Highland Capital Drops Texas Lawsuit Against Citigroup

Highland Capital Management LP dropped a lawsuit against Citigroup Inc. (C) in which it sought to block its removal as manager of a $921 million collateralized loan obligation.

Highland, which sued Citigroup and Babson Capital Management LLC in April, filed a notice of dismissal of the complaint yesterday in federal court in Dallas. It didn’t give a reason for the dismissal.

The Dallas-based investment advisory firm said this week that it would continue to manage the Liberty CLO after exercising a provision in the indenture allowing it to buy some of the riskiest portions, the so-called equity piece, of the fund from Babson and New York-based Citigroup.

CLOs are a type of collateralized debt obligation that pool high-yield, high-risk loans and slice them into securities of varying levels of risk and return.

Stefan Prelog, a spokesman for Highland; David Coburn, a spokesman for Babson; and Scott Helfman, a Citigroup spokesman, declined to comment.

Citigroup, the underwriter of the CLO, in May 2011 approached Highland, founded in 1993 by Mark Okada and James Dondero, about liquidating the fund, Highland said in court papers. Some CLOs allow a deal to be called if the majority of the investors in the equity portion vote to do so.

Citigroup Gains

Citigroup would have made gains from the transaction as it had purchased positions in the fund at a discounted price, according to Highland.

The price of AAA CLO debt rose to 94.75 cents on the dollar June 7, according to Morgan Stanley data. The price dropped to as low as 69 cents in April 2009.

After Highland refused to liquidate the fund, Citigroup sought to remove the firm and replace it with Babson, which also owned a piece of the CLOs’ riskiest portion, according to Highland’s filing.

Citigroup, the largest arranger of CLOs backed by widely syndicated loans in the U.S. this year, and its predecessors arranged at least five cash-flow CLOs for Highland.

The case is Highland Capital Management LP v. Citigroup Global Markets Inc., 12-01100, U.S. District Court, Northern District of Texas (Dallas).

To contact the reporters on this story: David McLaughlin in New York at dmclaughlin9@bloomberg.net; Kristen Haunss in New York at khaunss@bloomberg.net.

To contact the editors responsible for this story: John Pickering at jpickering@bloomberg.net; Faris Khan at fkhan33@bloomberg.net.