Falcone returned to Wall Street, trading distressed debt for several firms, including Barclays Plc.

In 2001, Harbert Management Corp., a Birmingham, Alabama- based money management company, was looking for someone to start a fund to trade distressed debt and came across a PowerPoint presentation from Falcone. Harbert hired him to start what became Harbinger, staking him with $25 million.

Falcone was a valuable commodity. Harbinger returned 18.7 percent a year on average over the next five and a half years compared with 15 percent for competing distressed-asset funds.

Buying Insurance

In 2006, he put on the trade that would make his name. Like Paulson and other mortgage mega-bears, he bought credit-default swaps, contracts that rose in value as the price of interest- paying securities constructed from individual home mortgages lost value. Also like Paulson, Falcone bought many of the swaps from a salesman named Greg Lippmann at Deutsche Bank AG, according to a person familiar with the purchases.

When the housing market collapsed in 2007 and defaults soared, Falcone got rich.

Falcone's wealth has made him and his wife, Lisa, highly visible newcomers to big-time philanthropy. Lisa rattled the titans of charity in June 2009 at a party for donors to the High Line, a new park in Manhattan built atop a disused elevated railway. In the middle of a speech by High Line founder Joshua David, Lisa, clad in a gray, shimmery minidress tied at the waist with a white bow, strode to the front of the crowd, asked for the microphone and said she would match a $10 million gift to the High Line that had just been announced by Barry Diller, chief executive officer of IAC/InterActiveCorp., and his wife, fashion designer Diane von Furstenberg.

Lisa Lawsuit

Lisa's upbringing was even more hardscrabble than her husband's: She grew up in Spanish Harlem and was raised by a single mother on welfare. She was working as a model when she met Phil Falcone through mutual friends at a Manhattan restaurant in the late 1980s. They were married in 1992.

Lisa is now the overseer of the Falcones' properties, one of which is a compound on the island of St. Barts in the Caribbean that the Falcones bought for $39 million in 2008-the most expensive home purchase in the island's history, according to Sotheby's International Realty, the listing agent.

William Gamble, the former manager of their homes, says in a complaint filed in February in New York State Supreme Court that Lisa sexually harassed him on a trip to St. Barts in March 2008. First, she told him to wear a smaller bathing suit to help improve his tan, he says in the suit. Days later, she put her hand down his pants while drunk and, when rebuffed, hit him with her hand three times, leaving bruises on his abdomen, the suit says.

Falcone Denial