UPDATE 1-Investors sue Highland Capital after funds shut

* Investors sue hedge fund firm Highland Capital Management

* Suit alleges hedge fund misrepresented key data

* Highland Capital shut down two hedge funds in October

* Highland calls suit without merit

* Highland says trying to treat all investors fairly (Adds comment from Highland Capital)

By Svea Herbst-Bayliss

BOSTON, July 8 (Reuters) - A group of wealthy clients who invested $50 million with two hedge funds felled by last year's credit crisis are accusing Highland Capital Management's partners of having lied about key facts.

LV Highland Credit Feeder Fund LLC, an investment vehicle managed by Long Vue Advisors in Boston, and several charitable foundations and wealthy individuals filed the lawsuit on Wednesday in a U.S. district court in Dallas.

The group is charging that the Dallas-based hedge fund firm and its co-founders James Dondero and Mark Okada and three other partners were dishonest about other clients' requests to exit the funds at a time of increasing market turmoil.

The suit, which was reviewed by Reuters, also names JPMorgan Chase & Co's (JPM.N)'s Boston-based JP Morgan Investor Services Co and JP Morgan Hedge Fund Services (Bermuda) Ltd as defendants, charging that the units, which provided accounting services to the investors, provided false data.

Highland said the suit has no merit.

"We will defend ourselves vigorously," a spokeswoman said.

She said the company is trying to maximize the money investors will get back and has waived management fees and agreed to a third party mediation process.

JP Morgan did not respond to the calls seeking comment.

Attracted by Highland's strong returns -- the funds were named "best new fund of 2006" by Institutional Investor's Absolute Return Magazine -- the LV Highland Credit Feeder Fund LLC and the others put roughly $50 million into the hedge funds in July 2007.

In the summer of 2008, they added another million, the court papers show.