A U.S. pension fund is suing Catalyst Capital Group Inc. and its founder, financier Newton Glassman, claiming gross negligence and breach of contract related to the Toronto-based private-equity company’s dealings with a struggling lender it controlled.
The Missouri State Employees’ Retirement System (MOSERS), an investor in three of Catalyst’s funds, alleges Mr. Glassman and his company failed to provide the necessary duty to protect its interests and breached a limited partnership agreement as they repeatedly extended financial lifelines to Callidus Capital Corp., a formerly publicly traded lending company.
It is the first known instance of a limited partner suing Catalyst and Mr. Glassman over their business activities. The company and its founder have launched several lawsuits of their own against business rivals, reporters and others. One long-running case in Ontario Superior Court of Justice alleges a conspiracy to damage Catalyst and Callidus, and the fund manager has filed as evidence e-mails between those it accuses of being involved.
None of the claims in the MOSERS suit has been proven in court. An official with the US$11.5-billion pension fund declined to discuss the case, citing a policy of not commenting on ongoing litigation.
Catalyst said the suit, being heard in Cole County Circuit Court in Missouri, is “entirely without merit.”
Spokesman Dan Gagnier said the lawsuit is “rooted in previous false reporting that has been detailed in evidence currently before the Ontario court. MOSERS was unsuccessful in its first attempt to avoid its obligation to fund a capital call, and we will continue to defend the partnership and the interests of our other LPs vigorously so that MOSERS is held to its binding commitment to the partnership and those LPs.”
In a petition filed in October, now heavily redacted, MOSERS described loans and guarantees Catalyst funds extended to Callidus. Both companies were closely related and shared managers, including Mr. Glassman, who is managing partner of Catalyst and was also Callidus’s chief executive. The pension fund called the arrangement a “web of entanglements” between the two organizations.
Callidus was a lender to distressed companies. It went public at $14 a share in 2014. Last year, after several quarters of net losses, the second-largest investor, Braslyn Ltd., bought out the minority shareholders for 75 cents a share. Catalyst funds retained the majority interest in the company, which is now known as FrontWell Capital Partners.
The Catalyst funds were both major equity investors and debt holders of Callidus, and they also backstopped bad loans that Callidus had on its books. MOSERS pointed out that Catalyst made a $200-million unsecured bridge loan to Callidus in 2014, and that was increased by $50-million a year later. The maturity of the loan was extended and other covenants waived in subsequent years.
By March, 2019, Callidus owed Catalyst funds $339.8-million related to that loan, MOSERS said. With other financing that Catalyst funds provided, Callidus owed it $421-million when the company was taken private at a fraction of the price it was once worth.
In its petition, MOSERS alleges Catalyst’s dealings with Callidus amounted to negligence and breach of fiduciary duty, and that it suffered financial losses as a result. It also claims Catalyst breached its limited partnership agreement, partly by failing to provide information about the investment funds when requested. Besides compensation for the losses, which are tallied, the pension fund is also seeking punitive damages.
As part of its case, MOSERS had applied for a temporary restraining order to release it from having to make a capital call to Catalyst, but the judge in the case denied the application in November.
MOSERS said in its annual report for the 2020 fiscal year ended June 30 that its investments with Catalyst were worth US$40.9-million. That was down from nearly US$72-million in 2015.
Other companies in Catalyst’s portfolio include Gateway Casinos & Entertainment Ltd., Sonar Entertainment and Therapure Biopharma. Catalyst also recently agitated for a higher price in the privatization of Hudson’s Bay Co. and led the restructuring of Cirque du Soleil.
The case is scheduled to return to court in early January.
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Jeffrey Jones