Dallas' Most Tabloid-Worthy Hedge Fund Wants it Known: Its President Owned His Wife in Court

Surely you recall James Dondero, the high-powered Dallas hedge fund manager who spends his leisure time dining on giraffe, jamming to Steve Winwood, and becoming embroiled in ridiculously messy legal feuds.

Last we checked some 17 months ago, Dondero was legal-feuding with two people. One was his wife, whom he accused of infidelity and was in the process of divorcing. The other was a former Highland Capital Management business partner named Patrick Daugherty, who was booted from Highland in September 2011 for being "megalomaniac," and who was "unmanageable, erratic and insubordinate" and went on abusive tirades against employees, according to court filings.

Things got very weird very quickly. Dondero reportedly believed his wife was cheating on him with Daugherty. Daugherty, in turn, accused his former business partner, whose income was $36 million in 2010, of hiding assets to avoid paying his wife spousal support, a claim he first unveiled in a legal filing describing a very weird dinner scene in which Dondero said he had 20,000 emails and texts, obtained from sources in "certain branches of the intelligence community," proving his wife was being unfaithful.

See also: James Dondero, Highland Capital's Giraffe-Eating Hedge Fund Manager, is in a Helluva Legal Fight

The two men, both endowed with a healthy ego, have been sniping at each other ever since.

Last month, as Dondero's divorce was going to trial, the New York Post entered the fray with a piece rehashing the salacious details and implying that the hedge fund manager was, in fact, hiding assets from his wife, who it said was owed up to $5 million under the terms of the couple's pre-nup.

At first, Dondero responded to the Post's queries with a statement saying, "My divorce is a private matter, and I do not wish to speak about it publicly."

That has apparently changed. On Wednesday, Highland Capital Management dispatched a very weird press release accusing Daugherty of leaking "misinformation" to the Post and boasting of how thoroughly Dondero owned his wife in court.

After establishing that Dondero never hid his assets and that his wife repeatedly violated their prenuptial agreement, the company takes a few digs at Daugherty.

No evidence or testimony in the trial suggested anything salacious, illicit or improper on the part of Mr. Dondero. The only unusual aspect of the trial was the active participation of Mr. Daugherty, a disgruntled former Highland employee who voluntarily resigned over two years ago, and who is engaged in a contentious legal dispute with Mr. Dondero and Highland.

Mr. Daugherty was in the courtroom the entire first day, most of the second day and testified on behalf of Ms. Dondero on the third afternoon. Based on observations of those in the courtroom, he worked closely with Ms. Dondero's legal team in jury selection and conferred with them throughout the trial. His courtroom testimony was confused, bitter and largely irrelevant. Indeed, when questioned regarding his knowledge of the primary issue in the case, the prenuptial agreement, he vaguely offered: "I think he [Mr. Dondero] talked to me about certain aspects of it. He never really talked to me about it. 'I want to talk to you about the premarital agreement,' he [Mr. Dondero] never said that. We just talked about aspects of the prenatal agreement. Did I say prenatal? I'm sorry. Premarital agreement."

At one point while he was on the witness stand, Mr. Daugherty asked: "Can you please repeat the question? I flashed out there for a moment."

That an $18 billion hedge fund is sending out press releases declaring victory in its co-founder's divorce trial and slamming a former employee might seem to be a red flag to current or potential investors. Highland says it shouldn't be.

"Neither Mr. Dondero's divorce trial, nor the case with Patrick Daugherty has any bearing on Highland's ongoing business," it says. "These disputes are separate and distinct from its day-to-day business. As always, Mr. Dondero and the rest of the Highland team are focused on improving already strong fund performance."

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Eric Nicholson
Contact: Eric Nicholson