Missouri State Employees' Retirement System, Jefferson City, filed an amended lawsuit against Canadian distressed debt specialist Catalyst Capital Group, making multiple allegations including misconduct and breaches of fiduciary duties.
The $9 billion pension fund, which filed the amended lawsuit Thursday in Cole County Circuit Court in Jefferson City, alleges Catalyst and Newton Glassman, the firm's founder and managing partner, "did not manage investments honestly, or with anything close to due care," making "conflicted, unfair investments" which "lost hundreds of millions of investors' money," according to the court filing.
Among the allegations cited in the lawsuit, the pension fund claims that Catalyst Capital's "purported fealty to concentration limits was a ruse," saying that the funds into which MOSERS had invested had become severely overconcentrated in specialty debt manager Callidus Capital Corp. and "failed to disclose the true extent of the funds' exposure to Callidus' failing business," charging that Catalyst Capital did so because Mr. Glassman was the chairman and CEO of Callidus and "he and (Catalyst Capital) each had a large equity position in Callidus that would be wiped out if the company failed."
MOSERS originally committed $50 million to Catalyst Fund III, $25 million to Catalyst Fund IV and $100 million to Catalyst Fund V, according to the court filing.
The lawsuit alleges that Mr. Glassman took control of Callidus in 2006. That firm was a Canada-based lender founded early in the 2000s specializing in loans to firms that had problems obtaining financing from traditional lenders. He made it an affiliate of Catalyst Capital Group, became its chairman and CEO, "desired to grow the size of Callidus' loan book dramatically" and did so with money from investors in Catalyst Capital's funds.
"Each of these funds purchased large 'participation interests,' in which the funds essentially funded all or parts of loans Callidus made," according to the filing, which alleged that by 2014, Funds III and IV were owed almost $400 million by Callidus for participation interests.
Among the 10 counts against Catalyst Capital include breach of fiduciary duty, fraudulent inducement, breach of contract and civil conspiracy.
According to a news release from MOSERS, the pension fund went to court against Catalyst last year and filed the updated petition Thursday due to additional revelations from a 2018 SEC examination of Catalyst.
A Catalyst Capital Group spokesman said in an email that MOSERS has lost every issue they have brought before the court, and last month Catalyst moved to dismiss the case and its lawyers had contacted the pension fund's lawyers Wednesday that the firm would bring that motion before the court.
"(Previously), they were denied a TRO and denied a preliminary injunction. After two full days of testimony, the Court denied MOSERS' request for a preliminary injunction. In that ruling the judge noted the 'shaky substance of MOSERS' claims,' " the spokesman said. "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."
The Catalyst spokesman also said the SEC in its examination did not reach the conclusions referenced in the lawsuit and "conducted a thorough examination of Catalyst and decided not to take actions against Catalyst."
In the pension fund's news release, Ronda Stegmann, its executive director said, "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."