Highland v. Daugherty: All We Need Here Is JR Ewing, Part 1

| William A. Schreiner, Jr.

Many of the executive employment disputes we write about focus on one or two key issues – the enforcement of a non-compete clause in an employment agreement, for instance, or the odd ways a severance package can work

A case being heard in Dallas, however, brings together a whole set of executive-employment-related problems in one place: alleged defamation, corporate confidential information allegedly not returned by a departing executive in breach of a written employment agreement, compensation demands and agreements that were never put in writing, and an executive’s desire to work part-time from home.  Throw in alleged self-dealing and conflict of interest allegations against the executive – who ran a specialty investment team at the employer, a large hedge fund – and you have the sort of intense, angry dispute that used to be featured on a soap opera set in Dallas that captivated the nation in the 1980s

Without, of course, the famous shower scene.  

But what we have in Highland Capital Management v. Daugherty is almost as interesting.  We look at it this week because the allegations and testimony in the case demonstrate how long-term, successful relationships between a senior executive and an employer can go way, way off the tracks, and wind up in expensive litigation that forces each side to share information about itself that it would otherwise not want to see reported in the Dallas Morning News (which has excellent coverage of the trial). 

As always, we take no position on who is right or wrong, or what’s true or false.  But this case presents a cautionary tale about executive employment disputes that go extreme. 

We start in this part with Highland Capital Management’s allegations against Patrick Daugherty.  Highland sued Daugherty in early 2012, claiming, among other things, that he had breached his employment contract when he resigned from the company in 2011.  That breach came from Daugherty’s alleged failure to return 59,000 confidential documents that he took with him (to his credit, Daugherty later returned 11 of those documents).  The fund also alleges Daugherty used those documents to poach clients, and spread rumors about the company. 

During the trial, though, even more bad blood has been spilled.  According to the Dallas Morning News, Highland’s executives testified that an incentive program called “Sierra Verde,” set up to compensate Daugherty and his team, had to be stopped after Daugherty resigned because of “serious compliance violations.”  According to that executive’s testimony, “Daugherty engaged in conflict-of-interest transactions for Sierra Verde that benefited him at the expense of investors,” the Dallas Morning News reports, including backdating stock prices while selling the firm’s clients shares of the same stock at three times that price. 

Daugherty is not without his defenses, though, and we look at them in Part 2.