Faulting a trial judge's mishandling of a discovery dispute, a state appeals court on Tuesday wiped out a $46 million award against Manhattan hedge fund Touradji Capital Management, and ordered a new trial in a decade-old legal battle involving two former portfolio managers who said they were stiffed on millions of dollars in performance bonuses.

A four-judge panel of the New York Supreme Court, Appellate Division, First Department unanimously held that a lower court judge went too far in sanctioning Touradji Capital for allegedly failing to turn over U.S. Securities and Exchange Commission documents in response to the plaintiffs' pretrial demands.

The earlier ruling, from Supreme Court Justice Andrew Borrok, blocked Touradji Capital from using regulatory documents to support its counterclaims for breaches of fiduciary duty by the former employees, and prevented the firm from referencing their alleged destruction of evidence at trial.

In an eight-page opinion, the First Department declined to say whether Touradji Capital had committed a discovery omission, but did hold that the "drastic" sanctions were clearly "disproportionate" to the alleged misconduct. Ultimately, the court said, Touradji Capital had been denied a fair trial and the ability to challenge its adversaries' credibility on the stand.

"The record as a whole does not support a finding of willfulness or bad faith so as to justify the severe sanctions imposed," the court said. "No basis exists to indicate that this was anything other than a disagreement over the scope of discovery."

Tuesday's ruling revived a long-running and nasty dispute between Touradji Capital and its former portfolio managers, Gentry Beach and Robert Vollero Jr. The pair, who ran the firm's oil and gas sector-based portfolio, sued Touradji Capital in 2008 for breach of contract, claiming the hedge fund and its founder, Paul Touradji, had reneged on verbal promises that they could recoup huge performance bonuses based on the funds they operated.

The bonus agreements, they said, were always verbal because Touradji refused to put the terms in writing. As the years rolled by and the portfolios made large sums, the men said they found themselves repeatedly asking in vain to be paid the bulk of their bonuses.

Touradji, an Iranian-born hedge fund standout who in 2009 made Fortune magazine's "40 Under 40" rising stars list for having $2.7 billion in assets under management, shot back with a 52-page filing that in part laid out 11 counterclaims that blamed Beach and Vollero "for the destruction of millions of dollars of investor capital and millions of dollars in damages to Touradji Capital through a pattern of fraud, breaches of fiduciary duty, violations of law, mismanagement and utter disregard for the interests of the investors whose capital they were obligated to protect."

According to the First Department's ruling, many of Touradji's counterclaims hinged on supposed SEC violations that Beach and Vollero had committed while working for Touradji Capital, as well as allegations that Vollero had destroyed handwritten notes of his conversations with Touradji and replaced them with word-processed versions that appeared more favorable to the plaintiffs.

Attorneys for Beach and Vollero requested documents ahead of trial related to Touradji's SEC claims, but the defense counsel refused, saying they were under no obligation to produce the files based on prior requests. The First Department said that Borrok apparently "asked" Touradji at a pretrial conference to turn over the document. However, there is no transcript available from the meeting, and the judge never signed a formal order requiring production, the First Department said.

According to the ruling, an attorney for the defendants then told the jury during opening statements at trial that the SEC had made a "finding" that Beach and Vollero had "violated the securities laws." Plaintiffs' counsel immediately objected, arguing that the SEC document the opposition had referenced was not a finding, but rather a settlement between the SEC and Touradji, which referenced violations by two former hedge fund employees.

Touradji Capital clarified to the jury that it was prepared to introduce evidence proving the two unnamed employees were, in fact, Beach and Vollero.

Borrok, however, found that Touradji Capital's communications with the SEC were subject to three earlier discovery demands and imposed sanctions for breaching its ongoing obligation to produce the files.

The jury found in favor of the plaintiffs last year, awarding $21.4 million to Beach and $24.3 million to Vollero. Those figures, however, were expected to balloon to a nearly $91 million total payout because of 9% yearly interest to be added to compensation that was earned from 2005 to 2008.

On appeal, attorneys for Touradji defended the comments to the jury as accurate, and said that any misstatement was trivial and did not require a cure.

The First Department on Tuesday agreed that the statements "did not fairly describe" the SEC's findings, but said that the production issues amounted to nothing more than a "disagreement over the scope of discovery."

"It is unclear why a short continuance to give plaintiffs time to review the newly-produced documents would not have been a viable option, or why further curative instructions would not have sufficed," the opinion said.

"The record as a whole does not support a finding of willfulness or bad faith so as to justify the severe sanctions imposed," the court continued.

Robert Seiden, who represented the plaintiffs along with attorney Michael Stolper, said the ruling was based on a "technical interpretation" of the law, which would not ultimately harm his clients' case.

"We believe the jury spoke loud and clear last spring that Touradji Capital abused its employees," said Seiden, of Seiden Law Group. "We are very confident the jury will feel the same way in the upcoming retrial."

Aaron Panner, a Kellogg, Hansen, Todd, Figel & Frederick partner who represented Touradji Capital, did not return a call Tuesday seeking comment on the ruling.

The First Department panel in the case, captioned Beach v. Touradji Capital Management, included Justices Rosalyn Richter, Judith Gische, Troy Webber and Ellen Gesmer.

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