Highland court saga tests fact vs fiction

Jim Dondero, the distressed debt investor who was once a scourge of private equity, is the kind of hard-charging financier you might read about in a novel. In fact, Dondero thinks it possible that you have read about him in a novel — one that, strikingly, was written by a federal judge who is overseeing the bankruptcy of Highland Capital Management, his once high-flying investment firm.

Highland’s rise and messy fall is a story for the ages. During the go-go years, visitors to Dondero’s Dallas office reported that the staff there worked under the glassy gaze of animals that he had shot dead from his porch. The firm raked in billions of dollars of capital in the years before 2008, investing some of it on consumer debt, real estate, even unwanted life insurance policies. Its core business, though, was owning the debt of companies that had been bought by private equity firms.

Dondero’s enthusiasm for private equity was sometimes unrequited. Some of the biggest US buyout firms grew so tired of their shouting matches with his underlings that they tried to freeze Highland out of owning debt issued by the companies they bought. Yet the firm was difficult to avoid, and had a reputation for being quick to threaten legal action when deals went wrong. In one celebrated case, Highland reportedly delivered its demands to a recalcitrant borrower with a 10-minute ultimatum, and a warning that the firm already had a representative stationed outside a nearby bankruptcy court.

When the financial crisis struck, Dondero enjoyed a glimpse of the bonanza. His firm held some of the debt issued by Metro-Goldwyn-Mayer in connection with its ill-fated 2004-05 buyout by a consortium that included Texas Pacific Group. The deal soured, and Highland ended up owning a slice of the movie studio.

Distressed debt investors have only grown more influential since then, with about $272bn under management as of last year, according to a tally maintained by Preqin, more than double the amount 10 years earlier.

But Highland was not among the victors of the financial crisis. Its flagship vehicle, the Crusader fund, closed to investors in 2008 after suffering losses, triggering battles that are still echoing across American courtrooms. Perhaps it is the endless fighting, or perhaps it is just the passage of time, but Dondero looks less youthful now. According to a person who works with him, his hair has turned greyer.

After losing a legal skirmish with investors, Highland Capital Management entered bankruptcy in 2019. Initially filed in Delaware, the Highland case became a page-turner after it moved to a Dallas court, where judges are less frequently called upon to deal with complex corporate bankruptcies.

Dondero, who resigned as a director after a negotiation with creditors, grew unhappy with the proceedings. US bankruptcy judge Stacey Jernigan took exception to Dondero’s conduct, too, twice ruling him in contempt of court. Jernigan imposed sanctions of nearly $240,000 on Dondero and others over one of those incidents, warning that if they appealed against her ruling and lost, she would hit them with $100,000 more.

What began as a routine business dispute has, over time, become something more poetic. Dim the courtroom lights, and you would have a real-life Texas noir.

One wonders whether that thought ever occurred to Jernigan, who is not only the bankruptcy court’s chief judge but also a part-time author. Her most recent novel, Hedging Death, features a fund manager named Cade Graham. Her fictitious financier buys an eclectic range of assets, from commercial debt to life insurance policies whose original owners no longer want them — a trade that one character calls “creepy”. “His boyish brown hair had turned silver,” Jernigan writes of Graham, “and his sun-kissed smooth skin had grown weathered.”

In a ruling handed down this week, in which she denied Dondero’s request that she step aside on grounds of bias, Jernigan was emphatic: her novel, she wrote, was “entirely fiction”, and “not about Mr Dondero or the hedge fund industry”. In the story, she points out, Graham fakes his own death in Mexico after linking up with drug cartels. He is a Princeton graduate. (Dondero holds a degree from the University of Virginia.)

Authorial intention is a slippery notion but it is striking that a close observer of the distressed debt industry should devise an unappealing character whom Dondero sees as “patterned after” himself. Jernigan insists that any resemblance to actual people, living or dead, “is entirely coincidental”. 

mark.vandevelde@ft.com