The state employee retirement system is alleging an investment manager mismanaged its funds in a grandiose fashion and hid a history of doing so from the state.
The allegations of misuse include $57,000 flights on private jets and $9,000 hotel suites that were paid for by private investment funds run by the same company MOSERS trusted with $175 million and is now suing.
MOSERS, the Missouri State Employees’ Retirement System, filed an amended petition Dec. 16 in an attempt to reinvigorate a lawsuit from October 2020. The petition was filed in Cole County Circuit Court with Judge Jon Beetem
presiding.
The case had a motion for dismissal made last month, and the court has sided against MOSERS in two previous motions.
The state employee retirement system is now alleging Newton Glassman, founder and managing partner of Catalyst Capital Group, and his company used money MOSERS contributed to investment funds to grow an “affiliate” company — Callidus Capital — and hid the self-dealing practices.
The amended petition alleges 10 counts against Glassman, Catalyst Capital Group and its relevant funds. The charges include violation of state statutes, unjust enrichment, breach of contract and fraudulent inducement, among others.
“This is a case about fraud, deception, willful misconduct, self-dealing and gross mismanagement by an investment fiduciary charged with managing investments for Missouri state employees,” the amended petition begins. “At the center of the case is a private equity manager who believes the rules don’t apply to him — that he can do and say whatever he wants, regardless of his prior representations and promises, without consequences. This case seeks to hold that man and his companies responsible for their misconduct, which has caused hundreds of millions of dollars of losses to innocent investors, including MOSERS.”
Between 2010-12, MOSERS contributed $50 million to one Catalyst Capital Group investment fund and $25 million to another. A few years later, MOSERS invested $100 million into a third investment fund after Catalyst Capital Group presented “a series of false and misleading statements and material omissions,” according to the court filing.
Around the same time, Glassman was growing Callidus Capital, the “affiliate” of Catalyst Capital Group, and the amount it was providing in loans. Callidus Capital is a
Canada-based specialty finance corporation that provided bridge loans to companies traditional lenders would usually pass on.
“Glassman fueled this growth with money from investors in Funds II, III and IV,” the court filing states. “Each of these funds purchased large ‘participation interests,’ in which the Fund essentially funded all or parts of loans Callidus made. By 2014, Funds III and IV were owed nearly $400 million by Callidus for participation interests in outstanding loans originated by Callidus.”
The amended petition also alleges Glassman and Catalyst Capital Group repeatedly violated defined concentration limits, which would’ve prevented investing more than 60 percent of a fund’s assets in its top five investments.
MOSERS’ amended petition included a 2018 deficiency letter and a preliminary examination of Catalyst Capital Group from the U.S. Securities And Exchange Commission.
The preliminary examination found at least four instances in which Catalyst Capital Group used money from investment funds to pay for hotel suites with nightly rates of at least $5,500. It also found at least five instances in which investor funds were used to pay for private jet flights costing at least $10,800 and up to $57,850.
Although MOSERS didn’t contribute to the fund that paid for those hotel rooms, the SEC letter states private jet travel was generally improperly charged to funds, including the ones MOSERS invested in.
MOSERS legal representation is using the SEC deficiency letter and examination as evidence of mismanaged investment funds it contributed to and to argue there is an established pattern of financial malpractice.
According to the amended petition, the letter and examination findings were previously withheld from investors, including MOSERS, and did not become publicly available until they were filed earlier this year in a pending Canadian lawsuit.
In a statement, Catalyst Capital Group said MOSERS has lost every issue it has brought before the court and is attempting to abandon prior allegations and “repackage some old news” to avoid the case from being dismissed.
Catalyst Capital Group moved to have the case dismissed last month after the court blocked MOSERS’ motions for a temporary restraining order and preliminary injunction.
The court has noted the “shaky substance of MOSERS’ claims” in previous motion rulings.
Since the case was first filed, MOSERS has dropped its request to avoid making future capital calls, allowing the state retirement system to keep its investment in a Catalyst investment fund while the case is pending.
Additionally, Catalyst Capital Group said the preliminary SEC examination MOSERS references in its amended petition do not represent the commission’s findings.
“After the preliminary concerns were raised, the SEC conducted a thorough examination of Catalyst and decided not to take any actions against Catalyst,” the company statement said. “That is because the Catalyst Funds are well-run and continue to produce returns for their investors.”
MOSERS is the only investor to have filed a lawsuit against Catalyst Capital Group, the statement continues, even though hundreds have invested into the various funds.
“MOSERS’ real problem is that it has mismanaged the investments of state employees,” the statement said. “Now MOSERS seeks to shift the blame for its own mistakes.”