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Hedge Fund Claims Law Firm Tried to Extort It

DALLAS (CN) - Hedge fund manager Highland Capital Management claims in court that a Texas law firm representing a disgruntled former employee is trying to extort it for $2 million.

Dallas-based Highland Capital Management sued the Looper Reed & McGraw law firm, in Dallas County Court. It claims the attorneys disregarded professional conduct rules and committed a "series of criminal acts."

Looper Reed represents Patrick Daugherty, Highland's former general counsel, who held several senior-level positions at the firm for more than 13 years, according to the complaint.

Highland sued Daugherty in state court in 2012, accusing him of using the firm's confidential information and making false statements about it after a dispute over pay.

"Flush with over 60,000 documents containing more than 100,000 pages of confidential and privileged information stolen from Highland, Looper Reed refused to return the materials when instructed by Highland," the complaint states. "Instead, Looper Reed lawyers, in conjunction with their client, threatened to use the materials to publicly slander and disparage Highland unless Highland agreed to pay their client more than a million dollars."

Highland says the information includes partner and employee pay plans, investment and management strategies, investment strategies for new acquisitions, leverage, margin calls and liquidity issues and negotiations with lenders, among other things.

It claims Daugherty used the information to start a competing investment business at its expense.

Highland claims that Daugherty, as head of its distressed investment group and special situations investing department, became "increasingly unmanageable, erratic, and insubordinate" in his final years at the firm. "So much so that a number of employees made complaints regarding Daugherty's actions," the complaint states.

"Specifically, these complaints centered on Daugherty's abusive tirades, where Daugherty would frequent dehumanize employees, publicly berating them with expletive-filled gay slurs and the like. Although Highland's management discussed the complaints with Daugherty in an attempt to cease such outburst, Daugherty arrogantly declared that he had the right to insult and demean any man or woman at Highland in any way he saw fit regardless of the purpose or content."

Highland claims that when it tried to negotiate his departure, Daugherty demanded a "ransom," before quitting in September 2011.

It claims Looper Reed then threatened that if it did not pay the $2 million demanded, Daugherty would provide adverse testimony against Highland and its executives in pending litigation.

Highland claims Daugherty has been disclosing its confidential information to several investors at industry conferences, "where he also spread disparaging lies about Highland in an attempt to damage its reputation and gain future clients for his competing investment company."

"Both Looper Reed and Daugherty made it clear to Highland that Daugherty would continue his efforts to slander and disparage Highland unless Highland agreed to pay Daugherty more than $2,000,000 and that if Highland failed to do so Looper Reed intended to make it 'bad' for Highland," the complaint states. "Again, Highland did not oblige Looper Reed's demands."

Highland claims the law firm violated professional conduct rules and committed crimes when it reviewed and analyzed the employment and buy-sell agreements in place, knowing Daugherty's fiduciary and contractual duties to Highland and the obligation to maintain the confidentiality of the information.

"Nonetheless, when Looper Reed learned from Daugherty that he unlawfully possessed over 60,000 documents comprising more than 100,000 pages of proprietary information, it knowingly obtained a copy of the stolen proprietary information - not so Looper Reed could notify Highland and return the proprietary information, but so Looper Reed could review, copy, analyze, and use the information against Highland in furtherance of their scheme to extort, slander and disparage Highland," the 24-page complaint states.

Highland also claims the law firm interviewed Daugherty repeatedly to learn more privileged information to use against it.

Ruth Ann Daniels, a partner at Looper Reed's Dallas office and lead defense counsel in Highland's lawsuit against Daugherty, said Monday that Highland's lawsuit "is baseless and contains allegations and arguments which have already been advanced and rejected" in the other case.

"This is yet another transparent trial tactic employed by Highland to further delay and complicate the underlying litigation, which is specially set for trial on Jan. 14, 2014," Daniels said in an interview. "We will not be distracted from vigorously advocating for Mr. Daugherty in that litigation."

Founded in 1985, Looper Reed has more than 120 attorneys in its offices in Houston, Dallas and Tyler, according to its website.

Highland seeks damages for theft, conspiracy, breach of duty of confidentiality, conversion, aiding, and abetting and tortious interference.

It also wants Looper Reed to be enjoined for at least five years from any representation adverse to Highland without its permission.

Highland is represented by Roger Mandel with Lackey Hershman in Dallas.

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