Highland Capital unit sued for allegedly using fund assets to rescue separate MLP offering

Highland Capital Management Fund Advisors, an affiliate of Highland Capital Management, is facing a class-action lawsuit filed by an investor who claims the firm tapped one of its mutual funds to support a separate failing fund, according to court documents.

The lawsuit, filed Wednesday in U.S. District Court in Dallas, accused Highland and James Dondero, co-founder and president, of using assets from the Highland Global Allocation Fund to invest in the Highland Energy MLP Fund, which has lost assets both before and after Mr. Dondero took over management of the master limited partnership fund in early 2015 over plunging oil prices, according to court documents.

The MLP fund had fiscal-year investment losses of 43% in 2015, 16% in 2016, 10% in 2017 and 16% for the first six months of fiscal 2018. In all of those years, the fund underperformed its benchmark and its peer group, the suit claims.

The $457 million Global Allocation Fund owned nearly 63% of the $29 million MLP fund's total shares as of March 31, according to the documents. (The asset amounts are both as of July 31, according to Morningstar data.) "While incurring damage to the Global Allocation Fund, the investment adviser was getting paid advisory fees by having the Global Allocation Fund buy and hold shares in the MLP fund," the suit claimed.

The investors said the activity was "a flagrant fiduciary breach" of Highland's responsibility, the documents said.

The suit seeks to recover unspecified damages.

Highland opposes these claims, noting that it waived fees for this investment over the period, a company spokeswoman said. "We believe this is a nuisance lawsuit and its claims are without merit."

"The issues raised in the complaint were thoroughly reviewed by the (fund) board, and an extensive written report, produced by a committee comprised of two independent trustees and independent counsel, demonstrated that all investments were made in compliance with fund documents and applicable law," she added.