Alts Fund Highland Capital Management Entity Files for Chapter 11

Court documents show a long battle between managers and investors

Highland Capital Management announced that one of its investment adviser entities has filed for Chapter 11.

The news comes after a long-winded battle with investors, according to court filings.

A legal battle has endured due to the $189.3 million that Highland Capital Management LP owes to investors of its “Crusader” fund.

“Although Highland disputes the underlying claims, entry of the judgment in its maximum potential amount could result in a judgment against HCMLP greater than the entity’s liquid assets,” the company said in a statement. “HCMLP’s Chapter 11 filing was therefore necessary given its present liquidity position.”

Background of Highland Capital

Back in April, the firm said it didn’t have enough money to meet obligations if required to pay investors one day. Although the company was one of the pioneers of the credit markets, it has experienced quite a rollercoaster.

Mark Okada and James Dondero founded the company in 1993. The company structured one of the first collateralized loan obligations and managed upward of $40 billion.

However, it experienced large losses at the height of the financial crisis. The entity shuttered the Crusader fund after it lost large amounts of capital speculating on high-risk loans. Fund investors sued the group in 2016.

“Willful Misconduct?”

In the suit, investors claimed that managers engaged in “willful misconduct and gross negligence” by refusing to return capital and extracting fees without justification.

As noted above, the Highland denied any culpability and disputed the charges. However, liquidity challenges forced it to seek bankruptcy protection. The fund said it distributed more than $1.55 billion of the original $1.7 billion balance on the account.

“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,” it said. 

Co-founder Okada announced that he would retire in September.

[Related: Credit Suisse COO Out Due to Spying Scandal (and Other People on the Move)]

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