Highland Fight With Ex-P.E. Chief Goes To Trial

Jan 15 2014 | 1:30pm ET

The bitter dispute between Highland Capital Management founder James Dondero and the firm's former private-equity chief is at last going before a jury.

The trial, pitting Highland against Patrick Daugherty, began this week in Dallas. Highland has accused Daugherty of violating his employment contract and defaming the company with "false remarks about Highland to its current investors." Daugherty countersued, alleging that Highland owed him $160 million. Both sets of claims will be dealt with at trial.

Daugherty left Highland in 2011—voluntarily, according to the hedge fund, in a dispute over compensation. The fireworks did not begin until Daugherty testified on behalf of Dondero's wife as part of their divorce proceedings, alleging that Dondero had told him of a plan to understate his assets and that his former boss had asked him to lie.

Soon thereafter, Highland sued Daugherty, accusing him of spreading lies about the company. Highland added that Daugherty had been abusive towards the hedge fund's staff, and that he was "unmanageable, erratic and insubordinate." The hedge fund attributed the behavior to "two strokes he suffered years earlier" which "left him with dead spots in his brain that impacted his mental competence and conduct."

Daugherty shot back with a countersuit, much of which has been dismissed. The judge in the case allowed him to proceed with claims of defamation, breach of fiduciary duty, breach of good faith and improper withholding of books and records.

A Friday pre-trial hearing gave a sign of things to come: Dondero's lawyer said witnesses will testify that "Jim Dondero promises you something and he horse trades." And the judge in the case said he would allow testimony from Dondero's divorce trial, as long as it relates to Daugherty.

"The case will be more interesting if we let all that stuff in," he said.


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