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Highland Unit Files Bankruptcy Over Disputed Crisis-Era Fund (3)

Oct. 16, 2019, 10:05 PMUpdated: Oct. 16, 2019, 5:58 PM

Highland Capital Management LP, part of a once-high flying credit firm, filed for bankruptcy amid a long-running dispute over a fund it froze during the height of the global financial crisis.

The investment adviser unit within Highland Capital Management filed for Chapter 11 protection ahead of a potential legal judgment, the Dallas-based firm said in a statement. The judgment, which stems from a fund known as Crusader that was frozen in 2008, would exceed the assets the entity could quickly sell to meet any payment, it said.

Highland was founded in 1993 by James Dondero and Mark Okada. Regarded as a pioneer in credit markets, the firm structured one of the first collateralized loan obligations, and at its height managed some $40 billion. But it also had its share of struggles. It shuttered Crusader in 2008 after suffering losses on high-risk loans and other debt when markets tanked. A group of the fund’s investors sued in 2016 saying Highland engaged in “willful misconduct and gross negligence” by refusing to return their money and taking fees it wasn’t entitled to.

Although Highland disputes the claims, the bankruptcy filing was necessary given the entity’s liquidity position, it said in the statement Wednesday. No other Highland entities are filing and business operations will continue without interruption, according to the statement. Highland operates mutual funds and invests in real estate.

“Rather than liquidating the fund at the height of the crisis for pennies on the dollar, HCMLP carried out a liquidation process over time intended to maximize recoveries for investors,” the firm said.

Liquidation Plan

The Crusader fund has been in liquidation since 2011, when the fund’s investors together with Highland set up a group called the Redeemer Committee to coordinate the process. During that year, Highland said it would return about $350 million in cash to clients from the Crusader fund and the remaining $1.3 billion over the following three years as part of a plan approved by most of its investors.

Between 2011 and 2016, HCMLP distributed more than $1.55 billion of the original $1.7 billion account balance, according to Wednesday’s statement. But, in 2016 the Redeemer Committee filed its complaint over timing of the fees and other related claims. In April of this year, an attorney for Highland said the entity didn’t haveenough cash on hand to make a payment to those investors if it had to.

The Redeemer Committee is listed on the filing as the bankruptcy’s largest unsecured creditor, with a $189 million disputed claim. The Highland entity listed as much as $500 million in assets and liabilities in its Chapter 11 petition filed in Delaware.

The Redeemer Committee had been “prepared for a hearing to confirm the award, when Highland filed for bankruptcy,” it said in an e-mailed statement. The committee, which had secured an arbitration award of about $189 million based on findings of “multiple instances of willful misconduct and breaches of fiduciary duty by Highland,” is confident it will recover the full amount through the bankruptcy process, according to the statement.

Okada Retires

In late September, Highland announced that Co-Founder Okada was retiring. Okada and Dondero struck many in the market as an unlikely -- yet complementary -- pair. Okada made numerous media appearances as a market commentator, while Dondero was known as the financial puzzle solver who remained largely behind the scenes, except in some high-profile, contentious court cases.

In one such legal dispute last year, the former head of the firm’s structured products team, Josh Terry, successfully prosecuted an involuntary bankruptcy against two companies controlled by Highland: Acis Capital Management LP and Acis Capital Management GP LLC, an investment adviser and CLO manager, according to court documents and a statement from Acis.

Terry was fired in 2016 after becoming embroiled in disagreements with Dondero. Arbitration over his termination awarded him an $8 million judgment in December 2017, according to a federal judge’s ruling on Acis’ bankruptcy in January.

Concerned that Highland was rendering Acis insolvent immediately after he won the arbitration award, Terry initiated the involuntary bankruptcy case against Acis, according to the judge’s ruling. Upon emergence from bankruptcy, Acis would be owned by Terry, Acis said in a February statement.

The case is Highland Capital Management LP, 19-12239, U.S. Bankruptcy Court, District of Delaware

(Updates with statement from Redeemer Committee in ninth paragraph.)

--With assistance from Katia Porzecanski, Davide Scigliuzzo and Steven Church.

To contact the reporters on this story:
Jeremy Hill in New York at;
Josh Saul in New York at

To contact the editors responsible for this story:
Rick Green at

Sally Bakewell, Pierre Paulden

© 2021 Bloomberg L.P. All rights reserved. Used with permission.

(Updates with details on Crusader fund dispute, background on legal battles.)