Gregor Logan, the former joint chief investment officer of New Star, has said a leveraged balance sheet and poor performance from flagship funds caused the demise of the asset manager.
Speaking at the employment tribunal where Patrick Evershed is claiming unfair dismissal from New Star, Logan denied Evershed's claim that founder John Duffield's treatment of his staff was the reason New Star folded.
Logan said moves to boost the company's dividend by taking on debt had instead played a major role in the asset manager's collapse.
New Star took on bank debt and leveraged its balance sheet 18 months before it paid out a special dividend to shareholders in 2007, he said.
By late 2008 its debt had spiralled and shares had tumbled in value, and it was eventually bought by Henderson in early 2009.
"My subjective opinion is that there were essentially two main reasons which lead to New Star's demise," Logan said.
"Firstly, 12 to 18 months before, the company had paid a large special dividend and in order to do so the firm leveraged its balance sheets by taking on bank debt."
Logan added the poor performance of the group's flagship funds also contributed, as New Star's share price tumbled from nearly 500p to just 2p.
He said a number of funds fell in value along with the stock market itself, spooking investors. "This resulted in unitholders becoming unnerved and led to a wave of redemptions," he added.
Logan said he did not believe Evershed's performance was poor, instead stating the fund was a hostage to the market it was invested in.
He disputed Evershed's claim that founder John Duffield's handling of staff caused the group's downfall.
Denying claims there was a poisonous atmosphere under Duffield's stewardship, Logan said he did not witness any bullying on the trading floor.
"I do not accept Duffield had an aggressive manner. When he called someone a 'moron' it was meant as a joke, and was taken as a joke by the staff," Logan said.
"He had a tough approach in trying to get the best possible performance out of the managers but he let them get on with managing the funds in their own styles and rarely questioned their decision making - it was New Star's ethos not to employ a top-down view."
Evershed has previously claimed his former boss Duffield bullied and humiliated New Star staff, including withdrawing offers of sweets from managers having a poor period of performance.
Evershed said in his statement that in a career spanning 40 years, he had never experienced such a "poisonous working environment", and argued Duffield's actions led directly to the demise of the firm.
"The much publicised demise of New Star was as a direct result of founder John Duffield's bullying, his interference with the way in which the fund managers managed their funds, and his refusal to take on board anyone's advice," Evershed said.
He is claiming more than £1m in damages.
'Right thing to do'
£69m spent on upgrades
European fintech market 'underserved'