Highland Capital Chief Tells Divorce Judge He’s Insolvent

Highland Capital Management LP Chief Executive Officer James Dondero testified in a divorce proceeding that he’s insolvent under Texas family law, if not according to normal accounting rules.

Dondero, 49, told Texas state court Judge David Lopez in Dallas yesterday that the 2008 financial crisis took his debt-investing firm “to a state of insolvency and we’ve been juggling liquidity since that.” Highland Capital assets under management fell to $23 billion by Jan. 1 from $39 billion at the end of 2007.

“The last three, four years have been negative to the tune of hundreds of millions of dollars,” Dondero said. The money manager said his annual income is “a million, two.”

Highland is the largest manager of collateralized loan obligations in the U.S. by dollar amount, according to Moody’s Investors Service. In 2008, the Dallas-based firm had to suspend investors’ withdrawals from two hedge funds as a result of the credit crisis, resulting in litigation with investors and banks.

Marilea Lewis, a lawyer for his wife, Becky, told the court that a 2010 tax return showed Dondero’s adjusted gross income to be more than $36 million.

Dondero said in an interview during a break in the hearing that his net-worth calculation takes into account contingent liabilities such as pending litigation.

‘Lot of Lawsuits’

“In family court, Goldman Sachs and JPMorgan would be insolvent because of all the litigation they’re involved in,” he said in the interview. “We’re involved in a lot of lawsuits as well.”

He said family court accounting didn’t follow the same generally accepted accounting principles used by businesses. He and Highland are solvent on a GAAP basis, Dondero said.

“Highland and James Dondero are solvent,” the company said in an e-mailed statement. “The legal wranglings of a family law proceeding have no bearing on the financial wherewithal and continued success of Highland.”

The company had positive net investor inflows of $1.4 billion last year, has opened an office in Seoul and has moved to new headquarters in Dallas, according to the statement.

Dondero testified that he filed for divorce in September after a six-year marriage. The couple have two daughters, ages 3 and 6, he said. Becky Dondero is seeking enforcement of a prenuptial agreement guaranteeing her half of the couple’s community property, capped at $5 million.

Spousal Support

Becky Dondero testified that her husband hadn’t paid $104,000 she said she is currently owed under the agreement. Lopez is being asked to decide whether James Dondero must pay her $20,000 a month in spousal support and interim attorney fees. The judge adjourned the hearing without ruling.

Patrick Daugherty, a former senior portfolio manager at Highland who quit in October, testified that he met with James Dondero for drinks last month.

“He told me his plan was to get his net worth down and pay her as little as possible,” said Daugherty, who was called to the stand by Becky Dondero.

Richard Lee, a partner at Deloitte Financial Advisory Services LLP, testified for James Dondero. He said he was hired to evaluate Dondero’s net worth as it applied to the prenuptial agreement as of September 2011.

‘Substantially Negative’

“Mr. Dondero’s net worth was substantially negative as of Sept. 20,” Lee said.

Ike Vanden Eykel, James Dondero’s attorney from KoonsFuller PC in Dallas, and Lewis, of Godwin Ronquillo PC, both told the judge that the money manager has produced financial statements saying he has a net worth of negative $50 million.

The lawyers declined to comment after the hearing.

At least eight investors have sued Highland on grounds that the firm deceived them about the health of the hedge funds and the rate of redemptions. The plaintiffs included the Houston Municipal Employees Pension System and the Mary E. Bivins Foundation, an Amarillo, Texas-based senior citizens charity.

Most of the lawsuits have been settled or dismissed. Highland has said it paid no compensation.

Highland has also traded litigation with Barclays Plc, Deutsche Bank AG, Royal Bank of Scotland Group Plc and UBS AG.

Highland has yet to lose a case, Dondero said in the interview.

The case is In the Matter of the Marriage of IC and QC, DF11-16417-Z, Dallas County, Texas, District Court, 256th Judicial District (Dallas).

Before it's here, it's on the Bloomberg Terminal. LEARN MORE