Financier Newton Glassman’s Catalyst Capital Group Inc. is pressing ahead with a lawsuit over an alleged short-selling conspiracy targeting one of its companies, saying new details have strengthened its case.
Catalyst and its struggling majority-owned unit Callidus Capital Inc. have filed new documents in a one and a half-year-old case, which alleges the companies were targeted by hedge funds and former clients in a scheme to prompt a sell-off in Callidus shares by making complaints to regulators through whistleblower programs.
The plaintiffs are seeking $450-million in damages, claiming defamation, injurious falsehood, intentional interference with economic relations, civil conspiracy and unjust enrichment.
The materials stem partly from communications between one of the defendants, who has since been forced by a judge to hand over documents to Catalyst, and others in a group that the plaintiffs term as a “wolfpack conspiracy.”
Catalyst claims the scheme involved publicizing complaints to the Ontario Securities Commission (OSC) over alleged accounting irregularities against Catalyst and Callidus, a lender to distressed companies. Catalyst has denied any wrongdoing regarding its accounting.
The Wall Street Journal published an article about the whistleblower complaints on Aug. 9, 2017, prompting a drop of 21 per cent in Callidus shares. The stock has fallen steadily since then.
Mr. Glassman is continuing with the legal action, first filed in November, 2017, amid the growing financial worries at Callidus, which provides financing for companies that are unable to obtain loans from conventional institutions such as banks.
This month, Callidus reported the latest in a string of deep quarterly losses and disclosed that its net worth had fallen to less than zero, as its acquired businesses struggled and loan losses mounted. The company’s stock, which is majority-owned by Catalyst, has fallen to less than 80 cents a share, down 94 per cent from its initial public offering in 2015.
Among defendants in the lawsuit is Greg Boland, founder of rival private-equity fund manager West Face Capital Inc., who has asserted he was not part of any conspiracy and has countersued for defamation, conspiracy and other alleged misdeeds, seeking damages of $550-million. Mr. Boland has been a defendant in a number of other cases launched by Mr. Glassman as well.
None of the allegations in the suit or the countersuit has been tested in court.
Among other defendants are M5V Advisors Inc., Anson Capital LP, ClaritySpring Inc., Darryl Levitt and some former business owners who were Callidus borrowers. A number of the initial claims by the plaintiff were struck in January by Ontario Justice H.J. Wilton-Siegel.
The new information related to the suit, including personal correspondence, was produced by Mr. Levitt in response to a court order, as well as another former borrower who has since settled with Catalyst.
Catalyst’s allegations centre on whether the defendants were in on a months-long co-ordinated plan to generate negative publicity and put pressure on Callidus’s shares to benefit short-sellers – investors who benefit from a drop in the price of a security.
The effort allegedly involved making what Catalyst says are baseless complaints to the OSC, Toronto Police and other authorities alleging fraud at Callidus and Catalyst. According to Catalyst, the defendants then sought coverage from various media outlets.
Among the whistleblower complaints, the claim says, were allegations that Catalyst inflated the value of its holdings to generate higher fees for Mr. Glassman, that Catalyst’s loan guarantees to Callidus were not properly disclosed and that the companies were under criminal investigation.
According to the claim, the participants met often and discussed strategy for making the allegations. It said the new documents showed that the alleged participants were keenly aware of the need for secrecy and took steps to protect themselves from detection.
Catalyst launched the initial court action following a Wall Street Journal article, published in August, 2017, which reported on the complaints to regulators and police. The action also names Journal reporters as defendants.
Mr. Levitt said he welcomes the opportunity to go before the court, noting that many of the claims have already been tossed out.
“This matter has taken on great public interest concerns given that the plaintiffs manage money on behalf of public funds and also the lengths to which attempts were made to intimidate and stifle legitimate criticism. The facts in this matter will speak for themselves,” he said in a statement.
For his part, Mr. Boland rejected the claims, contending that he had closed out his short position on Callidus in 2015, long before the alleged conspiracy.
"Catalyst and Callidus have been pursuing, and losing, a series of vexatious lawsuits against West Face for almost five years. But no amount of litigation can distract from the evaporation of Callidus’s shareholders equity as a result of Callidus’s own loan underwriting decisions,” he said in a statement.
“West Face was not short the Callidus stock as alleged, has never met many of their co-defendants, and is certainly not responsible for the dire situation that Callidus finds itself in.”
Jeffrey Jones