The Missouri State Employees Retirement System is seeking to recoup losses it blames on the alleged misleading and fraudulent conduct of one of its private equity investment managers.
The pension fund first sued Canadian-based Catalyst Capital Group Inc. last year, claiming it had mismanaged investments. Much of the lawsuit was redacted.
New information that MOSERS believes backs up its allegations has since surfaced including a 2018 letter from the Securities and Exchange Commission, which is included in an amended complaint filed Thursday in Cole County Circuit Court in Jefferson City against Catalyst and its founder Newton Glassman.
Catalyst counters the amended complaint is a last-ditch effort by MOSERS to keep its litigation alive after adverse rulings in the original case and accuses the pension fund of trying to blame it for its own mismanagement.
Catalyst manages $175 million of the system’s $9.5 billion in assets — based on the fund’s market value for the last fiscal year — with investments in three Catalyst accounts.
“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 complaint reads. “This case seeks to shed light on that misconduct and to obtain justice and redress for MOSERS and the other investors that defendants willfully harmed.”
The system is 59% funded based on actuarial results for fiscal 2021 and has $6.2 billion of unfunded liabilities, up from $5.5 billion for 2020 with the funded ratio dropping from 61%. It serves nearly 43,000 active members, according to the 2021 valuation.
The fund’s health is noted in the triple-A rated state’s rating reports. “Despite Missouri making full ADCs and several rounds of pension reforms, liabilities have increased over time,” Fitch Ratings said in its latest review. “Asset gains that have lagged liability growth and a shift to lower discount rate assumptions for all pension systems has contributed to this trend. Stabilization of net pension liabilities will depend on the systems' achieving targeted investment returns over time.”
The pension fund accuses the firm of pouring too much of its money into the Callidus Capital Corp. which resulted in “reckless exposure” to a “failing” fund. MOSERS claims it was misled on the investments and what it calls the firm’s reckless loans and guarantee policies as Callidus was floundering all in an effort to keep Callidus afloat for the benefit of Glassman who held an equity position in the firm and served as its chief executive officer.
The pension fund accuses the firm of spending its money on “lavish” hotel rooms and to fly friends and family on a private jet. “MOSERS is committed to holding investment managers, who are entrusted with investing system assets, accountable to the agreements and obligations they have with the system,” Ronda Stegmann, MOSERS’ executive director, said in a statement.
“MOSERS has lost every issue they have brought before the court. They were denied a temporary restraining order and denied a preliminary injunction. In that ruling the judge noted the ‘shaky substance of MOSERS' claims,’” Catalyst spokesman Dan Gagnier said in an email.
Catalyst moved to dismiss the case last month. “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.
The various counts allege violations of state law, accuse the firm of breach of fiduciary duty, civil conspiracy, aiding and abetting breach of fiduciary duty, unjust enrichment, breach of contract, fraudulent inducement. It asks the court for a declaratory judgment in its favor.
The lawsuit seeks to recoup what it describes as tens of millions in losses and hundreds of millions in losses suffered by other investors to be determined at trial.
MOSERS’ membership covers general state employees, employees of ten regional colleges and universities, members of the General Assembly and statewide elected officials, as well as judges and is governed by an 11 member board.
Among the new evidence MOSERS cites is a May 2018 letter from the SEC’s private funds unit to Newton and Steven Rostowsky, the firm’s chief compliance officer and chief financial officer. The letter notifies the firm of “deficiencies” found by SEC staff during an examination that required “immediate corrective action.”
The SEC staff’s finding, according to the letter which is Exhibit A in the amendment complaint, warns the firm that “it appears that various statements by and practices of the adviser may constitute violations” of various provisions securities rules relating to factual statements, omission of material facts, disclosures on fund performance and conflicts of interest.
The SEC letter was obtained after it was made public in a separate lawsuit against the firm, according to the complaint.
The Catalyst spokesman countered that the "SEC letter" represented preliminary observations of an examiner and that the SEC then conducted an examination of Catalyst and “decided not to take any actions 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.”
