Secrecy surrounds lawsuit by Missouri employees over firm’s pension fund investments
The Missouri State Employees Retirement System, a public pension with nearly $12 billion in assets, accused a major Canadian private equity firm of mismanaging some of the pension’s investments.
MOSERS sued Toronto-based Catalyst Capital Group in October, accusing the firm of steering MOSERS investments into a troubled finance company that had close ties to top officials at Catalyst.
It’s not clear if, or how much, MOSERS lost on the Catalyst investment. The lawsuit filed by MOSERS is heavily redacted. Pension funds, experts told The Star, are usually reluctant to pursue litigation.
Most of the subsequent filings in the case are under seal and a portion of a hearing in the lawsuit on Wednesday was closed to the public, despite an objection by a reporter from The Star.
Charles Hatfield, a partner with the law firm Stinson who is representing Catalyst, said the second half of Wednesday’s hearing would involve discussions about sensitive data and internal workings of private funds. Cole County Circuit Court Judge Jon Beetem agreed to close the second half of the hearing.
A spokesman with Catalyst did not respond to a request for comment on the MOSERS litigation.
The Missouri State Employees Retirement System serves 46,417 active participants and pays benefits to 51,447 recipients.
MOSERS’ relationship with Catalyst, according to the lawsuit, goes back as early as 2011 when it invested in one of Catalyst’s funds. In 2012 and again in 2015, MOSERS invested in two other Catalyst funds.
According to MOSERS’ 2016 comprehensive annual financial report, the total fair value of the pension’s investments across the three Catalyst funds was $99.5 million. In MOSERS 2020 report, the fair value of the funds was $40.8 million.
Private equity investments are often difficult to value and it’s not clear what led to the change in Catalyst’s value to MOSERS. In its annual report, MOSERS describes the nature of its investment in Catalyst as “Canadian distressed debt.”
Catalyst made news earlier this year when it led a creditors group to buy performance art group Cirque du Soleil Entertainment Group out of bankruptcy.
Experts said that public pensions like MOSERS in recent years have developed more of an appetite for riskier — and potentially more lucrative — private equity investments. That’s primarily because more than a decade of low interest rates has meant more traditional pension investments — 10-year Treasury bonds, high-grade corporate bonds and the like — have tended to generate lower returns.
“Pension funds around the country have decided they will maintain the targeted returns they have had before and in order to continue targeting them they will have to move into riskier and riskier investments,” said Joshua Rauh, a professor of finance at Stanford University’s Graduate School of Business who studies government pensions. “The safe investments aren’t returning as much anymore.”
The MOSERS lawsuit involves Catalyst’s relationship with a company called Callidus Capital Corporation.
Before 2014, two of the Catalyst funds that MOSERS invested in owned — along with another Catalyst fund and partnership — 100% of Callidus.
Callidus is described in Canadian securities filings as a lender focused mostly on North American companies that can’t get financing from traditional sources like banks and investment firms. Known as alternative lenders, investments in companies like Callidus are typically regarded as carrying high risk, with a potential for a high return.
Callidus went public in 2014 on the Toronto Stock Exchange with its shares priced at 14 Canadian dollars apiece. The two Catalyst funds with MOSERS investments at the time kept majority ownership of Callidus after it went public, MOSERS said in its lawsuit.
MOSERS’ lawsuit said Catalyst and Callidus had close ties with one another: Newton Glassman, the founder of Catalyst who is generally regarded as one of the highest profile Canadian private equity players, is board chairman of Callidus. Callidus’ corporate secretary, Jim Ripley, had recently been Catalyst’s managing director.
Catalyst got itself involved in risky arrangements with Callidus, including a guarantee in 2014 by the two Catalyst funds that MOSERS invested in against losses involving some of Callidus’ more precarious loans, according to the lawsuit. That same year and in 2015, Catalyst offered up another investment in Callidus in the form of a combined $250 million unsecured loan.
MOSERS said Callidus had a “tumultuous” time, a period that lasted five years until 2019 when one of its top shareholders pledged to take the company private at 75 Canadian cents a share, a departure from the 14 dollar share pricing when the company went public in 2014.
A 2017 article in the Wall Street Journal reported that four whistleblowers filed complaints with Canadian securities regulators accusing Catalyst and Callidus of fraud ranging from inflating the value of assets and misleading borrowers about loan terms.
The following day, Glassman said the whistleblowers “must have an agenda” to drive down share prices for the benefit of short sellers, who are stock traders who place bets that a publicly traded company will do poorly rather than see share prices grow.
Given Callidus’ reported controversies throughout its time as a publicly traded company, it’s not clear why MOSERS decided to sue this year. A spokesperson for MOSERS said the pension could not comment on Catalyst, given the ongoing litigation.
MOSERS, historically regarded as one of the better run state pensions, reported $11.9 billion in assets in 2020, down from $12.2 billion the year before. In 2019, MOSERS reported $263 million in cash and short-term instruments, an amount that fell to $4.9 million in 2020.
Pensions have an obligation to keep promises to retirees, meaning if they come up short through investments, they have to turn to the state government for funds to keep payments going to retirees — often a politically and fiscally unpopular decision — or pursue investments that can attract a higher return.
This story was originally published December 17, 2020 at 5:00 AM.
