Pension Sues Highland Over 'Self-Interested' Deals

May 24 2011 | 1:15pm ET

The well of litigation stemming from the collapse of Highland Capital Management's Crusader fund has not yet run dry.

A Houston pension plan has sued Highland and JPMorgan Chase, which serviced the fund, accusing the two of effectively looting the fund. Highland has previously been sued by investors in the fund who accuse the firm of lying about the level of redemption requests prior to its collapse in 2008.

"Dozens of self-interested transactions" ordered by Highland founders James Dondero and Mark Okada left the firm's flagship "with poor quality assets that it would not have had if the partnership had been managed in the best interests of the partnership and its limited partners," the Houston Municipal Employees Pension System alleges. The plan, which invested $15 million in crusader, is seeking unspecified damages.

According to the lawsuit, Highland reduced its own stake in Crusader by more than 95% after it froze redemptions.

"In accomplishing this task, Highland stripped the master fund of its investment-grade assets, leaving it with only junk-rated (or unrated) investments," the lawsuit, filed in Delaware Chancery Court, alleges.

Highland said it was "extremely disappointed" by the lawsuit, which it characterized as the work of "a single law firm" seeking "to detail the continued hard work of over 100 investors."

"As highlighted by the recently-announced agreement among investors in the Highland Credit Strategies hedge fund, we are confident that an equitable solution that benefits all Crusader investors will be reached," the firm's spokesman, Armel Leslie, said.


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