Highland Capital Management alleges former CEO James Dondero ‘siphoned’ millions owed creditors (2024)

Even after being forced out of a Dallas investment management firm he co-founded, James Dondero remains a towering figure over the once-high-flying company.

In a new filing during a lengthy 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 bankrupt firm and transferring it to thousands of “lifeboats” — business entities that Dondero owned and controlled.

That effectively diluted the value of the fund from which creditors in its bankruptcy were owed money, according to the complaint filed late Friday in the Northern District of Texas. The bankruptcy grew out of a long-running dispute over a fund Highland Capital Management froze during the height of the global financial crisis when it suffered losses on high-risk loans.

Over the next decade, the complaint alleged, Dondero periodically transferred millions of dollars out of the fund to benefit him and his business partners, including co-founder Mark Okada.

Dondero defended himself in a statement provided by spokeswoman Lucy Bannon.

“The [Highland Capital Management LP] estate is worth at least $550 million today. Bonafide claims against the estate are no more than $150 million,” he said in his statement. “We will be unmasking those defrauding the court and creating conflict for their own interests in our response.”

Okada, who started a new Dallas investment firm late last year, said through a spokesman that he also looks forward to defending himself.

“There are no allegations that Mark engaged in any wrongdoing,” according to an emailed statement from spokesman Andrew Merrill. “He 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 as well as investment trusts owned by Dondero and Okada.

In the complaint, Kirschner alleges that Dondero’s companies “were operated and controlled for Dondero’s benefit, with Dondero utilizing complex corporate structures and transactions to transfer money and assets between the various Dondero entities in the manner he viewed most advantageous to his own bottom line.”

That included avoiding creditors, exploiting personal tax benefits and ensuring that assets were “preserved for his benefit and profits ultimately flowed to him,” Kirschner’s complaint said.

Founded by Dondero and Okada in 1993, Highland Capital Management helped pioneer the trading of speculative corporate loans in the years leading up to the 2008 recession. In 2007, the fund managed some $40 billion worth of assets. But it performed poorly through the Great Recession more than a decade ago, leading to a flurry of lawsuits from investors.

The decade that followed also saw Dondero engaged in aggressive litigation against former business partners. The complaint describes his legal endeavors as “vendettas on employees perceived as disloyal,” which cost Highland Capital millions in legal fees.

“The lifeboats collected the lion’s share of the profits for Highland Capital Management LP’s work, while Highland Capital Management LP bore the majority of expenses,” the complaint alleges.

Highland Capital Management filed for Chapter 11 bankruptcy in October 2019, listing as its largest debt a disputed $189 million claim from investors in Highland Crusader Fund, which had been in liquidation since the financial crisis.

Amid legal disputes between Dondero and Highland Capital Management’s creditors, Dondero survived being ousted from the company entirely in 2020 but was stripped of all control of the firm besides his role as an unsalaried portfolio manager. Dondero was finally terminated as an employee in October 2020, according to court filings.

Dondero still runs Highland’s other entities of a similar 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 shield the firm from future litigation brought by Dondero.

In March, Dondero was found to be in violation of a restraining order that required him to stay away from Highland Capital Management’s business affairs.