Long-Running Kentucky Retirement Systems Case Surmounts Yet Another Procedural Spanner, Moves Closer to Discovery After Seven Years

Yes, seven years. That is how long beneficiaries of the Kentucky Retirement Systems, represented by Michelle Lerach with the assistance of her formidable and controversial husband, Bill Lerach, have been trying to get damages from the sellers of customized hedge funds of funds, KKR, Blackstone, and PAAMCO, as well as as their principals, such as Henry Kravis and Steve Schwarzman.

The bone of contention in the original suit, Mayberry v. KKR, was that these various defendants were subject to Kentucky’s strict statutory fiduciary duty laws, yet violated them by (among many other things) fundamentally misrepresenting the products, depicting them as the impossible combination of low risk and high return and collecting rich fees as the hedge funds delivered barely any investor return. (For a more detailed recap of the history than the summary below, visit this post)

This litigation has still not gotten to discovery despite the considerable lapse of time. A big reason is the defendants engaging in very aggressive “motions practice.” The plaintiffs also suffered bad luck in the form of unexpected and adverse Federal appeals and Supreme Court cases that resulted in the original defined benefit plaintiffs lacking standing. Two separate pension-related precedents resulted in defined-benefit plan members needing to suffer a particularlized loss, which meant the plan came up short in making its promised payments to them, before they had standing to sue. Merely being massively underfunded, and being a party that made the underfunding worse, did not cut it.

But the case was reconstituted around the so-called “Tier 3” plaintiffs, who are in a hybrid plan and do not have guaranteed payments. Because their benefits depend on investment performance, the standing principles for defined contribution plans apply. Numerous cases have found that members in a defined contribution plan (and Tier 3 has elements of a defined contribution plan) can sue if their plan balances have fallen or even not produced the returns they should have delivered if the manager had executed his promised strategy.

In the meantime, the Attorney General, after an earlier Attorney General had filed a motion supporting the original litigation, filed suit saying he could “fully occupy the field” as in represent all potential claimants. That seemed impossible due to differences of interest among the claimants plus the Attorney General having a clear conflict of interest. Even Kentucky Retirement Systems objected; it is one of the Kentucky state agencies that is allowed to hire its own counsel and it had not authorized the Attorney General to represent them.

It appears that that Attorney General, Daniel Cameron, who was a protege of Mitch McConnell, hoped to negotiate a lowball settlement with the powerful Republican financiers. But after repeated filings with the court making excuses as to why Cameron needed more time, it became clear that the defendants weren’t even willing to entertain a cheap resolution.

Another unexpected development was that the original trial court judge, Philip Shepherd, considered to be one of the most progressive judges in Kentucky, was forced to recuse himself from the case. The defendants had caught out Shepherd making the bone-headed move of touting his tough stance on the litigation in his re-election campaign and sued for his removal.

But aside from creating a bit of delay due to a new judge, Thomas Wingate, having to master a very extensive record, Wingate is not working out to the defendants’ advantage. It turns out that a competent judge, regardless of his ideological bent, did not blindly defer to white shoe East Coast lawyers and their big money clients.

After wading through a very large number of motions to dismiss, at the start of May, Wingate issued a comparatively compact and well-reasoned omnibus ruling. He rejected the claim that the Attorney General could properly represent the Tier 3 plaintiffs, and denyied the motions to dismiss of the hugely powerful defendants, KKR, Blackstone, PAAMCO, and private equity kingpins Henry Kravis, George Roberts, Steve Schwarzman, and Tomlinson Hill personally.

This development would have seemed to mean the case could finally proceed to discovery. Mind you, that is what all this legal maneuvering has been about. It is not just that the plaintiffs have the potential to claw back the excessive fees as well as actual and punitive damages. It’s also that this case will expose the internal working of these operators, particularly their sharp practices. In addition to deservedly tarnishing their images, some of the findings may help similarly-situated investors launch their own suits.

But noes! The defendants went immediately to the appeals court even though there had been no trial court decision. They had also done that with original Mayberry v. KKR filing.

Normally, what is called an interlocutory appeal, which is an appeal made before the underlying court has heard the case and issued its decision, is as far as I can tell, generally looked upon dimly in most US courts. However, Kentucky procedure provides what appears to be an unrestricted right to try that gambit. You can find it under Rules of Appellate Procedure and is referred to as “RAP 60” in the filings below.

The plaintiffs (who are now defendants in this appeal, but we will continue to call them plaintiffs, or Real Parties in Interest) pick their way though the RAP 60 filing in the first embedded document below. You can see what a confection of motions practice this case continues to be. One of the tactics in the filing by the KKR and its fellow travelers is to repeatedly misrepresent prior rulings and facts of the case.

I must confess that the “writ of the first class” versus “writ of the second class” analysis in the ruling embedded below is over my pay grade, and a gander through search engine results suggest that this is Kentucky-only nomenclature. Anyone who has the expertise and patience to unpack it for the rest of us, please pipe up in comments.

But as you can see, the judge picked calmly through the various howler claims by the defendants, like merely going to trial would result in irreparable harm (this after saying in their own public filings that all of their outstanding litigation, in toto, did not represent a material risk). The judge similarly did not accept the flat out fabrication that the state guaranteed the payments of the Tier 3 plaintiffs’ accounts. The judge can’t resist from making occasional tart remark like, “This is not reflective of reality.”

Now one can expect the defendants (well confusingly the plaintiffs in this latest action) to appeal to the Kentucky Supreme Court. I can’t readily find how what percentage of cases this Supreme Court agrees to hear, but parties to a case in Kentucky are entitled to only one appeal, so acceptance of any further appeal is not a given. But even waiting for a rejection will take time.

Normally, delay in getting to a trial works to the advantage of defendants, since memories fade and witnesses in depositions or on the stand can go into “Mumble, mumble, I don’t remember” mode. But both in government matters and in investment deals, the written records are extensive. There’s no way to wriggle out of the bad facts there. The original (very extensive) filings already presented a ton, and the itty bitty bit of discovery undertaken so far unearthed more. So the normally weakening of cases due to the passage of time won’t be all that operative here.

So we will have to wait a bit more for popcorn time, but it is coming.