Highland Capital, Dondero Face Former Executive in Trial

Highland Capital Management LP and James Dondero are set to face off in a jury trial against a former employee the investment firm and its president called brain-damaged when they sued him for defamation and other civil wrongs.

Since leaving the firm, the former executive, Patrick Daugherty, “has made disparaging, defamatory and false remarks about Highland to its current investors,” the Dallas-based firm said in a Texas state court complaint filed in April 2012, accusing him of breaching a written promise of confidentiality.

Daugherty denies he’s mentally addled or that he defamed Highland, where he worked for 13 and 1/2 years before resigning in September 2011. He counter-sued claiming Highland, Dondero and related entities owe him $160 million and saying they’ve hurt his reputation.

“They’re punishing Pat Daugherty by not paying him,” his lawyer, Ruth Ann Daniels, said at a Jan. 10 pre-trial hearing. Jury selection is scheduled to start today before Dallas County Judge Martin Hoffman.

Daugherty’s list of trial witnesses includes Dondero and Highland co-founder Mark Okada, according to a court filing. Highland’s list includes Daugherty.

Highland and its affiliates manage about $17.7 billion in assets for public pension plans, corporations, governments and high net-worth people, according to its website.

Future Compensation

Daugherty was Highland’s chief of Stressed Special Situations and Private Equity Investing before he quit amid a dispute over his future compensation, according to court records.

Six months after his departure, Daugherty testified on behalf of Dondero’s wife, Becky, and against the firm president and co-founder, in a divorce proceeding over spousal support. Two weeks after that, the firm sued Daugherty.

James Dondero argued in the divorce case that the global economic crisis that surged in 2008 had left him insolvent under Texas family law.

“The last three, four years have been negative to the tune of hundreds of millions of dollars,” James Dondero said then.

Daugherty told the divorce court he’d met his former colleague for drinks the previous month.

‘Net Worth’

“He told me his plan was to get his net worth down and pay her as little as possible,” Daugherty said.

The ensuing two years of litigation between the men have been hotly contested as Highland and Dondero first moved to disqualify Daugherty’s lawyers and later sued them, while Daugherty asked the court to impose sanctions on his opponents’ counsel.

The plaintiffs also asked Hoffman to remove a court-appointed referee to whom disputes over the production of evidence were being referred after they had lost three rulings. The firm’s lawyers contended the process was no longer cost-effective.

Hoffman denied the request in March, saying both sides had agreed to the referee.

Daugherty’s Counterclaims

The trial judge in October rejected several of Daugherty’s counterclaims, while allowing him to pursue claims for defamation, breach of fiduciary duty, breach of good faith and the improper withholding of books and records. He declined to throw out any Highland claims against Daugherty.

Witnesses will testify that “Jim Dondero promises you something and he horse trades,” Daniels told Hoffman at the Jan. 10 hearing.

“There is no evidence of that,” replied Highland’s attorney, Marc Katz.

In addition to alleging Daugherty defamed and disparaged the firm, Highland has accused its former executive of breach of contract. The firm said Daugherty’s actions upon leaving nullify his entitlement to accrued money from various firm incentive programs.

The judge said at the Jan. 10 hearing he would allow the jury to hear testimony regarding Dondero’s divorce, as long as it relates to Daugherty.

“The case will be more interesting if we let all that stuff in,” Hoffman said.

The case is Highland Capital Management LP v. Daugherty, 12-04005, District Court of Dallas County, Texas, 68th Judicial District (Dallas).

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