Missouri employee pension makes new claims against Canadian firm in suit over losses
Missouri’s public pension system on Thursday alleged in a court document that it had lost tens of millions of dollars invested with a Canadian private equity firm, as executives spent on private jets and hotels and the company hid the results of a Securities and Exchange Commission examination.
The Missouri State Employees Retirement System, or MOSERS, said in a filing in Cole County Circuit Court that Toronto-based Catalyst Capital Group withheld a letter from the SEC highlighting potential undisclosed conflicts of interest and misleading statements.
Catalyst said Thursday the SEC decided not to take action against the company following what the company called the “preliminary observations” of an examiner.
MOSERS first sued Catalyst in October 2020 over alleged mismanagement of some of the pension’s investments, which generate revenue to help pay benefits to more than 46,000 people. MOSERS had just under $100 million invested in funds managed by Catalyst as of 2016. By 2020, the value was $40.8 million.
The new filing comes after MOSERS this spring suffered a setback in court, when Judge Jon Beetem denied a request for a preliminary injunction to keep Catalyst from declaring the $8 billion pension fund in default of its obligations if it didn’t fully fund its commitments to the Canadian firm. In November, Catalyst also renewed a motion to dismiss claims against it, contending MOSERS had largely failed to identify how defendants broke the law.
Early in the case, many of the court filings were heavily redacted, as the pension system and the firm sought to keep sensitive financial information out of public view. But the new document offers fewer redactions as it seeks to paint Catalyst as a company engaged in “fraud, deception, willful misconduct, self-dealing and gross mismanagement” among other shortfalls.
It says Newton Glassman, a managing partner at Catalyst who is a defendant in the suit, and others improperly charged expenses to funds in which MOSERS had invested.
“While MOSERS and other investors … were suffering losses, Glassman and his cohorts greedily used Fund money to pay for the cost of flights for Catalyst executives’ friends and family on (Catalyst’s) private jet, and lavish benefits like $9,000 per-night hotel rooms for Mr. Glassman,” the complaint says.
A spokesman for Catalyst, Dan Gagnier, said in a statement that MOSERS had lost every issue it had brought before the court. He noted that Beetem had referred to the “shaky substance of MOSERS’ claims” in an earlier ruling.
“Last month, Catalyst moved to dismiss the whole case. Catalyst’s lawyers contacted MOSERS’ lawyers yesterday to bring that motion to dismiss before the Court. Today, in an attempt to avoid another loss, MOSERS abandoned many of its prior allegations, and repackaged some old news to try to avoid a full dismissal,” Gagnier said.
Gagnier said the Catalyst funds are well-run and continue to produce returns for investors.
“MOSERS is the ONLY one of the hundreds of investors in the Catalyst Funds to have filed litigation against Catalyst. MOSERS’ real problem is that it has mismanaged the investments of state employees. Now MOSERS seeks to shift the blame for its own mistakes,” Gagnier said.
In a statement, MOSERS Executive Director Ronda Stegmann said the pension system takes its responsibility of safeguarding system assets and protecting the interests of our membership seriously.
“As this lawsuit reflects, MOSERS is committed to holding outside investment managers, who are entrusted with investing system assets, accountable to the agreements and obligations they have with the System. We look forward to a resolution of these claims,” Stegmann said.
Relationship with Callidus scrutinized
The lawsuit — uncommon for a public pension system — has been closely watched in Jefferson City. Catalyst hired a lobbyist, Richard McIntosh, and a top pension official testified in court the company had tried to influence key legislators and place pressure on MOSERS outside of the court proceedings.
Catalyst has said it didn’t hire McIntosh to interfere in litigation. Rocco DiPucchio, Catalyst’s managing director, testified in January that he had learned that MOSERS had just $4 million of free cash available at one point in 2020. MOSERS had $40 million in outstanding commitments to Catalyst, he said.
An attorney representing MOSERS at the hearing said Catalyst had “engaged in a pattern of misconduct” and that the pension concluded that it couldn’t trust Catalyst with its investments.
MOSERS’ new complaint and its first complaint in October 2020 both make allegations surrounding Catalyst’s relationship to Callidus Capital Corporation. MOSERS’ first complaint said Glassman is board chairman of Callidus.
MOSERS previously 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 share pricing when the company went public in 2014.
The Wall Street Journal reported in 2017 that whistleblowers had filed complaints with Canadian regulators accusing Catalyst and Callidus of fraud that included inflating the value of assets and misleading borrowers. At the time, Glassman said the whistleblowers “must have an agenda” to drive down share prices to benefit short sellers.
MOSERS has previously declined to answer questions from The Star, citing the ongoing lawsuit, about whether it monitored its investment advisers like Catalyst and why it didn’t act sooner.
The new complaint says Catalyst and Glassman caused the funds MOSERS had invested in to become “severely over-concentrated” in Callidus and “failed to disclose the true extent of the Funds’ reckless exposure to Callidus’s failing business.”
The publicly-available portions of the document don’t appear to divulge exactly how much MOSERS says it has lost through its investments with Catalyst. But it does allege misconduct by Catalyst has caused the pension system to lose tens of millions of dollars.
SEC examination
Much of Thursday’s filing focuses on a letter the SEC sent to Catalyst in May 2018 describing an examination that found potential violations of federal law prohibiting investment advisers from engaging in fraud. MOSERS says Catalyst didn’t provide the letter; instead, the pension system obtained it after it became public as part of litigation in Canadian courts.
The SEC examination revealed numerous contractual relationships and business practices that appeared to raise conflicts of interest that weren’t adequately disclosed to investors, the letter says. Disclosures by Catalyst didn’t describe the extent of potential conflicts with Callidus, “and they do not disclose that the Adviser would adopt a practice of resolving some conflicts in favor of Callidus,” the letter said.
The examination also found statements made to investors appeared misleading, including comments about the performance of a company in its investment portfolio, according to the letter.
SEC staff reviewed a sample of fund expenses and found spending that didn’t appear either directly related to the funds’ own operations or reasonable, according to the letter. The letter summarizes hotel and private jet bookings costing thousands of dollars each.
The SEC identified four hotel stays in 2014 for Glassman with nightly rates of $5,500 to $9,000. The commission also found four chartered flights in 2014 and 2015 costing between $15,120 and $57,850. At least twice, the SEC found, passengers appeared to include family and friends of an “investment professional.”
Attorneys for Catalyst replied to the SEC in June 2018 to dispute the commission’s letter. Catalyst said it believed it had disclosed possible conflicts and pushed back against the idea it had misled investors, though it committed to making changes — some of which are redacted.
The portion of Catalyst’s response that appears to deal with hotels and flight expenses is redacted on a copy of the letter available online.
Gagnier, the Catalyst spokesman, said the SEC took no action against Catalyst after conducting a “thorough examination” of the company.
“The ‘SEC letter’ MOSERS mentions were preliminary observations of an examiner. MOSERS’ petition does not disclose that the letter it references specifically advises that its statements are not the conclusion of the SEC,” Gagnier said.
Catalyst said in its June 2018 letter the company and its investors had endured a sophisticated “campaign of defamation and economic interference” from competitors.
“Catalyst is, always has been, and always will be, committed to its investors,” the company’s letter said. “Catalyst’s relationship with, and reputation among, its investors is the lifeblood of the company.”
The Star’s Jeanne Kuang contributed reporting
This story was originally published December 16, 2021 at 3:23 PM.
