Highland v. Daugherty: Part 2 -- Daugherty Responds

| William A. Schreiner, Jr.

In Part 1 of this post, we looked at a heated executive employment dispute that is being tried in Dallas.  The case involves a former hedge fund executive, sued by his former employer for allegedly not returning 59,000 confidential documents when he resigned and for trying to poach the firm’s clients.  The Dallas Morning News has full coverage here and here

The trial is forcing both sides to air things about the other – and themselves – that they would likely not want raised in a public forum.  In Part 1, for example, we noted how Highland executives testified that a compensation program had to be stopped after the executive, Daugherty, left the firm, because (as the Dallas Morning News put it) Daugherty “engaged in conflict of interest transactions” for the compensation program.  Surely Highland would rather not have raised that issue publicly.  But that’s what aggressive litigation sometimes forces parties to have to do to win their case – which is the cautionary tale of the Highland v. Daugherty trial.  

Daugherty has raised some defenses to Highland’s allegations, and we discuss them here to show the tough nature of this case – without, of course, taking a side on who is right or wrong, or what is true or false.  He’s countersued Highland, alleging that the firm has defamed him and still owes him compensation.

Daugherty pleads an interesting defamation case.  In what he calls “the ultimate insult,” he alleges that Highland told investors and other funds – which could have been potential employers – that he left the firm for “lifestyle reasons.”  According to the Dallas Morning News, Daugherty testified that this otherwise vanilla reason for his resignation made him “look like a flake, like I wasn’t committed to my job.”  In addition to having to prove that Highland people made these statements to others, he’ll have to prove that they “tended to harm his reputation” and were made with negligence or malice.  The jury will, it appears, have to be able to see Daugherty’s reputation in the hedge fund community, and its work ethic, through his eyes in order to find in his favor: resigning for “lifestyle reasons” is not something that could be said to be defamatory for people in perhaps less work-intense professions.

Daugherty also alleges he’s entitled to back compensation, although that may also be tough to prove – in his last pay negotiation, Daugherty wanted to get his compensation agreement in writing, but the fund’s founder refused.  Daugherty said he no longer trusted the firm’s founder, and that’s why he demanded a written agreement.  But according to an e-mail introduced at trial, the firm’s founder refused to do so, writing to Daugherty that “You will trust or you will leave. You will get no agreement in writing.”

Daugherty also testified in response to the firm’s allegations – again, covered in Part 1 – that the trades he made for the firm’s compensation incentive fund were conflicts of interest with the firm’s clients.  He claims that he cleared those trades with the firm’s outside counsel, and also argues that the increase in value of those shares (which means the firm’s clients were buying the shares at three times Daugherty’s backdated share price) reflected increased underlying value because Highland had since turned the companies around. 

On the firm’s allegation that he refused to return confidential information, Daugherty raises a defense that we've seen in similar cases.  He admits he only returned 11 documents out of 59,000 that he kept, because the documents are intermingled with personal documents, photos and emails.  He testified, instead, that while he has the information, he simply hasn’t used it – “just freezing” it, according to Law360

The trial is continuing, although it’s likely that both sides now wish it hadn’t gone this far and been this, well, trying.  We’ll let you know the result when we learn of it.  Regardless of the outcome, though, the lesson from this for those willing to litigate their employment dispute is: sometimes trials of executive disputes can cost both sides more than lawyers’ fees.