Fired Manager Can Challenge Highland Capital in Arbitration

(Bloomberg) -- A former portfolio manager can force Highland Capital Management LP into arbitration over his claim that he was fired after questioning what he described as the firm’s illegal self-dealing with outside investors.

Highland alleges Joshua Terry was the one who engaged in self-dealing and trying to profit at clients’ expense. The dispute escalated with the Dallas-based firm’s claim that Terry secretly recorded his colleagues and investors in violation of his employment contract. Terry’s legal filings are peppered with quotes allegedly taken from the recordings, which include Highland President James Dondero calling his investors “jackasses.”

A state court judge in Dallas on Thursday granted Terry’s request to send the dispute to arbitration. The judge said it made sense to have Terry’s claims considered first by an arbitrator.

Highland asked the judge to order Terry not to disclose confidential information, including recordings of the conversations, and to force Terry’s lawyers to quit because their case benefited from access to the recordings. The judge said the issue of Terry’s lawyers would be up to the arbitrator to decide.

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“Regardless of legal forum, we believe Mr. Terry’s claims are without merit and we are confident any fact finder will reach the same conclusion,” Lucy Bannon, a spokeswoman for Highland, said in an e-mailed statement.

Terry’s lawyer, Rogge Dunn, said he and his client were “very pleased with the judge’s ruling.”

Highland, which managed $11.7 billion in regulatory assets as of Dec. 31, sued Terry in Dallas state court on Sept. 8, claiming he had instructed one of its lawyers to suspend distributions from a fund he managed. The move would have triggered the fund to be unwound and would have allowed Terry to make an early withdrawal of $700,000 he had invested in it.

Around the same time, Terry was advising a client to invest $16 million in the fund, which was “a clear conflict of interest,” Highland said in a court filing.

Highland says it fired Terry, who was hired in July 2005, for self-dealing, breach of fiduciary duty, having sexual relationships with subordinates and making disparaging remarks about Highland executives. It asked the Dallas court to rule that Terry was fired for cause and it doesn’t owe him benefits and payments.

Terry said in a court filing that Dondero was engaging in a “smear campaign.” Terry said he stood up for investors and refused to engage in Dondero’s self-dealing.

Taxes, Guns

He alleges in his filing that Dondero has experienced financial trouble, including margin calls and delinquent personal tax payments, over the past several years. Dondero has needed to use his extensive gun collection as collateral for personal bank loans, Terry says.

Terry said he was fired because Dondero wanted to use money due outside investors in the firm’s collateralized loan obligations and mutual funds to buy a South American company that “he intended to convert to a condom manufacturer.” The investors were due repayment of loans to a company controlled by Dondero, according to Terry’s filing.

Terry said that when he raised concerns the U.S. Securities and Exchange Commission might ask questions about the transaction, Dondero said the loan would be paid off before the regulator had time to look at it, according to the filing.

Highland, founded by Dondero and Mark Okada in 1993, invests in asset classes and structures including hedge funds, mutual funds and distressed situations as well as exchange traded funds.

The case is Highland Capital Management LP v. Terry, DC-16-11396, 162nd Judicial District, District Court of Dallas County, Texas.