The bare-knuckle legal battle between two private equity funds reached a one-sided finish on Wednesday after an Ontario judge tossed out a $1.3-billion lawsuit from Catalyst Capital Group Inc. against rival West Face Capital Inc.
Justice Glenn Hainey of the Ontario Superior Court ruled that Catalyst engaged in “an abuse of process” by launching the suit over its failed bid for wireless company Wind Mobile. The decision marked the latest in a series of legal and business setbacks for Catalyst, which has been under increasing scrutiny over both its legal tactics and the valuation of some of its privately held assets.
Catalyst and founder Newton Glassman have now lost two civil cases over the sale of Wind in the fall of 2014. The wireless company was acquired for $300-million by a consortium led by West Face and subsequently sold 18 months later to Shaw Communications Inc. for $1.6-billion.
West Face chief executive Greg Boland said: “This decision is yet another independent confirmation of lack of merit to the serial litigation being pursued by Catalyst against West Face for almost four years.” Catalyst spokesman Dan Gagnier said the company was “disappointed” by the decision and plans to appeal.
Catalyst said in a written statement: “Consistent with its previous statements, Catalyst will explore all appropriate legal avenues to vindicate the above rights and interests, to ensure that all of the relevant evidence is publicly revealed, and to enable the truth about what happened in the Wind sale to be fully examined and decided on the merits in a court of law.”
The heart of Catalyst’s legal claim was an allegation that confidential details of its own negotiations to acquire Wind were leaked during the summer of 2014, allowing the West Face group to win the deal. However, the courts found that Catalyst was the author of its own misfortune: Mr. Glassman and his colleagues walked away from Wind after refusing to agree to a so-called break fee of $5-million to $20-million they would pay to Wind’s owners if the deal did not close.
Catalyst’s first lawsuit, known as the Moyse case, accused one of its former analysts of giving West Face confidential information when he took a new job there. A judge ruled in favour of West Face and the analyst in 2016 and Catalyst lost its appeal this February.
The second case – the one dismissed on Wednesday – again accused West Face and a number of others, including UBS Securities, former Wind owners VimpelCom Ltd. and a three private investment firms, of leaking or using vital information about Catalyst’s bid.
In dismissing the claim, Justice Hainey wrote that Catalyst was attempting to stage a new trial on issues that had already been decided in court.
“Re-litigation of this issue in this proceeding would impeach the integrity of the judicial system. It should not be permitted,” Justice Hainey said in a 32-page decision. He wrote: “Catalyst’s current action is dismissed against all of the defendants as an abuse of process.”
Catalyst has invested approximately $5-billion on behalf of institutional investors, including pension plans at the University of Toronto and McGill University. The firm is under some pressure to cash in on holdings, which were made over the past nine years, in order to return capital to investors in some of its funds.
Catalyst and Mr. Glassman are known for using aggressive legal strategies, and in some cases they have suggested to investors that litigation can bring in large financial rewards. For instance, in a presentation to investors in two of its largest funds last April, Catalyst placed a US$447-million potential value on Wind Mobile litigation – a valuation that is now likely worth zero now after Wednesday’s court decision. (Catalyst has said it does not include future litigation awards in its official financial statements, and gave the US$447-million figure only to provide additional disclosure to investors.)
In a court hearing on Monday, Catalyst’s lawyers said they had new evidence in the Wind case, should it move forward. Lawyers for West Face said as part of Monday’s court session that the new information was gathered in a Black Cube sting operation run against West Face employees.
Operatives for Black Cube, founded by ex-Mossad agents, allegedly posed as recruiters for a rival private equity fund to get current and former West Face employees to talk about their firm. Catalyst declined to comment on the source of its new evidence.
West Face’s lawyers, from law firm Davies Ward Phillips & Vineberg LLP, said Black Cube also ran a sting operation on Catalyst’s behalf that attempted to discredit the judge in the Moyse case, Justice Frank Newbould. On Wednesday, West Face said in a news release that if litigation continues, “the full scope of conduct by Catalyst and its agents will be publicly revealed.”
In Wednesday’s decision, Justice Hainey relied in part on Justice Newbould’s ruling, which said: “This lawsuit was driven by Mr. Glassman. He was not able to accept that he lost his chance to acquire Wind by being outsmarted by someone else.”
Catalyst’s investments also include distressed lender Callidus Capital Corp. Catalyst sold a minority interest in the company in 2014 for $14 a share; the stock closed at $4.96 on Wednesday. In 2017, Callidus reported $217-million of loan losses, including a particularly large loss to an oil-services company operating in Venezuela.
Catalyst and Callidus jointly filed as $450-million lawsuit last November that alleges West Face and a number of journalists, bankers and hedge funds were “wolfpack conspirators” engaged in a scheme to drive down Callidus’s stock price. West Face filed a $500-million counterclaim against the two businesses.