$450-million lawsuit cites short-selling scam

$450M suit accuses funds, individuals of defamation, spreading rumours

Catalyst Capital Group Inc. has launched a lawsuit against Anson Group Canada, a privately held asset manager with operations in Canada and Texas, and Torontobased private equity firm West Face Capital Inc., accusing them of participating in a “manipulative ‘short and distort’ campaign.”

The alleged target was publicly traded Catalyst subsidiary Callidus Capital Corp., claims the lawsuit, which dubs the Anson, West Face and several associated and unrelated individuals as “Wolfpack Conspirators.”

The lawsuit, filed Tuesday in Ontario’s Superior Court of Justice, claims the group targeted Callidus with a short-selling strategy that involved coordinating with and providing financial support to a group of borrowers who had defaulted on loans to Callidus, and were fighting to prevent Callidus from collecting.

It also alleges use and attempted use of the news media to further their short-selling campaign, improper use of a new regulatory whistle-blowing program, and coordinated buying and selling of shares.

None of the allegations have been proven in court.

In a statement, West Face and principal Gregory Boland, who is named in the lawsuit, said they “deny strenuously every allegation made against them in Catalyst’s latest claim.” The firm intends to file a counter-claim, a spokesperson said.

The “allegations are completely devoid of merit, and will be defended vigorously at every turn,” West Face said in the statement, adding that the firm has not shorted the shares of Callidus “in more than two years,” and had “no discussions” with Anson Group about Callidus investments.

Among others, the lawsuit also names Anson principals Moez Kassam and Adam Spears and analyst Sunny Puri, as well as a handful of guarantors to Callidus loans, and a series of 10 John Does who Catalyst says it does not yet know the identity of, but who it believes were part of the alleged short-selling scheme.

Representatives of Anson in Toronto and Dallas could not be reached for comment.

The lawsuit alleges defamation, injurious falsehood, intentional interference with economic relations, civil conspiracy and unjust enrichment, and is seeking general and aggravated damages amounting to $450 million.

Among the claims in the lawsuit is an allegation that some guarantors who owed money to Callidus “filed false ‘whistleblower’ complaints against Callidus through the Ontario Securities Commission.” Then, once the whistleblower complaints were filed, it alleges “the Conspirators worked together to leak allegations contained in the complaints to the media in order to generate media interest.”

It is alleged that the “conspirators” sought to spread rumours within the financial industry that Callidus and Catalyst were the subject of OSC whistleblower complaints and subject to investigations by the OSC and Toronto Police, as part of an effort “to undermine the public confidence in both firms.”

There was no such investigation into Catalyst or Callidus, the firms say in the 33-page statement of claim.

The lawsuit says the story was nonetheless shopped to media outlets including a magazine, a newspaper, and a wire service before the Wall Street Journal published a story on Aug. 9, 2017.

The lawsuit alleges that story was timed to come out late in the day to assist the funds and individuals shorting Callidus shares.

Steve Severinghaus, senior director of communications at Wall Street Journal parent Dow Jones, said in an emailed statement that the news organization is “confident in the fairness and accuracy” of its reporting.

Catalyst and competitor West Face, which both invest in distressed companies, have scrapped in court before, including a prominent dispute involving a former Catalyst employee who left to work at West Face.

Catalyst lost a case in which it alleged misuse of confidential information by West Face in the takeover of WIND Mobile Inc.

The action was dismissed “in its entirety” in August of 2016, with the judge saying he had “considerable difficulty” accepting much of the evidence presented by Newton Glassman, managing partner of Catalyst.

“He was aggressive, argumentative, refused to make concessions that should have been made and contradicted his own statements made contemporaneously in emails,” Justice Frank Newbould said in his August 2016 ruling. “I viewed him more as a salesman than an objective witness.” The decision is under appeal. A spokesperson for Catalyst and Callidus declined to comment on the latest lawsuit, in which the plaintiffs are also seeking to recoup “the cost of the ‘investigation’” of the alleged misconduct.

According to the statement of claim, the firms’ investigation “resulted in sworn statements, discovery of emails and other facts and evidence” on which the lawsuit is based.