The Falcones denied Gamble's charges in a response filed in court on April 20. "Plaintiff's job performance during his employment by the defendants was unsatisfactory," the response says.

Falcone bought the St. Barts house just before he got clobbered by the credit crisis and the subsequent slowdown in the economy. That's when his Calpine bet, among others, went south. Like other hedge funds, Harbinger had to fight its way through the crisis, selling assets to limit losses and to return money to anxious investors.

"People looked at us like an ATM," Falcone says.

Harbinger wouldn't let investors have all the money they demanded from the flagship Capital Partners fund. He broke the news in an e-mail around midday on Christmas Eve 2008, saying he would limit redemptions to two-thirds of investors' requests.

Falcone put 15 illiquid private-equity investments into a segregated account called a side pocket, according to investors. The holdings would be sold off over time, with investors getting cash back as sales were made.

7 Percent Solution

As of late September, investors had received only 7 percent of the money in the side pocket, they say.

Falcone declined to comment on the matter.

While denying clients, Falcone in October 2009 took a $113 million loan from the Special Situations Fund to pay his personal taxes, according to investors who learned of the loan in the fund's 2009 financial statements. Investors say they would have preferred having excess cash returned to them. The fund allowed no redemptions after the 2008 bankruptcy of Lehman Brothers Holdings Inc., which was the fund's broker and held its assets.

Falcone's funds are too narrowly focused for some investors. Executives that manage a fund for PNC Financial Services Group Inc. in Pittsburgh asked for the return of their whole investment -- an unspecified amount -- from Harbinger Capital during the fiscal year ended on March 31, according to a regulatory filing. Harbinger "got caught up in concentrated, illiquid situations in 2008," managers of the PNC Long-Short Master Fund LLC said in the filing.

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