defendants breached their duties to the Funds “by concentrating such a large portion of the

Funds in a single, high-risk venture.” (Id. ¶ 132.) Plaintiffs allege that the Harbinger Defendants

made purportedly “false and misleading” statements related to LightSquared, citing (1) excerpts

from offering documents about the Funds’ anticipated investment strategy, risk management, and

valuation procedures (id. ¶¶ 145-51, 191-97), and (2) “post-purchase . . . communications to

investors” (id. at 48) about LightSquared’s investment prospects (id. ¶¶ 152-90).

Second, Plaintiffs allege that the existence of the SEC investigation and enforcement

actions somehow prevented LightSquared from “find[ing] a political solution” to the GPS

overload issue allegedly hindering implementation of its network. (Id. ¶ 136.)

Third, with respect to the Applica/NACCO dispute, Plaintiffs allege that Defendant

Falcone “personally, through the Master Fund and the Special Situations Fund,” acquired

“sizable positions” in Applica, and that Falcone “orchestrated an acquisition of Applica” to

frustrate NACCO’s efforts to acquire Applica. (Id. ¶¶ 118-21.) Plaintiffs allege that this resulted

in NACCO suing Applica and two of the Funds, which “subjected the Funds to unnecessary risk”

and was improperly settled using monies from the Funds. (Id. ¶¶ 122-23, 140.)


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Plaintiffs assert five direct claims against the Harbinger Defendants: breach of contract,

breach of fiduciary duty, fraud, negligent misrepresentation, and unjust enrichment. (Id. ¶¶ 246-

78.) These claims are asserted on behalf of a putative class of all investors (except Defendants

and their affiliates) who purchased or acquired interests in the Funds (except the Master Fund)

prior to December 31, 2011. (Id. ¶¶ 240-45.)

Plaintiffs also assert derivative claims for breach of fiduciary duty against certain

Harbinger Defendants. These claims are asserted under Cayman and Delaware law on behalf of

five Funds as nominal defendants: the Master Fund, Fund I, Offshore Fund I, the Special

Situations Fund, and the Special Situations Offshore Fund. (Id. ¶¶ 279-94.) The TAC contains

allegations of continuous ownership and demand futility as to some—but, importantly, not all—

of these nominal defendants. (See id. ¶¶ 27-30, 212-230.)

Regarding damages, Plaintiffs allege that as a result of the activities related to

LightSquared, the Funds lost almost all of their $3 billion investment in LightSquared. (Id.

¶ 206.) Plaintiffs do not mention the SEC actions or the NACCO lawsuit in the TAC’s

“Damages and Loss Causation” section, and do not in that section allege or enumerate any

damages resulting from those activities. (Id. ¶¶ 203-06.)

ARGUMENT14

For the reasons set forth below, the TAC fails to state any claim against the Harbinger

Defendants and should be dismissed in its entirety with prejudice.

14 The Harbinger Defendants also join all applicable arguments advanced by Harbert Management Corporation

and Harbert Fund Advisors, Inc. (together, the “Harbert Defendants”) in support of their motion to dismiss, particularly the argument that the claims of two Plaintiffs—Armfield and Lang—are time-barred. See Harbert Defendants’ Memorandum of Law in Support of Motion to Dismiss, In re Harbinger Cap. Partners Funds Inv. Litig., No. 12-CV-1244-AJN (S.D.N.Y. Oct. 25, 2012).


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I. Legal Standard

To survive a motion to dismiss, a complaint must contain sufficient factual allegations to

“state a claim for relief that is plausible on its face.” Ashcroft, 556 U.S. at 678 (citation omitted).

While the Court must accept “well-pleaded factual allegations” as true, it should not accept

“legal conclusions” or “[t]hreadbare recitals of the elements of a cause of action.” Id. at 678-79.

The Court is permitted to “consider the full text of documents that are quoted in the

complaint or documents that the plaintiff either possessed or knew about and relied upon in

bringing the suit.” S. Cherry St. LLC v. Hennessee Grp. LLC (In re Bayou Hedge Fund Litig.),

534 F. Supp. 2d 405, 413 (S.D.N.Y. 2007) (citing Rothman v. Gregor, 220 F.3d 81, 88-89 (2d

Cir. 2000)). The Court may also consider public records, including SEC filings. See Kramer v.

Time Warner Inc., 937 F.2d 767, 773-74 (2d Cir. 1991).

II. SLUSA Precludes the Purported Class Claims.

All of Plaintiffs’ purported class claims are precluded by the Securities Litigation

Uniform Standards Act of 1998 (“SLUSA”). SLUSA mandates dismissal of any “covered class

action” based on state law that concerns a misrepresentation or omission of a material fact, or the

use of a manipulative or deceptive device or contrivance, “in connection with the purchase or

sale of a covered security.” 15 U.S.C. § 78bb(f)(1)(A)-(B); see also In re Beacon Assocs. Litig.,

745 F. Supp. 2d 386, 429 (S.D.N.Y. 2010). This action is a “covered class action” under 15

U.S.C. § 78bb(f)(5)(B)(i)(I) because it seeks damages on behalf of more than 50 prospective

class members15 and alleges that common questions of law and fact predominate. (TAC ¶ 242.)

The suit is based on state law, and the purported class claims all allege “explicit claim[s] of fraud

15 The TAC alleges that the Class Action Fairness Act (“CAFA”), 28 U.S.C. § 1332(d)(2), confers diversity

jurisdiction. (TAC ¶ 23.) Because CAFA only provides jurisdiction where the proposed class contains at least 100 members, 28 U.S.C. § 1332(d)(5)(B), this allegation (which must be accepted as true on this motion)


11

or misrepresentation” or “other garden-variety state law claims that sound in fraud.”16 In re

Merkin, 817 F. Supp. 2d 346, 359 (S.D.N.Y. 2011) (citation omitted).

The final element of preclusion also exists here: the alleged misrepresentations and

manipulations are in connection with the purchase or sale of a covered security. Covered

securities include securities that were “listed, or authorized for listing,” on the New York Stock

Exchange, NASDAQ, or another “national securities exchange,” 15 U.S.C. § 77r(b)(1)(A)-(B),17

at the time when the alleged misrepresentation or manipulative conduct occurred.18 15 U.S.C.

§ 78bb(f)(5)(E).

Here, two of the asserted bases for Plaintiffs’ claims involve the purchase or sale of a

covered security. First, Plaintiffs devote an entire section of the TAC to allegations concerning

the Applica/NACCO dispute, an instance where Defendant Falcone allegedly “caused damage to

the Funds when he used confidential inside information to scupper a merger between two

companies.” (TAC ¶ 118.) Plaintiffs allege that “Falcone personally, through the Master Fund

and the Special Situations Fund,” acquired “sizable positions” in Applica (id. ¶ 120), and that

satisfies SLUSA’s requirement that a “covered class action” seek damages on behalf of more than 50 prospective class members. 15 U.S.C. § 78bb(f)(5)(B)(i)(I).

16 See, e.g., Romano v. Kazacos, 609 F.3d 512 (2d Cir. 2010) (SLUSA preclusion of claims of negligent misrepresentation, breach of contract, and breach of fiduciary duty); In re Kingate Mgmt. Ltd. Litig., No. 09 Civ. 5386, 2011 WL 1362106 (S.D.N.Y. Mar. 30, 2011) (SLUSA preclusion of claims for common law fraud, negligent misrepresentation, breach of fiduciary duty, breach of contract, and unjust enrichment). Here, the purported claims for fraud, negligent misrepresentation, breach of fiduciary duty, and unjust enrichment plainly involve allegations of “fraud or misrepresentation,” Merkin, 817 F. Supp. 2d at 359, and the purported claim for breach of contract “sound[s]” in fraud, id., because it expressly alleges “numerous false and misleading representations.” (TAC ¶ 255.)

17 SLUSA’s definition of “covered security” incorporates certain standards in the Securities Act of 1933. 15 U.S.C. § 78bb(f)(5)(E).

18 It is irrelevant that Plaintiffs did not themselves hold “covered securities,” but instead held limited partnership interests or shares in certain of the Funds, which, in turn, held “covered securities.” See Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit, 547 U.S. 71, 85 (2006) (“[I]t is enough that the fraud alleged ‘coincide’ with a [covered] securities transaction—whether by the plaintiff or by someone else.”); In re Kingate Mgmt. Ltd. Litig., 2011 WL 1362106, at *7 (specifically rejecting argument that SLUSA preclusion did not apply where plaintiffs “purchased shares in the Funds, rather than any covered securities within the meaning of SLUSA”).


12

Falcone thus orchestrated an acquisition of Applica that ended the NACCO effort to acquire

Applica. (Id. ¶¶ 118-21.) This activity, Plaintiffs allege, resulted in NACCO filing a lawsuit that

was settled using monies from the Funds, thus damaging the Funds. (Id. ¶¶ 122-23, 140.)

The two Funds’ positions in Applica (Ex. 23) were positions in a covered security

because Applica’s stock, at the time, was traded on the New York Stock Exchange (Ex. 24). The

TAC alleges that NACCO sued Harbinger “for fraud related to false and misleading statements

in SEC filings” concerning the Funds’ purchases of Applica stock (TAC ¶ 122), and that the

Funds improperly paid part of a $60 million settlement “to settle serious charges of fraudulent

and tortious behavior by Falcone himself.” (TAC ¶ 123.) These allegations are incorporated

into each of Plaintiffs’ class claims. (TAC ¶¶ 246, 252, 262, 267, 273.) Accordingly, because

Plaintiffs’ class claims are based on alleged misrepresentations in connection with the purchase

of a covered security, SLUSA requires those claims to be dismissed.19

Second, Plaintiffs allege that the Funds made misrepresentations in connection with their

effort to gain control of SkyTerra and develop LightSquared. (See TAC ¶¶ 52-64, 147.) This

effort was connected to the Funds’ investment in covered securities issued by TerreStar Corp.20

As described above, in 2008 the Funds held substantial positions in TerreStar’s common stock21

and purchased nearly 40 million shares of SkyTerra stock from TerreStar. See supra at 5.

TerreStar’s 8-K explicitly connected the Funds’ September 2008 purchase of SkyTerra stock to

Harbinger’s “pending application to acquire control of SkyTerra.” (Ex. 14 at 2.) The clear

19 See, e.g., Feiner Family Trust v. Xcelera Inc., No. 10 Civ. 3431, 2010 WL 3184482, at *4-5 (S.D.N.Y. Aug. 9,

2010) (SLUSA preemption applied to fraud claim where alleged fraudulent scheme “coincided with the solicitation and . . . purchase of shares” of covered securities “by an alleged agent of Defendants”).

20 TerreStar’s equity is a “covered security” because it was traded on NASDAQ, a national securities exchange, at the time of the alleged misconduct. (Ex. 25.)

21 (Exs. 26 (indicating Master Fund’s holdings of more than 26 million shares) & 27 (indicating Special Situations Fund’s holdings of more than 10 million shares).


13

relationship between the Funds’ substantial investment in TerreStar’s covered securities and the

Funds’ alleged misrepresentations related to LightSquared satisfies SLUSA’s “in connection

with” requirement.22 SLUSA thus requires dismissal of all five class claims.

III. Plaintiffs Fail to Plead Their Direct Claims with Particularity.

Plaintiffs’ direct claims should be dismissed because they have failed to plead those

claims with the “particularity” required by Fed. R. Civ. P. 9(b). The particularity requirement

applies to all claims “alleging fraud or mistake,” id., including claims that “sound in fraud[]” or

are predicated on allegations of fraud. Rombach v. Chang, 355 F.3d 164, 166 (2d Cir. 2004).

Here, all of Plaintiffs’ direct claims either allege fraud directly or “sound in fraud.”23

As explained above, the TAC alleges that the LightSquared investment was inconsistent with

representations made in the Funds’ offering documents and was misrepresented by the Harbinger

Defendants after Plaintiffs invested in the Funds. The TAC also alleges that Falcone made an

improper loan that was not timely disclosed, that Defendants engaged in an improper “short

squeeze” in high yield bonds, and that Defendants improperly used confidential inside

information to interfere with the proposed Applica/NACCO merger.24 The particularity

22 Cf. Dabit, 547 U.S. at 86 (noting the “presumption that Congress envisioned a broad construction” of SLUSA’s

“in connection with” language); Romano, 609 F.3d at 524 (describing Dabit’s “flexible standard” and finding preclusion based on transactions in covered securities eighteen months after alleged misrepresentations).

23 See, e.g., Lewis v. Rosenfeld, 138 F. Supp. 2d 466, 477-78 (S.D.N.Y. 2001) (applying requirement to common law fraud under New York law); Hampshire Equity Partners II, L.P. v. Teradyne, Inc., No. 04 Civ. 3318, 2005 WL 736217, at *2 (S.D.N.Y. Mar. 30, 2005) (fraud and negligent misrepresentation); In re Leslie Fay Cos., Inc. Sec. Litig., 918 F. Supp. 749, 767 (S.D.N.Y. 1996) (negligent misrepresentation); Daly v. Castro Llanes, 30 F. Supp. 2d 407, 414 (S.D.N.Y. 1998) (unjust enrichment); In re Parmalat Sec. Litig., 501 F. Supp. 2d 560, 573 (S.D.N.Y. 2007) (breach of fiduciary duty).

24 The TAC describes the SEC’s action over the “short squeeze” as a “fraud action” (TAC ¶ 110), and alleges that Falcone “orchestrated the fraud and tortious interference” at issue in the NACCO litigation. (TAC ¶ 140.)


14

requirement also applies to the purported claim for breach of contract, which alleges “numerous

false and misleading representations.”25 (TAC ¶ 255.)

To satisfy the particularity requirement, the complaint must (1) identify the allegedly

fraudulent statements; (2) identify the speaker; (3) state where and when the statements were

made; and (4) explain why the statements were fraudulent. Rombach, 355 F.3d at 170; ATSI

Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 99 (2d Cir. 2007). Where “fraud is alleged

against multiple defendants, the acts complained of by each defendant should be separately set

forth in the [c]omplaint.” Lasky v. Shearson Lehman Bros. Inc., 139 F.R.D. 597, 598 (S.D.N.Y.

1991) (citing Zerman v. Ball, 735 F.2d 15, 22 (2d Cir. 1984).)

The TAC fails these requirements. Rather than identify the specific offering materials at

issue, it instead refers generally to the COMs and alleges that they “were identical in many, if not

all[,] material respects.” (TAC ¶ 143.) The TAC fails to specify what version of each COM was

in effect when each Plaintiff invested, and improperly quotes the Fund I COM as an “example”

without specifically alleging the representations made with respect to other Funds (see, e.g.,

TAC ¶¶ 144, 148). Finally, the TAC fails to provide particular allegations about the “acts

complained of by each defendant,” instead relying on generalized assertions of common control

and collective wrongdoing.26

25 See Frota v. Prudential-Bache Sec., Inc., 639 F. Supp. 1186, 1193 (S.D.N.Y. 1986) (“Rule 9(b) extends to all

averments of fraud or mistake, whatever may be the theory of legal duty—statutory, common law, tort, contractual, or fiduciary.”)

26 (E.g., TAC ¶¶ 238 (alleging that “all [Defendants] are ultimately controlled by or affiliated with Defendant Falcone”); 231 (“The Defendants had a special relationship with Plaintiffs . . . .”); 130 (“Defendants, however, materially deviated from [the Funds’ stated] investment objective . . . .”); 132 (“Defendants breached their duties to the Funds . . . .”); 152 (“Despite knowing of these enormous risks and hurdles, Defendants provided the Plaintiffs and Class Members with positive, anodyne general reporting on Harbinger’s investment in LightSquared . . . .”); 169 (“On June 11, 2010, Harbinger provided a confidential investor presentation on its website. . . . This presentation contained numerous materially false and misleading statements.”).)


15

Where a complaint—especially a Third Amended Complaint—fails to satisfy Rule 9(b),

the Court should dismiss the complaint without leave to replead.27

IV. The Purported Direct Claims Fail as a Matter of Law.

All of the direct claims are inadequate as a matter of law because Plaintiffs’ factual

allegations—even if accepted as true—fail to state a cause of action.

A. Plaintiffs’ Breach of Contract Claim Should Be Dismissed.

Under New York law, a breach of contract claim must allege (1) the terms of the

agreement; (2) consideration; (3) performance by plaintiff; and (4) the basis of the defendant’s

alleged breach.28 Furia v. Furia, 498 N.Y.S.2d 12, 13 (2d Dep’t 1986); Harsco Corp. v. Segui,

91 F.3d 337, 348 (2d Cir. 1996) (applying New York law). “[A breach of contract] claim cannot

withstand a motion to dismiss if the express terms of the contract contradict plaintiff’s

allegations of breach,” and the Court is “not required to accept the allegations of the complaint as

to how to construe the parties’ agreement.” Merit Grp., LLC v. Sint Maarten Int’l Telecommc’ns

Servs., NV, No. 08 Civ. 3496, 2009 WL 3053739, at *2 (S.D.N.Y. Sept. 24, 2009) (internal

quotation marks and citations omitted) (applying New York law).

As a threshold matter, the breach of contract claim fails as to Holdings, Philip Falcone,

and Special Situations GP, who are not alleged to have been parties to any agreements with

Plaintiffs. (See TAC ¶¶ 27-30, 238, 253.) Without a contract, no breach of contract claim

27 See, e.g., Salinger v. Projectavision, Inc., 972 F. Supp. 222, 236 (S.D.N.Y. 1997) (where complaint failed to

plead fraud with particularity and failed to state a claim, denying leave to replead because “[t]hree bites at the apple is enough”); Acito v. IMCERA Group, Inc., 47 F.3d 47, 55 (2d Cir. 1995) (leave to amend should be denied “when such leave would be futile”).

28 New York law applies to the purported contract claim because New York has the “most significant relationship” with the dispute. Md. Cas. Co. v. Cont’l Cas. Co., 332 F.3d 145, 151-52 (2d Cir. 2003) (setting out five-factor test). Here, Plaintiffs contend that the Harbinger Defendants breached certain agreements through their investment activities, which were carried out in New York. (See TAC ¶¶ 31-44, 255-260.) In any event, the elements of a breach of contract claim are substantially the same under Delaware and Cayman law. See, e.g., VLIW Tech., LLC v. Hewlett-Packard Co., 840 A.2d 606, 612 (Del. 2003); Robinson Decl. ¶ 58.


16

(express or implied) can exist. F.W.J. Realty Corp. v. Cnty. of Suffolk, 901 N.Y.S.2d 674, 675-

76 (2d Dep’t 2010); Keefe v. New York Law School, 897 N.Y.S.2d 94, 95 (1st Dep’t 2010).

As against the remaining Harbinger Defendants, the contract claim fails for the basic

reason that none of their alleged conduct violates any provision in their contracts with Plaintiffs,

as a matter of law. Plaintiffs allege that they entered subscription agreements with certain Funds,

which incorporated (1) the COMs and (2) the Funds’ formation documents. (TAC ¶ 253.)

Even assuming the subscription agreements incorporate the COMs and formation

agreements, these documents simply do not say what Plaintiffs allege: they do not “require[] that

the Defendants only act in conformity with the investment objectives” stated in the COMs. (Id.

¶ 255.) Nor do they “limit Defendants’ powers to buying, selling and holding securities, and

other typical activities of an investment manager.” (Id. ¶ 256.) Nor do they contain binding

“representations about the risk management strategies Defendants will employ,” or “require[]

Defendants to calculate and report NAV to investors using GAAP account practices,” or prohibit

a loan to Falcone, or prohibit the waiver of redemption requirements as to certain investors. (Id.

¶¶ 257-260.) Instead, the COMs afford great flexibility on these matters:

• “The Partnership may engage in investment strategies not described herein that the General Partner considers appropriate.” (Ex. 1 at 5.)

• “[T]he Partnership has broad and flexible investment authority.” (Id. at 14).

• Risk management guidelines “are subject to change without notice,” “are not strict limits, and may be exceeded.” (Id. at 15.)

• Certain securities will be valued “by the General Partner in its sole discretion.” (Ex. 6 at 11.)

The Funds’ formation documents confer similarly broad discretion. For example: “The

General Partner [of Fund I], in its sole discretion, may waive or modify the conditions relating to

withdrawal with regard to . . . certain large or strategic investors.” (Ex. 28 § 8.02(g).) Tellingly,


17

Plaintiffs do not identify any specific provisions of the formation documents that were allegedly

breached, and this failure requires dismissal of the contract claim to the extent it is based on

those documents. See, e.g., Chrysler Cap. Corp. v. Hilltop Egg Farms, Inc., 514 N.Y.S.2d 1002,

1003 (3d Dep’t 1987) (dismissing complaint because it failed to specify the “essential terms of

the contract” that was supposedly breached).

The COMs also contain robust cautionary language that explicitly refutes Plaintiffs’

suggestion of a breach based on risk or investment concentration. For example:

• “An investment in the Partnership involves a high degree of risk, including the risk that the entire amount invested may be lost.” (Ex. 1 at 37.)

• “THE PARTNERSHIP MAY HAVE A CONCENTRATED PORTFOLIO THAT MAY BE COMPRISED OF A LIMITED NUMBER OF ISSUERS.” (Id. at 15.)

Plaintiffs “cannot be permitted to ‘cherry pick’ language from the offering memoranda,

and then ignore explicit cautionary language which [bears on the issues about which they

complain].” Merkin, 817 F. Supp. 2d at 355.

Finally, any claim for breach of the “implied warranty of good faith and fair dealing” also

fails. Under New York law, no contractual “obligation can be implied that would be inconsistent

with other terms of the contractual relationship.” Dalton v. Educ. Testing Serv., 87 N.Y.2d 384,

389 (1995) (internal quotation marks omitted). Here, because the relevant agreements do not

prohibit the conduct alleged to constitute a breach, there is no basis for implying any sort of

contractual obligation.

In sum, the COMs do not support a legally cognizable claim for breach of contract.

B. Plaintiffs’ Remaining Direct Claims Are Barred as Duplicative.

Plaintiffs’ tort claims—for fraud, negligent misrepresentation, breach of fiduciary duty,

and unjust enrichment—are based on the same factual allegations as their contract claim: alleged


18

misrepresentations about the LightSquared investment, risk management, and asset valuation, as

well as the allegations in the SEC actions and lawsuit described above. (See TAC ¶¶ 246-51,

262-78; 118-23.) Accordingly, the tort claims are duplicative and should be dismissed.29

C. Duplicativeness Aside, Plaintiffs’ Direct Claims for Unjust Enrichment and Breach of Fiduciary Duty Should Be Dismissed.

Even if they were not duplicative of the contract claim, Plaintiffs’ direct claims for unjust

enrichment and breach of fiduciary duty (TAC ¶¶ 267-278) should be dismissed because they are

not properly direct claims.30

Under Delaware law,31 whether a claim is direct or derivative depends on (1) “who

suffered the alleged harm (the corporation or the stockholders, individually)” and (2) “who

would receive the benefit of the recovery or other remedy (the corporation or the stockholders,

individually).” Tooley v. Donaldson, Lufkin, & Jenrette, Inc., 845 A.2d 1031, 1033 (Del. 2004).

As to the first element, to demonstrate individual harm, a plaintiff must show “that the duty

breached was owed to the [plaintiff] and that he or she can prevail without showing an injury to

the corporation.” Id. at 1039 (emphasis added). Plaintiffs cannot make that showing here,

because any injury necessarily would have been suffered by the Funds through the depletion of

29 See, e.g., Grayson v. Imagination Station, No. 5051-CC, 2010 WL 3221951, at *7-*8 (Del. Ch. Aug. 16, 2010)

(breach of fiduciary duty); Gale v. Bershad, No. Civ. A. 15714, 1998 WL 118022, at *5 (Del. Ch. Mar. 4, 1998) (same); Tsilogiannis v. 53-11 90th St. Assocs., 739 N.Y.S.2d 633, 633 (2d Dep’t 2002) (fraud); Greenman-Pedersen, Inc. v. Levine, 829 N.Y.S.2d 107, 108 (1st Dep’t 2007) (negligent misrepresentation and fraudulent concealment); Goldman v. Metro. Life Ins. Co., 5 N.Y.3d 561, 572 (2005) (unjust enrichment).

30 Furthermore, Special Situations GP did not owe any fiduciary duties to Plaintiffs because, as noted above, no named Plaintiff invested in the Special Situations Fund. See supra n.5.

31 Delaware and Cayman law apply to the fiduciary duty claim because under New York’s choice-of-law rules, which the Court is required to apply, “the law of the state of incorporation” applies to claims for breach of fiduciary duty. Marino v. Grupo Mundial Tenedora, S.A., 810 F. Supp. 2d 601, 607 (S.D.N.Y. 2011).


19

their assets.32 Similarly, any unjust enrichment necessarily would have been paid from the

Funds. (See TAC ¶ 271.) As to the second element, the Funds—and not investors

“individually”—would receive any recovery from the Harbinger Defendants.

Cayman law (which looks to English common law for guidance on shareholder derivative

suits) reaches the same result. ABF Capital Management v. Askin, 957 F. Supp. 1308, 1332

(S.D.N.Y. 1997) (“Under the law of the Cayman Islands . . . claims based on breach of fiduciary

duty . . . that result in the diminution of share value belong to the corporation and can only be

brought by it or a shareholder suing derivatively.”); Gardner v. Parker, [2004] EWCA Civ. 781,

2004 WL 1174334, at ¶¶ 23-24 (appeal taken from Eng.); Robinson Decl. ¶¶ 54-57.

D. Plaintiffs’ Fraud Claim Should Be Dismissed.

Under New York law,33 a fraud claim requires (1) a misrepresentation or omission of

material fact; (2) which the defendant knew to be false; (3) which the defendant made with the

intention of inducing reliance; (4) upon which the plaintiff reasonably relied; and (5) which

caused injury to the plaintiff. Wynn v. AC Rochester, 273 F.3d 153, 156 (2d Cir. 2001).

Plaintiffs concede that the only statements they allegedly relied on in deciding to invest

were contained in the Funds’ offering documents. (TAC ¶¶ 207-209.) Many of these allegedly

false and misleading statements are clearly forward-looking statements that under New York law

cannot support a fraud claim. See, e.g., Matsumura v. Benihana Nat’l Corp., 542 F. Supp. 2d

245, 253 (S.D.N.Y. 2008) (“[A] promissory statement of what will be done in the future gives

32 See, e.g., San Diego Cnty. Emps. Ret. Ass’n v. Maounis, 749 F. Supp. 2d 104, 127 (S.D.N.Y. 2010) (claim is

derivative under Delaware law “because the misrepresentations that allegedly caused its losses injured not just Plaintiff, but the Fund as a whole.”).

33 New York law applies to Plaintiffs’ claims for fraud, negligent misrepresentation, and unjust enrichment. New York uses an “interest analysis” rule to determine the governing law for these claims, which looks “almost exclusively” at the parties’ domiciles and the locus of the tort. Krock v. Lipsay, 97 F.3d 640, 646 (2d Cir. 1996). Here, the majority of the parties are domiciliaries of New York, and the locus of the alleged tortious wrongdoing occurred in New York.


20

rise only to a breach of contract cause of action.” (emphasis in original)). The TAC even

characterizes many of these alleged misstatements as forward-looking. (See TAC ¶ 145

(describing what the partnership “seeks” to achieve and how it “will” focus its research), ¶ 148

(describing the risk management guidelines the partnership “intends to employ”), ¶ 248

(referring to “the prospects for the underlying Fund investments” (emphasis added).) Other

alleged misstatements are simply too conclusory to support a fraud claim, or are phrased clearly

as statements of opinion. (See, e.g., TAC ¶¶ 160-161, 171, 191-193.) Still others cannot be

misleading because the allegedly misrepresented information was publicly available. (See, e.g.,

TAC ¶¶ 163, 167, 171, 176, 182-185, 187-190 (allegations relating to FCC licenses, orders, and

filings).) In sum, none of the alleged misstatements gives rise to a viable fraud claim.

Plaintiffs also fail adequately to allege scienter. New York imposes pleading

requirements similar to those under federal securities law. Abu Dhabi Comm. Bank v. Morgan

Stanley & Co., 651 F. Supp. 2d 155, 171 (S.D.N.Y. 2009). The plaintiff must allege either (1)

“motive and opportunity to commit fraud” or (2) “strong circumstantial evidence of conscious

misbehavior or recklessness.” Id. (citing Kalnit v. Eichler, 264 F.2d 131, 138-39 (2d Cir. 2001).)

Where motive and opportunity are alleged, the facts pleaded must support an inference of

scienter that is “cogent and at least as compelling as any opposing inference of nonfraudulent

intent.” Tellabs Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 314 (2007).

Here, the TAC does not adequately allege the “conscious misbehavior or recklessness” of

any Harbinger Defendant, or adequately plead facts supporting a “strong inference” of scienter

based on motive and opportunity to commit fraud. At most, Plaintiffs allege that Falcone had a

personal “vision” related to LightSquared. (E.g., TAC ¶ 10.) This allegation plainly fails to

support any plausible—much less “cogent” or “compelling”—inference of scienter. Moreover,


21

the alleged incentive-fee structure of the Funds (TAC ¶¶ 200, 202) actually supports the opposite

inference: that the interests of investors and the Harbinger Defendants were fully aligned.

Plaintiffs have simply offered no reason why Falcone or any Harbinger Defendant would want

the Funds to perform poorly; indeed, Plaintiffs even allege that Falcone himself “invests in the

Funds” (TAC ¶ 38).

Nor do Plaintiffs adequately allege reasonable reliance. The TAC suggests that Plaintiffs

were entitled to take no action, to conduct no research into the matters about which they now

complain, then to bring suit against the Harbinger Defendants while remaining invested in the

Funds. However, the failure to conduct diligence is only excused where the “matters [at issue]

are peculiarly within [the] defendant’s knowledge.” Crigger v. Fahnestock & Co., Inc., 443 F.3d

230, 234 (2d Cir. 2006). Here, information about LightSquared and other matters34 was publicly

available or disclosed to investors in the Funds. Plaintiffs imply that Harbinger was their sole

source of information about the LightSquared investment and the risks of the mobile satellite

industry. (See TAC ¶¶ 11, 12.) But Harbinger’s control purchase of SkyTerra, a public

company at the time, required a detailed change-in-control application to be filed with the FCC

in August 2008; this application, and Harbinger’s various other public filings, gave clear notice

of a heavily regulated and risky industry. (See TAC ¶¶ 55, 66-68.) The disclaimers in the

COMs, described supra at 16-17, further undercut Plaintiffs’ allegations of reliance.

In sum, Plaintiffs’ fraud claim is not adequately pleaded and must be dismissed.

E. Plaintiffs’ Negligent Misrepresentation Claim Should Be Dismissed.

Under New York law, a negligent misrepresentation claim requires the plaintiff to show

that: “(1) the defendant had a duty, as a result of a special relationship, to give correct

34 (See, e.g., Ex. 21 ¶ 19 (stating that loan from the Special Situations Fund was disclosed five months after it was

made).)


22

information; (2) the defendant made a false representation that [it] should have known was

incorrect; (3) the information supplied in the representation was known by the defendant to be

desired by the plaintiff for a serious purpose; (4) the plaintiff intended to rely and act upon it; and

(5) the plaintiff reasonably relied on it to his or her detriment.” Hydro Invs., Inc. v. Trafalgar

Power Inc., 227 F.3d 8, 20 (2d Cir. 2000) (applying New York law).

Here, the negligent misrepresentation claim is fatally flawed because Plaintiffs’

allegations of a “special relationship” (TAC ¶¶ 231-37) are entirely conclusory and thus

inadequate, especially as to HCP, Holdings, and Falcone. Cf. Cobalt Partners, L.P. v. GSC

Capital Corp., 944 N.Y.S.2d 30, 36 (1st Dep’t 2012) (rejecting “the proposition that a manager

for an entity like a hedge fund . . . has any duties to the individual investors in the funds it

manages”). In addition, as discussed above in connection with the purported fraud claim,

Plaintiffs do not adequately allege that the Harbinger Defendants should have known their

representations were false, or that Plaintiffs reasonably relied on such representations. See

DynCorp v. GTE Corp., 215 F. Supp. 2d 308, 328 (S.D.N.Y. 2002) (reasonable reliance standard

for negligent misrepresentation is same as for fraud claim).

F. Plaintiffs’ Unjust Enrichment Claim Should Be Dismissed.

Under New York law, a claim for unjust enrichment requires “1) that the defendant

benefitted; 2) at the plaintiff’s expense; and 3) that ‘equity and good conscience’ require

restitution.” Kaye v. Grossman, 202 F.3d 611, 616 (2d Cir. 2000) (requiring “specific and direct

benefit” to defendant).35

35 Delaware’s law is similar, requiring a related enrichment and impoverishment lacking justification, and the

absence of a remedy at law. See Agilent Techs., Inc. v. Kirkland, No. 3512-VCS, 2010 WL 610725, at *30 (Del. Ch. Feb. 18, 2010).


23

Plaintiffs’ unjust enrichment claim—which is based on the management fees certain

Harbinger Defendants received from the Funds (see TAC ¶¶ 267-272)—fails because it is not a

proper direct claim. See supra at 18-19. In any event, the unjust enrichment claim is barred

because the relevant agreements and documents specifically provide for the calculation of

management fees (see TAC ¶¶ 200, 202), and thus plainly address “the same subject matter” as

the unjust enrichment claim. Goldman, 5 N.Y.3d at 572.36 Moreover, the unjust enrichment

claim fails as against Falcone, Holdings, and HCP for the additional reason that Plaintiffs cannot

allege the requisite “direct dealing or actual, substantive relationship” with any of these

defendants. Redtail Leasing, Inc. v. Bellezza, No. 95 Civ. 5191, 1997 WL 603496, at *8

(S.D.N.Y. Sept. 30, 1997).

V. Plaintiffs’ Derivative Claims Should Be Dismissed.

A. Plaintiffs’ Derivative Breach of Fiduciary Duty Claims Under Delaware Law Should Be Dismissed.

Plaintiffs assert derivative claims for breach of fiduciary duty on behalf of Fund I and the

Special Situations Fund against Holdings, HCP GP, Special Situations GP, and Falcone. (TAC

¶¶ 285-294.)

The purported derivative claim on behalf of the Special Situations Fund should be

dismissed for lack of standing. Plaintiffs do not allege that any named Plaintiff ever invested in

the Special Situations Fund. See Parfi Holding AB v. Mirror Image Internet, Inc., 954 A.2d 911,

935 (Del. Ch. 2008); 6 Del. C. § 17-1002 (“In a derivative action, the plaintiff must be a partner

36 The existence of contracts addressing management fees bars the unjust enrichment claim regardless of whether

any Plaintiff is a party to those agreements. See ABF Cap. Mgmt., 957 F. Supp. at 1334 (dismissing investors’ unjust enrichment claims based on contracts between funds and funds’ investment advisors).


24

or an assignee of a partnership interest at the time of bringing the action and [a]t the time of the

transaction of which the plaintiff complains”).37

The purported derivative claims on behalf of Fund I and the Special Situations Fund also

fail by reason of exculpatory clauses in these Funds’ limited partnership agreements. These

agreements exculpate the Funds’ general partners and their principals, officers, directors,

affiliates, and employees from most liability.38 For the reasons discussed above, Plaintiffs fail

adequately to plead a non-exculpated claim (such as gross negligence, willful misconduct, or

violation of applicable law) “based on particularized facts.” Guttman v. Huang, 823 A.2d 492,

501 (Del. Ch. 2003). And even apart from the exculpatory clause, Plaintiffs’ allegations of

breach are insufficient as a matter of law.

B. Plaintiffs’ Derivative Breach of Fiduciary Duty Claim Under Cayman Law Should Be Dismissed.

Finally, Plaintiffs assert a derivative claim for breach of fiduciary duty under Cayman

law against HCP, Holdings, and Falcone on behalf of Offshore Fund I, the Master Fund, and the

Special Situations Offshore Fund. (TAC ¶¶ 279-284.) All of these claims are subject to the rule

in Foss v. Harbottle, which precludes derivative suits except in narrow circumstances. (See

Robinson Decl. ¶¶ 14-20.) Plaintiffs do not meet any of the exceptions to the rule. (Id. ¶¶ 21-

42.) The purported claim on behalf of the Master Fund should be dismissed for the further

reason that Plaintiffs do not allege any named Plaintiff ever invested in the Master Fund.39

37 Nor can Plaintiffs assert a “double-derivative” claim under Delaware law on behalf of the Special Situations

Fund. Delaware courts have only allowed such claims to be asserted on behalf of a wholly owned subsidiary. Inversiones, S.L. v. Cementos Portland Valderrivas, S.A., 34 A.3d 1074, 1079-80 & n.10 (Del. 2011). Here, the Special Situations Fund has partners other than the Special Situations Offshore Fund. (See TAC ¶ 46.)

38 (See, e.g., Ex. 28 § 3.03(a); Ex. 29 § 2.05.) 39 See Druck Corp. v. Macro Fund, Ltd., 290 F. App’x 441, 443 (2d Cir. 2008) (under both New York and

Cayman law, plaintiff “lack[ed] standing to bring a derivative claim because it was not a shareholder” of the relevant fund when it brought the claim).


25

Finally, even apart from the Cayman law and standing issues, Plaintiffs’ allegations of breach are

insufficient as a matter of law.

CONCLUSION

For the reasons above, the Harbinger Defendants respectfully request that the Court

dismiss the TAC with prejudice.

Dated: New York, New York

October 25, 2012

Respectfully submitted, PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP

By: /s/ Daniel J. Leffell Leslie Gordon Fagen ([email protected]) Daniel J. Leffell ([email protected]) Steven C. Herzog ([email protected])

1285 Avenue of the Americas New York, New York 10019-6064 (212) 373-3000

Attorneys for Defendants Harbinger Capital Partners LLC, Harbinger Holdings, LLC, Harbinger Capital Partners GP, L.L.C., Harbinger Capital Partners Special Situations GP, LLC, and Philip A. Falcone


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