To avoid ‘public spectacle,’ hedge fund firms want to seal evidence in KRS pension lawsuit

Several major investment firms that are being sued for allegedly cheating Kentucky Retirement Systems over $1.5 billion in controversial hedge funds want to take the lawsuit behind closed doors.

On Friday, after the Herald-Leader reported that the KRS Board of Trustees might join eight public employees who filed the suit Dec. 27, the firms asked Franklin Circuit Judge Phillip Shepherd for a protective order sealing documents and closing hearings in the case, to avoid “a public spectacle.”

In their motion to Shepherd, investment firms KKR & Co., Prisma Capital Partners, The Blackstone Group and Pacific Alternative Asset Management said they need confidentiality for any material produced in the case that might reveal financial, business or technical information about themselves or “trade secrets” that could give their competitors an advantage.

That cloak would cover much of the material in the suit, as it should, the firms’ attorneys told the judge.

“This case concerns investments on behalf of KRS that were managed by a broad range of investment managers. Plaintiffs’ discovery requests seek the production of documents containing highly confidential and proprietary information,” attorneys Barbara Edelman of Louisville and Brad Karp of New York wrote in their motion for a protective order.

“While plaintiffs attempt to use the guise of an ‘open proceeding’ to justify their position, they have provided no legitimate reason for inviting public inspection of every document produced in this case,” the attorneys wrote.

Lawyers for the eight public employees who filed the suit say they would consider letting the court seal individual records on a case-by-case basis if the investment firms can demonstrate a need, but “we will not agree to any blanket protective order.”

The defendants include billionaires who made a fortune off Kentucky taxpayers, attorney Ann Oldfather of Louisville wrote in her own motion requesting open proceedings. Among them are Henry Kravis, co-founder of KKR & Co., and Stephen Schwarzman, chairman of The Blackstone Group, two high-profile businessmen with a combined net worth of about $15 billion.

“One cannot flaunt the splendor of ‘plunder’ so ostentatiously and expect to litigate in secret over the alleged illegal conduct generating it,” Oldfather wrote.

“Billions of Kentucky tax and pension dollars were placed in the hands of the hedge fund sellers,” Oldfather wrote. “The fees they earned here — the extent of which has never been disclosed — help support the success, fame, fortune and lifestyles they now flaunt in an effort to lure more and more unsophisticated investors. How they, and their tightly controlled companies, made their money while acting as fiduciaries, money managers investments advisers to KRS, is a matter of public interest. Accordingly, these proceedings should be open and transparent.”

Among the documents the public employees are seeking is a 2010 study of KRS’ assets by longtime adviser R.V. Kuhns & Associates that “has been kept from public view,” Oldfather said in court on March 5. (R.V. Kuhns also is a defendant in the suit and joined the investment firms in their request for a protective order.)

The plaintiffs in the suit — including a circuit court judge in Clark and Madison counties, a former assistant Jefferson County attorney and a retired Kentucky State Police captain — have pensions at KRS and seek damages on behalf of public employees and state taxpayers.

The suit alleges that, starting in 2011, the firms sold hedge funds to KRS that were “extremely high-risk, secretive, opaque, high-fee and illiquid vehicles.” The hedge funds produced “excessive fees … poor returns and ultimately losses,” helping to saddle Kentucky with a crippling pension debt that now should be repaid by the firms and their wealthy owners, the suit alleges.

“There are only two known ways for KRS to avert the imminent collapse of its plans: a massive taxpayer bailout and/or the success of this lawsuit,” attorneys for plaintiffs in the case wrote in a court filing earlier this month.

Overall, KRS faces a $27 billion pension shortfall. It is responsible for providing pensions to about 365,000 past and present employees of state and local governments.

The KRS Board of Trustees is debating whether to join the suit as a plaintiff.

KRS board Chairman John Farris said last Tuesday that a special subcommittee of the board has been reviewing thousands of pages of internal documents to understand what went into the pension system’s decision to invest in hedge funds. KRS ultimately chose to withdraw from the funds in 2016, citing their weak performance and high costs.

“All of the actions discussed in the lawsuit happened before I joined the board and before most of the current members of the board joined,” Farris said.

This story was originally published March 31, 2018 at 4:25 PM with the headline "To avoid ‘public spectacle,’ hedge fund firms want to seal evidence in KRS pension lawsuit."