Attorney General Revives Lawsuit Against State Pension Officials and Hedge Funds

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Kentucky Attorney General Daniel Cameron has revived and expanded a lawsuit accusing hedge fund managers and Kentucky Retirement System officials of mishandling the state’s troubled pension fund for public employees, which at 13 percent solvency is among the worst funded in the country.

Cameron filed an intervening complaint joining the Mayberry et al. v. KKR & Co., L.P. et al case on Monday. 

In the original case, retired Kentucky State Policeman Jeffrey C. Mayberry and seven other Kentuckians who are entitled to KRS pensions accuse KRS employees and a group of hedge funds and hedge fund owners of mishandling the pension investments.

The hedge funds, the plaintiffs say, siphoned off money from Kentucky’s public pension trust fund by selling secretive, costly investment products to KRS trustees who were in charge of managing the fund. According to the lawsuit, the KRS employees were eager to cover up — and eventually, improve — the disastrous financial shape of the fund, and were thus willing to take a chance on the hedge fund’s risky investments.

That case was originally filed in December 2017 and dismissed earlier this month after the Kentucky Supreme Court ruled the plaintiffs didn’t have standing to bring the lawsuit because they weren’t harmed in a concrete way by the collapse of Kentucky’s pension funds. 

Now Cameron has joined as a plaintiff and added new allegations. 

Cameron’s claims bring the Kentucky Teachers Retirement System (KTRS) into the mix by alleging funds sold to it by Blackstone and Prism were faulty. The new complaint also claims the CEOs of Blackstone and KKR enriched themselves personally through the relationship between KRS and their respective companies.

“Our goals in pursuing this litigation are straightforward: to protect the pensions of hardworking government employees and to safeguard taxpayer dollars,” said Krista Locke, the deputy communications director for the Office of the Attorney General.

KRS Director of Communications Shawn Sparks said the agency does not comment on ongoing litigation.

Fund Mismanagement

In his complaint, Cameron explains that, around 2009, Kentucky’s retirement system was in dire straits and looking for a quick fix. The fund had sustained massive losses in recent years, including a loss of $2.2 billion in 2000 and another $4.4 billion in 2009, amounting to half of the fund’s assets.

The KRS trustees decided to gamble with so-called “alternative investments,” which were being marketed to struggling public pension funds all over the country by the defendants: KKR & Co., Prisma Capital Partners, Pacific Alternative Asset Management and the Blackstone Group.

“It’s surprising the Attorney General’s office would pursue a case that has already been dismissed by the Kentucky Supreme Court,” said Don Kelly, an attorney at Wyatt, Tarrant & Combs who is representing Blackstone in the case. “As we’ve demonstrated repeatedly, these claims have absolutely no merit. We delivered more than $150 million in net profits to Kentucky pensioners – and exceeded by nearly three times the benchmark set by KRS itself.” Kelly’s statement was provided to KyCIR by a PR firm.

The funds were usually hedge funds that invest in other hedge funds, and they carried higher risks and higher fees than traditional investments. They also promised higher returns, but studies have shown these alternative investments often fail to live up to those promises and that steep management fees eat away at the profits.

The hedge funds designed plans specifically for Kentucky with names such as the “Daniel Boone Fund,” “Henry Clay Fund,” and “Newport Colonels Fund.”

Cameron’s lawsuit claims that KRS, eager to cover up years of financial disasters that cut the pension fund’s balances, bought these so-called “alternative investments” without scrutiny and covered it up when the funds performance didn’t meet expectations. The bets placed on these funds were the largest single investments ever made by KRS.

KyCIR investigated the secretive funds back in 2014. The investigation found that, at the time, a quarter of the $15.7 billion managed by KRS was parked in alternative investments, and KRS refused to disclose much about their performance or the cost of fees, calling the information proprietary.

Chris Tobe was a trustee of the Kentucky Retirement Systems from 2008 until 2012. He became a whistleblower in 2010 and in 2012, in his role as KRS trustee, hired an independent counsel to investigate abuses of public funds at KRS. He later wrote about Blackstone’s relationship to KRS in his book, “Kentucky Fried Pensions – A culture of Coverup and Corruption.”

Tobe said he is thrilled to see the Attorney General take up this case with the added allegations regarding KTRS investments and violations of fiduciary and transparency standards. “Hopefully this involvement by the AG will finally lead to real reform on the investments,” Tobe said. 

Cameron’s lawsuit claims that KRS “failed to follow legal mandates regarding the safeguarding and prudent investment of trust monies for which they were responsible.” As a result, Kentucky’s pension funds are still underfunded and nearing collapse even during the longest running “bull market” in history.

Kentucky Connections

The case has the potential to shed light on an especially opaque and powerful side of Wall Street — and carries significant political implications for Kentucky.

Cameron’s complaint accuses Stephen Schwarzman, the CEO and co-founder of Blackstone, of arranging for his company to rent a corporate jet he owned to fly to Kentucky and arrange meetings with KRS officials. The complaint alleges Schwarzman netted millions of dollars this way.

Schwarzman is one of Kentucky Senator Mitch McConnell’s most generous supporters, having already donated $10 million to the Senate Leadership Fund, a super PAC tied to McConnell this cycle alone. Schwarzman also gave $3 million to a super PAC supporting President Donald Trump this cycle.

KKR CEO and co-founder Henry Kravis, who Cameron says ran a similar private jet scheme as Schwarzman, is also a financial backer of Mitch McConnell. He gave a total of $5,000 to McConnell in 2019.

Cameron served as McConnell’s legal counsel from 2015 until 2017 and has long been associated with the Senator.

Gov. Andy Beshear’s former law firm, Stites & Harbison, represented the investment firm KKR while Beshear worked there. Cassandra Wiemken, an attorney who served directly as counsel for KKR worked closely with Beshear at the law firm.

Beshear declined as Attorney General to join the Mayberry lawsuit when it was filed in 2017. When the Supreme Court dismissed the case on July 9, Chief Justice John Minton Jr. wrote in the court’s opinion that the state Attorney General was better suited to bring the case but has so far declined to do so. The judge’s opinion says plaintiff’s provided the Attorney General a copy of the complaint before filing, but he declined to join the suit.

Beshear’s communications director, Crystal Staley, said in an email it is the Attorney General’s decision to intervene on any case. “To the governor’s knowledge, he did not perform any legal work for the entity,” Staley said, referring to KKR. Staley also noted that Attorney General Cameron worked for Stites & Harbison.

Note: This story was updated at 4:25 p.m. Thursday to include comments from Gov. Andy Beshear and Blackstone. Contact Jared Bennett at jbennett@kycir.org.