Highland Capital Sued by Pension Over Failed Crusader Fund

Highland Capital Management LP, the debt manager with about $22 billion in assets under management, and JPMorgan Chase & Co. were sued by a Houston pension plan over claims that willful looting led to the demise of the Highland Crusader Fund.

Highland co-founders James Dondero and Mark Okada caused the Crusader Fund to engage in “dozens of self-interested transactions” with Highland affiliates designed to benefit the firm at the fund’s expense, the Houston Municipal Employees Pension System said in the complaint. The pension plan, which invested $15 million in the fund, is seeking unspecified losses caused by the alleged wrongdoing.

The Crusader Fund “was harmed by virtue of being stuck with poor quality assets that it would not have had if the partnership had been managed in the best interests of the partnership and its limited partners,” lawyers for the pension plan said in the complaint filed in Delaware Chancery Court.

Highland, founded by Dondero and Okada in Dallas in 1993, announced plans in October 2008 to shutter its flagship Crusader Fund and the Highland Credit Strategies Fund over a three-year period after suffering losses on high-yield, high-risk loans and other types of debt. Since then, the firm and two JPMorgan units that administered the funds have been sued over claims of fraudulently misleading investors about the health of the funds and failing to provide accurate monthly statements.

‘Equitable Solution’

“We are extremely disappointed by the action filed today by a single law firm in the Delaware Court, which is an attempt to derail the continued hard work of over 100 investors,” Armel Leslie, a Highland Capital spokesman, said in an e-mailed statement. “As highlighted by the recently announced agreement among investors in the Highland Credit Strategies hedge fund, we are confident that an equitable solution that benefits all Crusader investors will be reached.

Highland announced in April that it had won approval from a court in Bermuda to distribute assets of the Highland Credit Strategies fund.

Highland froze limited partner withdrawals from the funds in 2008 even while it managed to reduce its own investment in the Crusader Fund from $395 million to $16 million, according to the pension plan’s complaint.

“In accomplishing this task, Highland stripped the master fund of its investment-grade assets, leaving it with only junk-rated (or unrated) investments,” lawyers for the pension plan said in the court filing.

Jennifer Zuccarelli, a JPMorgan spokeswoman, had no immediate comment on the complaint.

Employee Lawsuit

A former JPMorgan employee claimed in a lawsuit filed in June that Highland, with the bank’s assistance, purposefully placed poorly performing assets into the Crusader Fund to shield other Highland portfolios, the Houston pension plan said in its complaint. Highland also artificially manipulated the net asset value of certain hedge funds and back-dated cross trades among certain Highland funds, according to the complaint.

JPMorgan, which provided back-office services for the Crusader Fund, was aware of Highland’s improper practices “yet consciously chose to do nothing to stop them,” according to the complaint.

At the height of the credit crisis, Okada and Dondero caused the Crusader Fund to “radically” increase the number and size of its transactions with other Highland affiliates, according to the complaint.

Sale Transactions

“In just two months in 2008, September and October, Highland now admits to having caused the Crusader Fund to engage in no fewer than 56 purchase and sale transactions with Highland and its affiliates,” the pension plan said in the complaint citing a summary of transactions reported to Crusader Fund investors in April 2009, six months after the partnership closed.

The Houston plan is seeking the return of all administration fees and all management fees to the fund as well as unspecified damages.

The case is Houston Municipal Employees Pension System v. Highland Crusader Fund GP, CA6510, Delaware Chancery Court (Wilmington).

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