New York private equity fund Quadrangle says its long-running legal battle with Ottawa is a warning to foreign investors

Veteran Wall Street private equity executive Michael Huber has a warning for the legions of institutional investors being pitched on putting their money into Canada at this week’s investment summit: The federal government doesn’t always keep its promises.

Mr. Huber, a managing principal at asset manager Quadrangle Group LLC, is fighting in an Ontario court to collect $500-million-plus judgment from the federal government. The heart of the legal battle is a Canadian judge’s finding that Stephen Harper’s Conservative government played fast and loose with telecom regulation, then two Liberal administrations compounded the problem by using litigation to defend the behaviour.

“The message the government is sending is Canada is a place that fails to respect rule of law,” Mr. Huber said in an interview. “There is an irony in the Prime Minister making the same allegation against the current U.S. administration.”

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Last August, Quadrangle and Toronto-based Obelysk Media Inc., controlled by former Toronto Raptors owner John Bitove, won a resounding legal victory. Justice Peter Osborne of the Ontario Superior Court of Justice ruled Ottawa was negligent when it induced the two private equity funds to launch cell phone company Mobilicity in 2008, as part of a consumer-friendly strategy to spur competition.

Mr. Harper’s government looked to institutional investors to shake up a domestic industry dominated by a handful of players and boost the economy. The government then “pulled the rug out” from under these investors, according to Justice Osborne, by changing the rules on the sale of wireless licences to require government approval.

Mobilicity filed for creditor protection in 2013, wiping out Quadrangle and Obelysk’s initial $243-million investment in licences and the $95-million they spent on building the business. Rogers Communications Inc. acquired Mobilicity in 2015.

Under former Liberal prime minister Justin Trudeau, the government went to court to contest the private equity funds’ claim of damages. On Mark Carney’s watch, the government continued the battle by appealing Justice Osborne’s decision.

This week, Quadrangle is back in court to fight that appeal. In a recent court filing, Quadrangle noted that Justice Osborne, who the government promoted to the Court of Appeal for Ontario last December, used words such as “wholly improper, capricious, arbitrary, contrived and highly irregular” to describe the actions of telecom regulators and the Harper government.

Court filings showed federal government lawyers warned both Conservative and Liberal politicians they would likely lose the case if it went to trial.

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Obelysk’s Mr. Bitove said in an interview: “The court’s findings in this case speak for themselves.” He declined further comment because judgment is in the appeal process.

The appeal hearing Tuesday will be heard a few blocks away from the Four Seasons Hotel in Toronto where Mr. Carney will be pitching about 300 senior executives from many of the world’s largest asset managers on investing in Canada.

If the government loses the Mobilicity appeal, taxpayers are on the hook for the judgment and legal costs that, when combined, are expected to top $700-million, according to Quadrangle’s lead lawyer, Jonathan Lisus.

Quadrangle was a powerhouse tech, telecom and media investor, with US$3-billion of holdings that included movie chain Cinemark. Its executives had close ties to former BCE Inc. chief executive officer Michael Sabia, who is now Canada’s top civil servant as Clerk Of the Privy Council.

Quadrangle’s founders, who include former Obama administration official Steven Rattner, are now winding down the fund, which was launched in 2000. The Mobilicity judgment is one of its last remaining assets.

When global institutional investors weigh where to invest, one of the key factors is determining whether the country has a reliable and impartial judicial and regulatory process.

In the Mobilicity judgment, Justice Osborne said the government interfered with both the courts and telecom regulators by using strong-arm tactics to successfully block Telus Corp.’s attempts to buy Mobilicity’s licences in 2013. “The misconduct is all the more troubling since it occurred in the context of an attempt to thwart a court-ordered mediation process and circumvent the lawful exercise of the jurisdiction of the CCAA court,” Justice Osborne said, referencing proceedings under the Companies’ Creditors Arrangement Act.

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Quadrangle and Obelysk’s Mobilicity court battle comes amid a period of declining investment in the domestic telecom market. Analysts say inconsistent and wrong-headed government policies have discouraged both institutional investors and operators like Bell, Rogers and Telus from investing in telecom infrastructure that is critical to a modern economy.

“Regulation by ideology is inherently sub-optimal given a myopic perspective that is out of balance for all stakeholders and for the net good of Canada,” analyst Adam Shine at National Bank Financial said in a recent report.

In April, Rogers announced it was cutting capital spending this year by more than 30 per cent, to between $2.5-billion and $2.7-billion. The company spent $4-billion improving its operations in 2024. Bell parent BCE and Telus announced similar cuts.

“Returns on telecom network investments are being steadily eroded by regulation that used to involve the dual objective of driving facilities-based investments and stimulating competition, but has mostly fixated only on the latter in recent years,” Mr. Shine said.

“We’re in the early innings of AI. How are innovation and productivity advanced when investment in critical infrastructure is contracting?” said Mr. Shine.