Highland Trial Witness Says Daugherty Incentive Plan Questioned

Jan 17, 2014 12:01 am ET

Jan. 17 (Bloomberg) -- Highland Capital Management LP’s chief compliance officer told a Dallas jury that an incentive program for former executive Patrick Daugherty’s team was unwound over questions about its legality.

Thomas Surgent, who is also deputy general counsel for the investment firm suing Daugherty, testified yesterday he ended the vehicle known as Sierra Verde in part because of a belief Daugherty was “self-dealing.”

Highland, which according to its website manages $17.7 billion, sued Daugherty after he quit in September 2011, accusing him of disparaging the firm and improperly disclosing information. Daugherty, who was chief of the firm’s Stressed Special Situations and Private Equity Investing, countersued, saying the firm and co-founder James Dondero hurt his reputation and owe him money.

“Did you do it to deprive Pat Daugherty of any money?” Marc Katz, a lawyer for Highland, asked Surgent about the decision to unwind Sierra Verde.

“No,” Surgent said. He was the second witness to take the stand in the state court trial that started yesterday.

Dallas County District Judge Martin Hoffman, who is presiding over the trial, said it is expected to last at least three weeks.

Internal Secrets

Katz, in his opening statement to the jury of nine women and three men, said Daugherty resigned in anger and then disclosed internal secrets.

“Mr. Daugherty quit his job with Highland Capital and he did not get what he wanted,” Katz said. “He disclosed information about Highland and Highland’s investors that he was not permitted to disclose because he was mad and because Highland didn’t pay him the money he demanded.”

Highland filed the suit in April 2012, about two weeks after Daugherty testified against Dondero and on behalf of Dondero’s wife, Becky, in a divorce proceeding.

Katz said Daugherty had been paid $26 million from 1998 to 2011. As he was negotiating his exit pay, Daugherty took 59,000 company documents, which he copied or e-mailed to himself, and recorded phone calls with company employees, Katz said.

Daugherty’s lawyer, Ruth Ann Daniels, told jurors that Daugherty is owed millions of dollars. Daugherty’s relationship with Dondero soured after he demanded in 2011 that his compensation terms be put into writing, and the tension grew after he quit and testified in Dondero’s divorce, she said.

‘Exact Revenge’

Dondero then used his control over the firm’s incentive compensation plans “to exact revenge on Pat Daugherty,” Daniels said.

“Pat Daugherty chose not to trust Jim Dondero,” Daniels said.

Highland’s first witness was its co-founder, Mark Okada, who testified about the firm’s 1993 start. Dondero holds a 75 percent stake, he said.

Okada told jurors that the Sierra Verde plan was unwound because of “compliance problems.” Earlier in the day, Daugherty’s lawyer had argued that the vehicle was dissolved to insure that Daugherty didn’t collect what he was owed.

Under cross-examination, Okada testified that he discussed with Dondero the need for the vehicle to be unwound. Okada spent less than an hour on the witness stand.

Surgent, following Okada, also told jurors about Sierra Verde.

Sierra Verde

He said Sierra Verde, which Daugherty formed in 2010, was meant to compensate Daugherty and members of his team for work they did for companies Highland owned, its so-called portfolio companies.

Equity from those companies was placed in Sierra Verde in return for services by Highland, the compliance officer said.

The program was ended out of concern over whether it complied with government regulations and firm policy, Surgent said. The company may have been liable if those worries were valid, he said.

In one instance Daugherty backdated the acquisition of one unnamed holding, then valued at $2,040 a share, to a date when it was only $640 a share giving Daugherty and other Sierra Verde participants an immediate gain of the difference.

He called it “self-dealing.”

Surgent’s testimony is scheduled to continue today. He hasn’t been questioned yet by Daugherty’s attorneys.

The case is Highland Capital Management LP v. Daugherty, 12-04005, District Court of Dallas County, Texas, 68th Judicial District (Dallas).

--Editors: Michael Hytha, Joe Schneider