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Most hedge-fund casualties of the financial crisis liquidated years ago. But investors in two funds that Dallas-based Highland Capital Management closed in October 2008 are still owed hundreds of millions of dollars as the fund liquidations stretch into their ninth year.

Now investors, including a classical-music charity in Los Angeles and a Christian university in Texas, are suing Highland to recover money they allege it cheated them out of, in a pair of pending cases.

Highland's founders James Dondero and Mark Okada have fought an unusual number of legal battles since the crisis. But the two new lawsuits mark the first time organized committees representing all investors in the liquidating hedge funds have sued the firm; one of the committees recently scored a victory in its case.

The lawsuits claim Highland, which manages about $17 billion, enriched itself by secretly taking a roughly $30 million fee out of one fund, called Crusader, and inappropriately selling assets from a second, called Credit Strategies.

"Just when you think you've seen it all, Jim Dondero comes up with a new twist," says Geoffrey Stern, president of Muirfield Capital Management, which invested in Crusader. "They just took our money."

The money Highland withdrew from a reserve account in the Crusader fund was part of a deferred fee that belonged to the firm, not to fund investors, a company spokeswoman said via email. The contested asset sale, from a fund called Credit Strategies, was in the best interest of investors, she said.

Many hedge-fund managers closed during the financial crisis over disputes with investors and the Wall Street banks with which they traded. Highland decided to close the hedge funds but waited to liquidate investments, later fighting in court against banks and investors who demanded immediate repayment.

Highland recovered more for investors—$1.55 billion so far for Crusader—because it waited to sell assets, fetching higher prices, and because it litigated to defend investor interests, said the firm's General Counsel Scott Ellington.

The legal wrangling with banks and investors ended in a mix of wins, losses and settlements for Highland. The firm also settled with the U.S. Securities and Exchange Commission over alleged improper trades of client assets; Highland neither admitted nor denied wrongdoing.

At its peak in 2007, Highland managed about $39 billion, much of it in loan funds called collateralized loan obligations, but also in hedge funds that bought corporate debt, private equity, mortgage-backed bonds, bundles of life-insurance policies and timberlands.

When prices of many such complex instruments plummeted in 2008, Highland's flagship Crusader fund lost about $1.5 billion, or 50%, according to documents reviewed by The Wall Street Journal. Investors in Credit Strategies suffered heavier losses as banks repossessed about 80% of its assets, which Highland had pledged as collateral for loans, people familiar with the matter said.

Highland spent two years negotiating with investors in these "zombie" hedge funds over how best to split up liquidation proceeds. In 2011, Crusader investors agreed to a schedule of liquidation and to a $47.5 million deferred fee payable to Highland for its precrisis performance, but only after "complete liquidation of the Crusader Funds' assets," according to a copy of the liquidation plan reviewed by The Wall Street Journal. Credit Strategies investors agreed to a liquidation plan but with no fees for Highland.

The Crusader fund's liquidation was contentious from the start. By the spring of 2012, investors including Baylor University and Grosvenor Capital Management had received about $500 million and they urged Highland to sell more assets and speed up repayments.

Highland responded by offering to buy investors out immediately at 75% of fair value, according to documents reviewed by The Wall Street Journal. Several large investors rejected the deal because they considered the buyout price too low, people involved in the process said. Highland responded by telling investors it planned to cut the price to 50% of fair value, then decided to abandon the buyback, according to the documents.

The firm was "in good faith attempting to devise a creative, viable, solution," a Highland spokeswoman said.

The liquidation continued slowly, frustrating investors. They decided in April to sue Highland, when the firm disclosed in a financial report that months earlier it had paid itself part of the deferred fee, which investors say breached their agreement to wait for full liquidation before withdrawing the roughly $30 million.

Crusader still held $270 million of assets in July, according to a letter Highland sent to the committee in August. The committee of fund investors sued Highland in Delaware Chancery Court to fire the firm as Crusader's manager and recover the fee it allegedly took.

Highland said it was entitled to the fee because Crusader's assets were frozen by a temporary restraining order from a lawsuit UBS Group AG filed against the firm for failing to pay $745 million it allegedly owed the bank, making it impossible to liquidate on schedule. Highland had been aware of the UBS lawsuit, filed in February 2009, for two years when it agreed to the Crusader liquidation plan in May 2011, and the restraining order was in place from August to November 2013 and from January 2014 to January 2016.

Highland agreed in August to be replaced by restructuring specialist Alvarez & Marsal as Crusader's manager after the committee filed its lawsuit.

Selling off assets in the second fund, Credit Strategies, also has been fraught. One of the largest investments left in the fund in 2011 was a 19% private-equity stake in Cornerstone Healthcare Group, an acute-health-care company majority owned by Highland and its other hedge funds.

The shares became a flashpoint in 2012 after Highland proposed selling the stake to Cornerstone for less than what investors considered fair value. Investors led by the Colburn Foundation, a Los Angeles-based classical-music charity, and investment adviser Concord Management refused and tempers flared.

Mr. Dondero called the investors "idiots," and "disrespectful," for questioning the proposed share sale, according to emails disclosed in court documents. He also pushed the investors to start paying Highland a $250,000 monthly management fee for liquidating the defunct fund because of the "significant monthly legal expenses" involved, according to the emails.

The investors refused and Brant Behr, a director at Concord, sent Mr. Dondero an email telling him, "I had also thought you agreed to unwind this portfolio at no charge because of the notable losses your fund incurred."

The hedge-fund investors misunderstood Highland's proposals, "resulting in frustration on both sides," the company spokeswoman said.

The conflict escalated in 2013 when investors learned Highland had secretly sold the fund's stake to Cornerstone for $24 million, 13% less than Highland's own valuation of the shares, according to an arbitration-panel finding.

"Highland hid from us that it was selling the position, and then sold it for a below-market price, cheating the investors out of their money," says Colburn's former executive director Ruth Eliel.

The investors demanded arbitration, winning an award against Highland in April for its "willful misconduct" in selling the stake at a low price "to the benefit of Highland," according to the award. A U.S. District Court of New York upheld the award and ordered Highland to pay $11.4 million in damages and interest and to disburse $35 million from the fund in August.

Mr. Ellington, Highland's general counsel, said that Highland has appealed the ruling and that the sale price was favorable for investors because Cornerstone's value fell in recent years.

"Every other fund manager I had did the right thing in the crisis," said Eloise Yellen Clark, CEO of Los Angeles-based financial adviser OmniQuest Capital LLC, whose firm has had investments tied up for years in Crusader. "It is my opinion that Highland did not."

(END) Dow Jones Newswires

October 24, 2016 16:45 ET (20:45 GMT)

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