Supreme Court to decide if public workers can sue over state pension investments
The Kentucky Supreme Court heard arguments Thursday on whether government employees can sue over state investment decisions that might have hurt their pension funds.
The case at hand involves eight public workers who filed a fraud lawsuit two years ago alleging that out-of-state firms cheated Kentucky Retirement Systems on $1.5 billion in hedge fund investments starting in 2011. Blame was shared by some KRS trustees and employees who allegedly didn’t understand what they were doing and subsequently tried to conceal the losses, the lawsuit alleged.
The firms sold funds that were “extremely high-risk, secretive, opaque, high-fee and illiquid vehicles,” leaving KRS in poor financial shape, according to the suit. KRS faces an unfunded liability of $23.6 billion. Any damages collected in the suit would go to KRS, the plaintiffs said.
The Kentucky Court of Appeals dismissed the lawsuit in April, ruling that the plaintiffs — headed by retired state Trooper Jeffrey Mayberry — lacked the standing to sue. The plaintiffs are enrolled in KRS, the appeals court said, but they cannot show that their retirement benefits have been reduced because of any alleged losses caused by the hedge fund investments.
The Supreme Court heard an appeal of the case Thursday.
There are broader implications at stake when the high court issues its decision in coming months. Other Kentucky public employees, such as Louisville high school teacher Randy Wieck, also have sued over how their pension money was being invested only to see their cases tossed out of court.
Arguing for the defendants in Thursday’s case — KKR & Co., Prisma Capital Partners, The Blackstone Group and Pacific Alternative Asset Management — attorney Paul Curnin said the only party qualified to file a fraud suit would have been KRS, which had a contract with the investment firms, and KRS did not do so. Curnin told the high court that it cannot let roughly 350,000 public employees hire their own lawyers and sue independently when they are unhappy about investment returns in their pension fund.
“That is a radical departure,” Curnin said. “There is nothing in the law that supports it. It is contrary to common sense.”
Deputy Chief Justice Lisabeth Hughes echoed this theme during questioning. Hughes said the Supreme Court recently handed down a decision involving the attorney general’s use of outside counsel that required lawsuits filed on behalf of the state to employ attorneys whose contracts are approved through the state’s model procurement code — that is, competitively bid and reviewed by the Finance and Administration Cabinet and the legislature’s Government Contract Review Committee.
Now, not two months later, the court is being asked to approve third-party suits supposedly filed on behalf of a state agency with no official supervision, Hughes said.
Arguing for the plaintiffs, attorney Ann Oldfather said she agreed that either KRS or the attorney general’s office should have sued during the last eight years over the losses suffered by Kentucky due to its hedge fund investments. But they failed to act, so the job falls instead to the public employees to protect themselves both as KRS members and Kentucky taxpayers, Oldfather said.
“The plaintiffs are bringing this action on behalf of KRS and the commonwealth,” Oldfather told the justices. “They have committed that every penny they collect will go to KRS.”
Before the Court of Appeals dismissed the case last spring, it was slowly moving through Franklin Circuit Court.
Although discovery in the case had been stalled while several issues were appealed, lawyers for the public employees gathered enough documents to level accusations of “self-dealing” against the investment firms and KRS insiders.
For example, the plaintiffs alleged that Prisma gained improper control over the KRS hedge fund portfolio when the pension agency’s then-chief investment officer, who previously worked for Prisma, allowed a Prisma executive to be embedded at the KRS offices as an adviser, and later, when a Prisma retiree with financial interests in the company was named to the KRS Board of Trustees.
Prisma countered by saying that its Daniel Boone Fund generated $139 million in net returns for KRS, and that its various relationships with KRS were understood by the pension agency’s Board of Trustees and its investment committee. William Cook, the Prisma retiree on the KRS Board of Trustees, also named in the suit, said he abstains from voting on Prisma-related business.
KRS has mostly stayed on the sidelines during the litigation, choosing not to join as a plaintiff.
But KRS could get stuck with an enormous bill for dozens of lawyers and court fees because the hedge fund dealers are suing the pension agency in Delaware and California in order to pass along their costs from the lawsuit. They argue that they partnered with KRS under contract in good faith, and KRS should cover the expense of any litigation they now face for their work.
This story was originally published October 24, 2019 at 2:03 PM.
