Highland Capital Management Alleges Former CEO James Dondero ‘Siphoned’ Millions of Creditors
Even after being forced out of a Dallas investment management firm he co-founded, James Dondero remains a dominant figure on the once high-flying company.
In a new case amid a protracted legal battle, a Texas bankruptcy court trustee overseeing Highland Capital Management LP accuses Dondero and a handful of his business partners of siphoning tens of millions of dollars from the company into bankruptcy and transfer them to thousands of “lifeboats” – business entities that Dondero owned and controlled.
This effectively diluted the value of the fund from which his bankruptcy creditors owed money, according to the complaint filed Friday night in the North Texas District. Bankruptcy arose from a long standing dispute on a fund Highland Capital Management froze at the height of the global financial crisis when it suffered losses on high-risk loans.
Over the next decade, according to the complaint, Dondero periodically transferred millions of dollars from the fund to benefit himself and his business partners, including co-founder Mark Okada.
Dondero defended himself in a statement provided by spokesperson Lucy Bannon.
“The [Highland Capital Management LP] estate is worth at least $ 550 million today. Good faith claims against the estate do not exceed $ 150 million, ”he said in his statement. “We will expose those who defraud the court and create conflicts for their own interests in our response.”
Okada, who started a new Dallas investment firm at the end of last year, said through a spokesperson that he was also anxious to defend himself.
“There is no allegation that Mark has committed any wrongdoing,” according to an emailed statement by spokesman Andrew Merrill. “He has acted ethically and appropriately at all times at Highland and looks forward to defending himself in this litigation.”
Highland Capital Management bankruptcy trustee Marc Kirschner is trying to recover more than $ 350 million, naming Dondero, Okada and other executives as defendants along with investment trusts owned by Dondero and Okada.
In the complaint, Kirschner alleges that Dondero’s companies “were operated and controlled for the benefit of Dondero, with Dondero using complex corporate structures and transactions to transfer money and assets between different Dondero entities in the manner which he considered the most advantageous for his own results ”.
This included avoiding creditors, exploiting personal tax advantages and ensuring that assets were “preserved for his benefit and the profits ultimately returned to him,” Kirschner’s complaint said.
Founded by Dondero and Okada in 1993, Highland Capital Management helped launch the negotiation of speculative corporate loans in the years leading up to the 2008 recession. In 2007, the fund managed some $ 40 billion in assets. But it performed poorly during the Great Recession more than a decade ago, leading to a wave of lawsuits from investors.
The decade that followed also saw Dondero engage in aggressive litigation against former business partners. The lawsuit describes his legal efforts as “vendettas against employees perceived to be disloyal,” which cost Highland Capital millions of dollars in legal fees.
“The lifeboats collected the lion’s share of the profits for the work of Highland Capital Management LP, while Highland Capital Management LP bore the majority of the expenses,” the complaint alleges.
Highland Capital Management filed for Chapter 11 bankruptcy in October 2019, citing as the largest debt a disputed claim of $ 189 million from investors in the Highland Crusader Fund, which had been in liquidation since the financial crisis.
Amid legal disputes between Dondero and the creditors of Highland Capital Management, Dondero survived his complete ouster from the company in 2020, but was stripped of all control of the company in addition to his role as a self-employed portfolio manager. Dondero was eventually fired as an employee in October 2020, according to court documents.
Dondero still heads the other Highland entities of the same name, including Highland Capital Management Fund Advisors.
In February, a court approved bankruptcy reorganization plan made Kirschner the litigation trustee of Highland Capital Management and attempted to protect the company from future litigation brought by Dondero.
In March, Dondero was found at be in violation of a restraining order this required him to stay away from the business affairs of Highland Capital Management.