Activist investor Carl Icahn is under fire from a hedge fund that accuses the billionaire investor of enriching himself at the expense of minority shareholders in XO Holdings Inc , a company he controls.

R2 Investments LDC in June filed a lawsuit in New York state court complaining that Icahn tried to take XO's $3.5 billion of net operating losses (NOLs) for his own use but at an inadequate price. NOLs are valuable because they can offset income in later periods to reduce taxes.

The suit represents a role reversal for Icahn, who has made a lucrative career of buying stakes in companies and rattling management he says is not realizing the full value of its businesses.

In this case, Icahn is the management. He serves as chairman of XO's board and his investment empire owns 80 percent.

XO disclosed on Monday that last month it received a takeover offer from ACF Industries Holding Corp, an entity wholly-owned by Icahn, to acquire all the XO common shares it does not already own for 55 cents a share in cash.

On July 10, XO's share price nearly doubled to 50 cents and has since risen to 70 cents in over-the-counter

trading.

XO's board established an independent committee to review ACF's proposal and retained JPMorgan Securities as an adviser.

Officials at Icahn and Q Investments, parent of R2, did not return calls seeking comment.

BREACH OF DUTY

R2 -- pronounced R-squared -- of Fort Worth, Texas, complains that Icahn and the XO board of directors repeatedly breached their fiduciary duties in favor of self-dealing.

The lawsuit said XO's board effectively gave Icahn stock worth $2 billion for $1 billion, and agreed to a preferred stock transaction that diluted minority shareholdings.

Additionally, the suit said Icahn and the board ignored takeover bids for XO that exceeded the telecommunication company's market price, instead choosing to refinance the company's debt by issuing $780 million of preferred stock.

Icahn this week told the Wall Street Journal that the preferred stock transaction actually saved XO from insolvency at a time money was not available from the markets.

In a motion to dismiss the lawsuit, Icahn said that Even if the facts alleged in the complaint are treated as true, (XO's) independent special committee diligently negotiated and evaluated the transaction with the assistance and advice of an independent financial adviser and independent counsel.

Herndon, Virginia-based X0 was once a high-flying telecommunications company that filed for bankruptcy in 2002 after the tech bubble burst. Icahn bought XO debt and held more than 80 percent of the company when it emerged from bankruptcy in 2003.

In 2005, Icahn proposed to acquire XO's profitable fiber optic unit and its tax-loss benefits. R2 said it filed suit to block the sale and Icahn backed down.

MINORITY RIGHTS

R2, in its complaint, listed a series of Icahn's actions over the past five years that hurt the value of XO, such as failing to refinance debt when credit markets were booming.

Icahn and XO also rebuffed three bidders, not identified in the court documents, that could have raised the value of XO stock. One suitor made an unsolicited $1 billion offer for the whole company, while another expressed interest.

Financial advisers told XO the $1 billion bid translated to $2.25 a share, far exceeding the company's value at the time, according to the lawsuit.

Last June a third bidder offered to pay $900 million to $1 billion just for XO's wireline unit. The XO board decided to halt the sale process, the complaint said.

XO's advisers, according to the lawsuit, recommended a stock rights offering. Because such a transaction would reduce Icahn's control, R2 said, he proposed the $780 million preferred stock offering instead.

The preferred transaction in July 2008 helped Icahn increase his ownership in the company to more than 80 percent. Minority shareholders received just one preferred share for every 20 sold to Icahn.

Icahn, in his motion, said R2's claims are not valid and that the lawsuit was a case of remorse.

Although (R2) was afforded the opportunity to purchase shares in the offering, Icahn said, it elected not to do so, choosing almost a year later to instead file this spurious action, challenging the transaction despite the fact that it resulted in a substantial infusion of cash and capital for XO and eliminated XO's substantial debt.

(Additional reporting by Ajay Kamalakaran in Bangalore; Editing by Steve Orlofsky)

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