Just when the long-running Kentucky Retirement Systems case against three (in)famous investment firms, KKR, Blackstone, Pimco, and critically, the top executives of KKR and Blackstone personally, was closing in on finally starting long-overdue discovery, yet another scheme by conflicted parties working to protect the financiers. And discovery is a very potent weapon, separate from the potential damages. It would expose the heretofore considerably hidden fees and costs paid by Kentucky Retirement Systems to funds that look designed to max out on looting: “fund of funds” with two layers of fees for dedicated, customized hedge funds. It would also make public the limited partnership agreements, allowing for independent analysis of their almost-certain-to-be-one-sided agreements.
We’ve embedded the latest filing in this tortured legal drama at the end of this post. Note that as is often the case for scandal-ridden institutions, Kentucky Retirement Systems, aka KRS, has rebranded itself as Kentucky Public Pensions Authority, or KPPA, so you’ll see both names in the filings.
Background
In late December 2017, attorneys filed a derivative lawsuit for eight Kentucky Retirement System beneficiaries against three fund managers, KKR/Prisma, Blackstone, and PAAMCO, that had sold customized hedge fund products that contrary to their sales pitch, had high risk and underwhelming performance. The Kentucky Retirement System, at only 13% funded, was the most spectacularly underwater large pension fund in the US.
KRS made what was a huge investment for a pension fund of its size. $1.2 billion across three funds all at once, in 2011, roughly 10% of its total assets at the time.
In the case of KKR/Prisma, the fund had installed an employee at KRS as well as having a KKR/Prisma executive sitting as a non-voting member of the KRS board.
The initial case was appealed before discovery had gotten meaningfully underway, an unusual sequence of events. The plaintiffs lost on what most independent lawyers thought was an extremely strained ruling. The case then went to the Supreme Court, which dismissed the case without prejudice on standing due to intervening appellate and US Supreme Court decisions.
The Kentucky Attorney general, Mitch McConnell protege Daniel Cameron, filed a surprise Motion to Intervene in July 2020. Bear in mind the attorney general’s office could have intervened at any time to support the case but oddly chose to now. Its filing was also clearly and wholly dependent on the earlier submissions by the private plaintiffs. Cameron’s filings claimed he could “fully occupy the field” as in properly represent the interests of the various parties who were on the losing side of the tender ministrations of the hedge fund players. Even Kentucky Retirement Systems bleated and said Cameron could not represent them without their authorization, which they had not given.
It was widely believed that Cameron intended to extract a quick, cheap settlement, which would allow him to declare peace with honor while giving these big Republican donors a “get out of jail almost free” card. But after many requests for delay by Cameron, no settlement came. Apparently the moneybags were still confident in their legal firepower and felt any settlement would be an unnecessary admission of guilt.
After a raft of oppositions, the original trial court judge, Judge Philip Shepherd,issued an order on December 28. He rejected most of the plaintiffs’ reformulations to deal with the standing issues except having the so-called Tier 3 Plaintiffs effectively make their pitch. The reason the earlier case had been largely shot down was those intervening decision (such as Thole v. US Bank) required that the plaintiffs have suffered a “particularlized” loss. The Kentucky Retirement System beneficiaries hadn’t yet, since the fund has not yet missed a payment and arguably even if the system does, the State of Kentucky is also on the hook.
By contrast, the Tier 3 plaintiffs had mandatory deductions from their paychecks for a hybrid pension which is not state guaranteed. Even though public pension plans are not subject to ERISA, they are often managed in accordance with ERISA principles. The Kentucky Supreme Court in fact used ERISA cases to guide its decision. Unlike a defined benefits plan, which is what the Tier 1 and Tier 2 plaintiffs have, the Tier 3 plan is a defined contribution plan. Extensive case law backs the idea that under a defined contribution plan, the employee has suffered when his account balance is impaired. So the standard for loss is completely different than for the original “Mayberry Eight.”
Judge Shepherd was replaced by judge believed to be more conservative, Thomas Wingate, due to Shepard touting his tough rulings on the KRS case in his re-election campaign. In a very careful ruling dealing with many filings from many parties, Wingate found that the Tier 3 plaintiffs were differently situated from the other pension fund investors, so there case could not be consolidated with them and critically, the attorney general could not properly represent them, since the interests of some of his parties conflicted with theirs.
The defendants then attempted what sure looked like an interlocutory appeal (procedurally frowned upon) of asking for permission to appeal before the trial court had ruled. The Kentucky procedure, called RAP 60, is to ask for an emergency appeal based on the claim that the trial court is acting beyond its subject matter jurisdiction and if it continues to do so, the defendant will suffer with grave and irreparable harm. That is clearly ridiculous given that KKR and Blackstone have said in SEC filings that their total litigation exposure, meaning across all current legal actions, is not material.
Latest Outrage: Attorney General Seeking to Settle Claims by Plaintiff He Does Not Represent, on the Cheap
It’s not hard to tell that dirty dealings are afoot. The short version is the Tier 3 case was stayed and a motion to lift the stay was denied on January 3. Almost immediately, on January 8, the Attorney General filed to settle all of the KRS claims for a pissant net recovery of $227 million, when a single Tier 3 claim against KKR at the time of filing was worth as much as $787 million, and now with additional interest, over $800 million. This seems wildly improper given that Judge Wingate had determined that the Attorney General could not represent the Tier 3 plaintiffs.
On top of that, from the filing below:
….the AG had to admit in his press release that $145 million of that “recovery” is actually the return of “investment fund[s]” belonging to the KRS Trusts, but held by “Prisma-managed” fund.
Yes, you read that right. The attorney general is trying to depict funds that already, unambiguously belong to KRS are to be counted as part of a legal settlement of fund manager liability. This takes using other people’s money to a whole new level.
So the net money to the funds is only $82.5 million before attorney fees, which are not disclosed. On that topic:
Worse, the joint motion conceals the contractual contingency fee claimed by the AG’s private lawyers. Under their fee contract — made possible by a 2022 special legislation enacted over the Governor’s veto — the AG’s private lawyers stand to pocket 20% of the first $250 million of the “gross recovery.” Ex. 3 at 3. If these private lawyers claim the entire $227.5 million (as opposed to the $82.5 million portion) as the “gross recovery,” their attorneys’ fees will be a staggering $45.5 million, and the net recovery from the proposed Settlement will fall to $37 million ($82.5 million minus $45.5 million). And even if these private lawyers claim only the “fresh money” portion of $82.5 million as the “gross recovery,” the attorneys’ fees will be $16.5 million, and the net recovery will be $66 million. Since the Hedge Fund Sellers and the AG’s contingency-fee lawyers have concealed the dollar amount of the net Settlement fund, the Tier 3 Trust Plaintiffs must assume the worst — a $45.5 million fee and a much-smaller net “fresh money” recovery of $37 million. If it is the other way around, the outrage is just mildly diluted, while the outcome of this motion is unaffected.
Moreover, the press-rumored settlement simply drops all the claims against the billionaires who are also liable: Henry Kravis, George Roberts, Steve Schwarzman and Tomlinson Hill.
The filing argues in considerable detail why the proposed settlement is improper. Some of the reasons:
It violates the finding that the Attorney General could not “occupy the field” as in make a global settlement of this sort
It violates the stay on the Tier 3 filing versus KKR
It vitiates other claims of potential large value that have already been asserted, such as:
[(1)] motion for partial summary judgment as to the Trustee’s breaches of duties, and the Hedge Fund Sellers’ participation in, and aiding and abetting of, the Trustee’s breaches of duties.
[(2)] motion to compel Defendants Blackstone, Schwarzman, and Hill to account for and to return “sidekick” payments, i.e., secret diversion of Trust assets, to Park Hill (an entity formed by Schwarzman, and controlled by him, Hill and Blackstone), plus disgorgement of all other similar payments diverted from other public pension funds (as part of Blackstone’s alternative-asset business plan), plus interest and penalty.
It voids fiduciary duty claims against culpable trustees
There’s a lot more, but hopefully that gives you the drift of the gist.
The hearing is February 5. Stay tuned.
(2025-01-21) Motion to Modify the January 3 Order (Service)pdf-compressed-pages-deleted
Excellent summary of the drift of the gist!
Under the American system of Inverted Totalitarianism public officials exist only to facilitate looting by Our Billionaire Overlords. The level of public asset-stripping in Kentucky is staggering but far from unusual.
Years have passed since disgraced CalPERS CIO Yu “Ben” Meng was exposed to be diverting billions in employee trust moneys to Steve Schwartzman-controlled Blackstone within days of his hiring, while his blatant conflicts of receiving payments from the Schwartzman Institute at Tsinghua University in Beijing and refusing to divest personal stock holdings in Blackstone were known and tolerated by the CalPERS CEO and GC — but the California Fair Political Practices Commission complaint lodged against him has languished unresolved.
Conflicts of interest enabled by purported fiduciaries and by supposedly accountable legislatures and executive officials abound in a country in which there is nothing left to productively invest savings and trust funds. Legislatively-appointed and politically-connected outside counsel taking fees far exceeding the actual recovery of public money is paradigmatic of Inverted Totalitarianism.