ETF News

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

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.

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.

Like other hedge funds however, the Highland funds were bruised during last year’s worsening credit crisis. In October, Highland Capital Management shocked investors by shutting down the Crusader Fund and the Credit Strategies Fund after assets had shrunk and many other investors had exited.

Last year the average hedge fund dropped 19 percent, marking its worst-ever returns.

“My clients were lied to about what was happening at the funds, and if they had been told the truth they would have tried to get out much sooner,” said Jay Eisenhofer, whose firm Grant & Eisenhofer P.A. represents the investors.

Calls to Highland and JP Morgan were not returned.

From March to June 2008 the plaintiffs said that the fund managers misrepresented vital information about other investors’ requests to exit the funds.

Although the investors had asked specifically about other investors’ possible plans to exit, they were told that so-called redemption requests were fairly light.

Donald Salvino, a Highland partner, told the plaintiffs that redemptions “were almost a nonevent,” according to the documents.

When Highland, a multibillion firm that also managed other hedge funds and traditional portfolios, shut the two hedge funds, it divided investors into two groups -- those who asked to get money out and those who did not.

By believing the calming reports issued by the funds’ partners, the plaintiffs said they kept their money in the funds and are now disadvantaged in getting money back.

Redemption requests can be critical for hedge funds because managers often have to sell positions quickly in order to return the money fast, Last year many funds prohibited their investors from exiting to prevent all capital from leaving at once. (Reporting by Svea Herbst-Bayliss, editing by Gerald E. McCormick)