Cameron wants to join lawsuit over Kentucky pension system’s ‘secretive’ hedge funds
Attorney General Daniel Cameron wants to join a lawsuit filed by eight public workers in 2017 that alleges Kentucky’s pension system was cheated on up to $1.5 billion in hedge fund investments by several wealthy corporations, with blame to be shared by some of its own current and former trustees and officials.
Cameron, a Republican, is making his request at the 11th hour.
The Kentucky Supreme Court unanimously ruled on July 9 that the case should go back to Franklin Circuit Court for dismissal because the public workers lacked standing to sue over investments on behalf of the Kentucky Retirement Systems.
Over the last three years, the workers unsuccessfully urged KRS and then-Attorney General Andy Beshear — a Democrat who is now Kentucky’s governor — to join their suit to give it official sanction. Finally, they decided to pursue it alone.
The proper plaintiff in this suit should have been the state’s attorney general, the Supreme Court said in its decision. The public workers could not show how the controversial hedge fund investments — however harmful they might have been to the state pension system — reduced their own individual benefits, the court said.
“In this case, not only has the attorney general presumably exercised his discretion in declining to bring the plaintiffs’ claims, but he is also wholly uninvolved with the litigation,” Chief Justice John Minton Jr. wrote for the court.
Not so fast, Cameron said Monday in a motion to intervene in Franklin Circuit Court.
Cameron — who succeeded Beshear at the end of last year — is asking Judge Phillip Shepherd to let him join the suit as a plaintiff rather than see it dismissed. A hearing has been scheduled for Monday in Frankfort.
In his 135-page motion arguing for the right to intervene, Cameron echoed much of the case already presented by the public workers: The hedge fund firms allegedly sold to KRS “black box” products that were “secretive and opaque,” failing to disclose their true costs and leaving the pension system in worse shape.
“These unsuitable ‘investments’ did not lower risk, reduce illiquidity or generate sufficient returns to enable KRS to even approach, let alone exceed, the assumed rate of 7.75 percent (investment return) on an on-going basis,” Chris Lewis of the attorney general’s Office of Consumer Protection wrote.
“They did generate excessive fees for those hedge fund sellers, poor returns and ultimately losses for the funds, in the end damaging the commonwealth, KRS and Kentucky taxpayers,” Lewis wrote.
The defendants include KKR & Co., Prisma Capital Partners, The Blackstone Group and Pacific Alternative Asset Management, all of whom have argued that their investment products performed as promised for KRS and on the agreed contract terms.
In fact, the hedge fund dealers are suing KRS in Delaware and California in order to pass along their costs from the lawsuit. They argue that they partnered with KRS in good faith, and KRS should cover the expense of any litigation they now face for their work.
“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, a Louisville attorney representing The Blackstone Group, on Thursday.
“As we’ve demonstrated repeatedly, these claims have absolutely no merit,” Kelly said. ”We delivered more than $150 million in net profits to Kentucky pensioners and exceeded by nearly three times the benchmark set by KRS itself.”
KRS, which is responsible for retirement benefits for several hundred thousand state and local government employees, has $12.5 billion in pension assets and $25.8 billion in unfunded pension liabilities. Its primary state pension fund has only 13 percent of the money it’s expected to need to pay future benefits.
Other defendants in the suit include a number of former KRS trustees and officials, who are accused of fumbling the hedge fund investment decisions, and KRS’ investment and actuarial advisers, who are accused of providing the pension system’s Board of Trustees with inaccurate information.
Before the case ran aground in the appellate courts, it was slowly moving through Franklin Circuit Court.
Lawyers for the public workers gathered enough documents to level accusations of “self-dealing” against the hedge fund firms and some KRS insiders.
For example: The plaintiffs alleged that Prisma won 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 system’s Board of Trustees.
William Cook, the Prisma retiree who served on the Board of Trustees and who was named as a defendant in the suit, said he abstained from voting on all Prisma-related business at KRS.
This story was originally published July 23, 2020 at 12:46 PM.
