Highland Capital Sues Muirfield President for Defamation

  • Company says official made false statements in news report
  • Suit filed in New York state court seeks punitive damages

A pedestrian walks past a puddle reflecting the New York Stock Exchange.

Photographer: Michael Nagle/Bloomberg

Highland Capital Management LP, a Dallas-based investment fund, sued the president of a New York investment firm, alleging he defamed the company by knowingly making false statements that were included in a news report.

Highland Capital, founded by James Dondero and Mark Okada, sued Geoffrey Stern, of Muirfield Capital, based on comments published in October in an article in The Wall Street Journal. Stern said of Dondero and Highland Capital, "They just took our money," referring to Highland Capital secretly taking a roughly $30 million fee, according to a complaint filed in New York State Supreme Court on Monday.

The lawsuit alleges that Stern’s statements exposed Highland Capital to "public hatred, ridicule and disgrace," according to the complaint. Highland Capital seeks unspecified punitive damages and a court order barring Stern from making similar statements in the future. Stern didn’t immediately return a voice-mail message left at his office seeking comment.

Highland told investors in a letter on Monday that The Wall Street Journal article included a "patently false statement" from Stern. The firm said the funds at issue belonged Highland not investors.

"This false statement attacks the very foundation upon which we operate," according to a letter Highland sent to investors obtained by Bloomberg. "We therefore cannot let such allegations remain in the public realm without correction."

Investment Fund

Highland Capital, founded in 1993, invests hedge funds, mutual funds and distressed situations as well as exchange-traded funds. It had $11.7 billion in assets under management as of the end of last year.

The company, which is represented by Boies, Schiller & Flexner LLP, is also seeking a court order to force Breaking Media Inc. to identify an anonymous commentator who in November wrote about the firm on financial blog Dealbreaker.com. The commentator asserted in the post that the firm engaged in “tried and true criminal behavior,” according to the complaint.

Highland said the comments damage the integrity of the firm and constitute defamation. 

Highland shut its flagship Crusader fund, as well as a second fund, in October 2008 following losses on high-yield, high-risk loans and other types of debt. The closings came a month after credit markets froze following the collapse of Lehman Brothers Holdings Inc.

Suit Unsealed

Highland Capital itself has been sued multiple times over the management of its funds, including a lawsuit filed by investors in the main Crusader fund that was unsealed in July in Delaware Chancery Court. The investors said officials managing the fund took more than $30 million in fees they weren’t entitled to before the liquidation of the fund was complete. 

The distribution of those fees was supposed to take place at the end of a 43-month schedule, which Highland was ultimately prevented from following because of a separate lawsuit against the firm restricting it from liquidating Crusader. Highland said it was entitled to pay itself at the end of the period, despite the fund’s liquidation remaining incomplete.

It also said it has distributed to Crusader investors $1.55 billion of a targeted $1.7 billion from the liquidation plan. In August, the investors fired Highland from overseeing the remaining frozen assets.

In July, investors in Highland’s Credit Strategies fund won confirmation of a $31 million arbitration award after alleging 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 Capital, according to court filings. The award included more than $7 million in damages that investors would have received “absent Highland’s misconduct,” the arbitration panel found.

The case is Highland Capital Management v. Geoffrey Stern, 160396/2016, New York State Supreme (Manhattan).

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