Fired Highland Capital Manager Says He Opposed Self-Dealing

  • Highland says in suit portfolio manager violated contract
  • Firm says violations included secretly recording investors

A former portfolio manager seeks to force Highland Capital Management LP into arbitration over his claim that he was fired after questioning what he described as the firm’s illegal self-dealing with outside investors.

Highland said in a court filing that Joshua Terry violated his employment contract by secretly recording his colleagues and investors. The Dallas-based firm said Terry was the one engaged in self-dealing by trying to personally profit at clients’ expense. It’s asking a judge to order him not to disclose confidential information, including recordings of the conversations.

The suit in which both sides accuse each other of giving clients short shrift follows actions by investors against Highland, which managed $11.7 billion in regulatory assets as of Dec. 31.

For lawsuits involving Highland Capital Management, click here.

The firm sued Terry in Dallas state court on Sept. 8, claiming he had instructed a Highland lawyer to suspend distributions from a fund he managed. The move would have triggered the fund to be unwound and would have allowed Terry to make an early withdrawal of $700,000 he had invested in it.

Around the same time, Terry was advising a client to invest $16 million in the fund, which was “a clear conflict of interest,” Highland said in a court filing.

Highland says it terminated Terry, who was hired in July 2005, for self-dealing, breach of fiduciary duty, having sexual relationships with subordinates and making disparaging remarks about Highland executives. It asked the Dallas court to rule that Terry was fired for cause and it doesn’t owe him benefits and payments.

Terry said in a court filing Monday that Highland President James Dondero was engaging in a “smear campaign.” Terry said he stood up for investors and refused to engage in Dondero’s self-dealing.

Taxes, Guns

He alleges in his filing that Dondero has experienced financial trouble, including margin calls and delinquent personal tax payments, over the past several years. Dondero has needed to use his extensive gun collection as collateral for personal bank loans, Terry says.

Terry said he was fired because Dondero wanted to use money due outside investors in the firm’s collateralized loan obligations and mutual funds to buy a South American company that “he intended to convert to a condom manufacturer.” The investors were due repayment of loans to a company controlled by Dondero, according to Terry’s filing.

“The Dondero scheme was an audacious conflict-of-interest; and it was illegal,” Terry said in the filing.

Terry said that when he raised concerns the U.S. Securities and Exchange Commission might ask questions about the transaction, Dondero said the loan would be paid off before the regulator had time to look at it, according to the filing. Terry said Dondero called his investors “jackasses” and quotes him as saying, “Anyway I don’t have a lot of sensitivity toward them.”

Highland, founded by Dondero and Mark Okada in 1993, invests in asset classes and structures including hedge funds, mutual funds and distressed situations as well as exchange traded funds.

Terry’s lawyer didn’t respond to phone messages seeking comment on the case.

Highland said in an e-mailed statement that it has a “zero tolerance policy” for self-dealing.

“The purported quotes in Mr. Terry’s pleading are out of context and grossly misleading, and represent a disgruntled former employee taking desperate measures in pursuit of personal profit,” the company said.

Arbitration Award

The lawsuit follows a judge’s ruling in July confirming a $31 million arbitration award to investors in Highland’s Credit Strategies Fund. The investors alleged that the investment manager had engaged in willful misconduct, including “secretly marketing and selling at too low a price the fund’s stake” in a health-care company owned by Highland, according to court filings.

The award included more than $7 million in damages the arbitration panel found the investors would have received “absent Highland’s misconduct.”

Also in July, an investor lawsuit against Highland was unsealed in Delaware Chancery Court. The investors, seeking the return of money frozen during the financial crisis eight years before, said officials managing Highland’s main Crusader Fund had engaged in “willful misconduct and gross negligence.”

Highland, in a court filing this week in which numerous passages were blacked out, asked the judge in that case for an order declaring that it had complied with the terms of a plan for the fund.

The case is Highland Capital Management LP v. Terry, DC-16-11396, 162nd Judicial District, District Court of Dallas County, Texas.

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