Highland Capital Management and its co-founder, James Dondero, have been involved in their fair share of juicy legal battles. There’s the ongoing divorce battle between Dondero and his estranged wife, in which Dondero stands accused of deliberately driving down his net worth to screw over said estranged wife, while Dondero has said he is simply using the handy Texas family law insolvency rules available to a guy making a measly million or two bucks a year. There’s the lawsuit against the former Highland private equity chief who allegedly told Becky Dondero about James’ plans, full of words like “megalomaniacal,” “abusive,” “dehumanized,” “erratic” and “insubordinate,” as well as press releases describing that ex-p.e. chief as “confused, bitter and largely irrelevant.” And then there’s the lawsuit filed against Highland by its investors, accusing the firm of all manner of malfeasance, and also Dondero of calling his investors “idiots.” The picture that emerges of Dondero is a man so litigious, argumentative and sharp-elbowed that even the president thinks it’s all a bit too much.
But even with that impressive pedigree, nothing is quite as glorious as the battle between the hedge fund and another former employee, Joshua Terry.
According to Terry, Dondero’s pet names for investors don’t begin and end with “idiots” but also includes “jackasses” who’d all be paid off before the SEC got wind of his plan to spend money he owed them—withholding money from investors being fairly de rigueur at Highland—on a South American condom factory, while simultaneously putting his “extensive gun collection” up as collateral to pay for things like margin calls and late personal tax payments. When Terry objected to some of the above, he says Highland fired him. Highland says it fired him because he was doing some self-dealing, having some conflicts of interest, being mean to people, and also banging his underlings whilst involving them in his financial shenanigans.
“Dondero was simply angry and realized Terry was not a ‘yes man’ willing to let Dondero have his wrongheaded way,” the panel found in its ruling. “So Dondero fired Terry on the spot and later sought to characterize Terry’s termination of employment ‘for cause’….”
Mr. Terry never caused damage or loss to the fund Highland alleged he mismanaged, according to the arbitration ruling. The arbitration panel, made up of three former Texas district court judges, also determined that Highland’s accusation that Mr. Terry had sex with a junior lawyer at the firm and involved her in alleged financial improprieties was “offensive.”
The relationship never happened and “this allegation was based solely on someone’s fantasy related to costumes they wore to an office Halloween party,” the panel stated. Two other sexual relationships Highland alleged Mr. Terry had with coworkers were insignificant in one case and unproven in the other, according to the arbitrators.
Are Highland and Dondero worried that three former judges found that they made up improper sexual relationships to justify firing a top-performing hedge fund manager in a fit of pique and then ordered them to pay said ex-manager $13.6 million? Hell no: This isn’t their first courtroom rodeo, nor the only one in which they are still engaged. And, as always, they will be vindicated in the end.
“In this ongoing compensation dispute, Highland’s remaining claims regarding Josh Terry’s misconduct, including over a year of malicious taping of co-workers and counter-parties, will dwarf the arbitration award.”
Highland also lost an arbitration in 2016 against investors in one of its hedge funds who alleged they had been cheated out of millions of dollars. The firm subsequently reached an agreement with the investors. Separately, a New York State Supreme Court judge in April dismissed a lawsuit by the firm accusing an investor of libel, a ruling Highland is appealing.
Highland also is still fighting in court against another former fund manager, Patrick Daugherty. The firm sued Mr. Daugherty in 2012, alleging he defamed Highland and publicized confidential information after leaving in 2011. Mr. Daugherty countersued, alleging he had been forced out of the firm for refusing to approve asset transfers ordered by Mr. Dondero. A jury found in favor of each of the sides on different issues in 2014 and both Highland and Mr. Daugherty have since been litigating to collect the amounts the jury awarded them.