Philip Falcone, the disgraced former hedge fund manager, has lost a fraud and breach-of-contract judgment in a case brought by New York-based pawnbroker BLCE over a series of art-backed loans. The ruling, issued July 25 in a New York Supreme Court, stems from a complex scheme involving a $6.3 million 20-carat Harry Winston diamond engagement ring and four artworks by Damien Hirst, Richard Prince, and Pablo Picasso.
Falcone, the founder of Harbinger Capital and the one-time majority shareholder of the New York Times, was once thought to be worth $2 billion. He made his fortune in 2007 by betting against subprime mortgages. In 2013, he was effectively barred from financial services industry after reaching a $18 million settlement with the Securities and Exchange Commission. This came after charges of market manipulation, misusing customer funds to pay his taxes, and favoring certain clients over others.
Court documents suggest that Falcone double-pledged artworks for loans with two different lenders, then kept those pieces in his possession. He also allegedly used a limited liability company to hide them from searches by other potential creditors.
According to court documents filed by the law firm Grossman LLP, which represented BLCE in the lawsuit and specializes in art law Falcone and his wife, Lisa Maria, took out a $92.5 million loan with Melody Business Finance in 2013. The loan was secured with various assets, including 12 artworks. Soon after, the couple set up a new entity called “First Street LLC,” to which they transferred ownership of the artworks. By 2018, the Falcones had defaulted on the loan with Melody.
Court documents show that Falcone then tried to raise money through a series of other secured loans, including several from BLCE. One loan for $600,000 secured by his wife’s Harry Wilson diamond ring, which had been valued by BLCE at $6.3 million.
Between September 2019 and October 2020, Falcone entered into a succession of further loans with the pawnbrokers, which were secured by Picasso’s Deux Nus, Richard Prince’s Untitled (Cowboy), and Hirst’s I love you, love buds and A Playful Bubblegum Kiss. Falcone even personally delivered them himself to BLCE, Grossman LLP said. He then signed contracts claiming that he personally owned the Picasso, Prince, and Hirst artworks and that they were not subject to any personal property mortgage, security agreement, or pledge agreement. “But those representations and warranties were false,” Grossman LLP said in a statement on its website.
Falcone boldly proclaimed that double pledging the artwork “was the equivalent of taking a second loan on a home and giving a second mortgage.” Falcone also said this was a “rather common practice” in supporting documents on February 7. In Grossman LLP’s memorandum of law on March 7, it stated, “But here, the first loan expressly prohibited taking a second loan, and the second loan expressly denied the existence of any prior loan. So no equivalency can be drawn to a second mortgage; this was fraud, plain and simple.”
In February 2020, Melody Finance sued Falcone for reneging on the 2013 loan and sought to foreclose on the artworks. However, Falcone refused to hand them over before using them as collateral in the loans he took out with BLCE. He also defaulted on his loans with BLCE shortly afterward.
As a result, BLCE sold Bubblegum Kiss and Untitled (Cowboy) at auction. In June 2021, Melody Finance then sued BLCE, claiming to have superior title to the four artworks. At that point, it became clear that Falcone had lied about his title and ownership of them to BLCE. “Our client then settled that dispute with [Melody Finance],” Grossman LLP said.
“In late 2021, Falcone filed a lawsuit claiming that our client should not have foreclosed on the loans and sold the collateral,” the law firm stated. “Our client, in turn, filed counterclaims against Falcone on the basis that he had committed fraud and breach of contract by misrepresenting his ownership and legal status of the artworks. After securing dismissal of Falcone’s usury and replevin claims on a pre-discovery motion for summary judgment in 2023, we moved for summary judgment on our client’s fraud and contract counterclaims.”
In court documents, BLCE said it didn’t know about “First Street LLC” and its ownership of the artworks, which is why they didn’t show up in searches on databases for Uniform Commercial Code (UCC) filings. UCC filings note when specific assets like artworks have been used as collateral for a loan or other obligation in a secured transaction.
On July 25, Judge Lyle E. Frank agreed with BLCE’s claims that Falcone made material misrepresentations “clearly intended on their face to induce Defendant to issue the loans that later resulted in substantial financial injury”. The judge ruled in favor of BLCE’s counterclaims of breach of contract, indemnity, and fraud, and ordered the loan company “be granted a money judgment in an amount to be determined at the time of trial or other such resolution of this matter.
In response to the verdict, Grossman LLP stated, “We are pleased to have achieved this favorable outcome for our client, and proud to continue our record of litigation victories in the complex arena of art-backed loan transactions.”
The law firm declined to comment to ARTnews.
John Lonuzzi, the attorney representing Falcone, did not respond to a request for comment.
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