Pathbreaking Public Pension Case Mayberry v. KKR Is Back From the Dead as Kentucky Attorney General Joins Case

A little birdie told me a secret plan was afoot to revive Mayberry v. KKR, a derivative suit by eight beneficiaries of the severely underfunded Kentucky Retirement System against fund managers KKR/Prisma, Blackstone, and PAAMCO as well as private equity barons Henry Kravis, George Roberts, Steve Schwarzman and J. Tomilson Hill personally. That little birdie was right.

In a surprise move yesterday, the Kentucky attorney general, Daniel Cameron, intervened in the case, joining the plaintiffs. We’ve embedded the Commonwealth of Kentucky’s filing at the end of the post. As we’ll discuss, the politics of this move are extremely perplexing. Cameron is a protege of Mitch McConnell, and two of the defendants in this suit, Steve Schwarzman and Henry Kravis, are not just Republican heavyweight donors; they are (or at least have been) specifically top McConnell funders. What gives?

Readers may recall that the case seemed dead after the Kentucky Supreme Court dismissed it earlier this month, relying on the recent the US Supreme Court ruling in Thole v. US Bank to find that the plaintiffs lacked standing.1 It would seem awfully unlikely that the courts would take the view that the Kentucky’s highest law enforcement officer lacked standing to pursue these allegations and seek a sizable recovery on behalf of the state.

This filing uses much of the language of the original case, including defined terms like “Hedge Fund Sellers” and “Black Box” and has updated versions of key exhibits charting the terrible performance of the Kentucky Retirement System portfolio. The Attorney General filing preserves the main argument, which we summarized in 2018:

The suit, which we’ve embedded at the end of this post, was filed on behalf of the beneficiaries of Kentucky Retirement Systems (KRS), the state’s public pension fund and its taxpayers, against Blackstone, KKR/Prisma, and PAAMCO for engaging in a civil conspiracy and violating its fiduciary duties under Kentucky law by misrepresenting what it calls “Black Box” hedge fund products. One of the eight plaintiffs is a sitting district court judge.

In addition to suing the top executives at these funds, including Henry Kravis and George Roberts of KKR and Steve Schwarzamn of Blackstone, the filing also targets four former and three current KRS board members, four former KRS administrators for breach of fiduciary duties, along with KRS’ fiduciary counsel, several financial advisers, its actuarial adviser, and a firm that certified its Comprehensive Annual Financial Report.

The fund managers allegedly focused on KRS and other desperate and clueless public pension funds who were unsuitable investors, particularly at the risk levels they were taking. 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. They all had troublingly cute names. The KKR/Prisma funds was “Daniel Boone,” the Blackstone fund was “Henry Clay” and the PAAMCO fund, “Colonels”.

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 filing argues that that contributed to KRS investing an additional $300 million into the worst performing hedge fund even as it was exiting other hedge funds.

The suit seeks damages for losses, recovery of fees paid to the hedge funds and other advisers, and punitive damages. The damages would go to KRS and the suit also asks that the court appoint a special monitor to make sure the funds are invested properly.

This iteration of the case has cleaned up some of the repetitions in the original filings but more important, firms up and extends its arguments on some key points. I imagine that some of this material was developed in the successful effort at trial court to surmount Motions to Dismiss (recall it was the appeals and Supreme Court that ruled against the original plaintiffs).

One issue that was questionable in the original filing but is compelling in the version below is the rationale for suing Henry Kravis, George Roberts and Steve Schwarzman personally. The filing has a lengthly discussion of the unusual governance arrangements that allow these executives to retain operating control of their respective companies, including appointing board members, despite both KKR and Blackstone having gone public. The document argues that KKR and Blackstone are the alter egos of their founder. One tidbit that exemplifies this relationship:

Privately owned jet planes of Kravis and Roberts in the case of KKR/Prisma and Schwarzman in the case of Blackstone were used by their respective companies to fly their agents to Kentucky, for which the companies were charged and for which Kravis, Roberts and Schwarzman were reimbursed, in amounts, on information and belief, often in excess of $5 million per year. Thus each of Kravis, Roberts and Schwarzman personally profited from Kentucky business.

In fact, this practice is no secret except of course to fund beneficiaries and other members of the great unwashed public. Private equity and hedge fund limited partnership agreements not only authorize the use of “private class” travel, some even extend it to family members of the fund’s principals. Blackstone’s 10-K further discloses that Blackstone used Schwarzman’s jet for firm travel and pays him normal commercial rates.

The way private equity firm employees use private jets like taxis has remained under the radar. One top Wall Street Journal reporter has repeatedly pitched articles on private equity jet use and has repeatedly been told no (the excuse? The Journal does not want to look anti-capitalist).

Private equity firms justify this grifting by saying it helps their productivity. One can see a justification when private equity execs and staffers are having to go to a remote spot, or between awkward city pairs. But if they have only one layover, the pretense is an insult to intelligence. M&A pros, who are very time stressed and working on highly confidential matters, elite lawyers, and consultants, all fly commercial and make use of the time when they need to. Fund investors, by contrast, are bilked for thousands of dollar an hour for private jets….because private equity professionals are bad at time management?

Needless to say, having a publicly owned company should effectively guarantee the profits (by providing for full utilization) of a side venture of a top executive is not an arm’s length relationship. One of my private equity contacts volunteered that at prevailing rates, $5 million a year is an awful lot of flying to and from Kentucky (one wonders if Kentucky Derby partying was billed to Kentucky retirees).

In other words, the idea that a going-bust pension system of modestly-paid state workers is paying for the priciest airfare on offer is not a good look.

Having the plaintiffs root around in the use of the planes and how Kravis and Schwarzman profited from them is chump change in terms of all of the damage done to Kentucky Retirement Systems beneficiaries, but it nevertheless serves to illustrate the way these Masters of the Universe feel entitled to take personal advantage of the funds they operate.

Another set of arguments that this iteration of the case fleshed out more fully was the misrepresentation of the founding of defendant Jane Buchan’s firm PAAMCO. Buchan presented PAAMCO as a majority woman-owned firm, which gave her great advantage in marketing. In fact, virtually all of the founding money came from convicted hedgie David Sussman, who also obtained a large percentage of the economics. Sussman and Buchan even created fake documents to depict his ownership stake as a loan. The arrangement came to light when Buchan cheated Sussman on his payout and he successfully sued her.

This filing also explains how KKR/Prisma and PAAMCO decided to combine their hedge fund operations as the industry started imploding due to lackluster performance and investor withdrawals. The filing drily points out that Kentucky Retirement System was instead plowing even more money in despite poor returns.

Similarly, the media has chosen to ignore other accounts of private equity executives profiting personally from owning businesses that sold services to private equity portfolio companies. We wrote back in 2013 about how another Blackstone executive, Tony James, engaged in apparent self-dealing by gaining ownership of a software program, iLevel Solutions spun out of Blackstone, then selling the software to portfolio companies, including Blackstone’s.

As to process: the quick intervention of the Attorney General and the extent of updates and polishing of the filing strongly suggests considerable direct support of the plaintiff’s attorneys, Anne Oldfather and Michelle Ciccarelli Lerach. There’s even a nod in the text to the formidable, disbarred attorney Bill Lerach, a consultant on the case:

Other public pension funds have recouped billions of dollars through lawsuits against persons and firms which damaged those funds in violation of law – including Wall Street financial houses. Most notable are the suits arising out of the Enron, WorldCom and AOL Time Warner financial collapses by which public pension funds recovered billions of dollars

Those were all Bill Lerach cases.

Attorneys General often hire outside counsel on a contingent fee basis, and not just for their expertise. Even New York, which has one of the larger state AG offices, has only a dozen attorneys, so outside counsels also provide manpower.

In many states, these arrangements need to be approved by an independent party in the Administration, usually the Governor. As a lawyer who has been engaged by the Attorney General in another state opined, “In this situation, I would also guess that the Governor wouldn’t put up much of a complaint if the Attorney General wanted to hire the same crowd that started the case.”2previously adjudicated here. I assume the defendants will insist on repeating these fights; it is over my pay grade to know how a judge will respond if the case goes before a new jurist, as opposed to back to Judge Philip Shepherd.

Finally, I am not the only one having to wrap my mind around what is going on here. Attorney General Daniel Cameron is joined at the hip with Mitch McConnell. A Mitch McConnell scholarship helped fund his college education. After clerking for a Federal judge in Kentucky, Cameron then became McConnell’s legal counsel before joining a Kentucky firm for two years as a senior associate. At 34, he won the Attorney General election, the first Republican to hold the seat since 1944 and the first black, in no small measure due to McConnell’s backing. So there is no way for McConnell to pretend Cameron has gone off the reservation.

Not only are Henry Kravis and Steve Schwarzman long-standing, big ticket Republican donors, but Kentucky contacts maintain that they are also McConnell’s largest donors. The Mayberry v. KKR case was dead; there is simply no way that reviving it is in any of the defendants’ interest. The case is very likely to get to the discovery phase and discovery would be very damaging to the plaintiffs, most of all Blackstone and KKR. Remember that anything that gets into the public record isn’t just a potential embarrassment; it can be included in other cases.

Should Cameron believe he can go through the motions on this litigation after November, it’s going to be hard to extricate himself, given the dire state of the Kentucky Retirement System finances and the visibility of his involvement to beneficiaries, without clawing a meaningful-appearing amount out of the deep pockets. Even a cost of doing business fine/disgorgement like the big private equity funds paid to settle SEC enforcement actions, on the order of $50 million each, is an expense they would not have faced absent Cameron mixing things up. And a settlement would not be secret; it’s a public record, subject to disclosure.

So what is the political play here? Does McConnell feel the need to bolster his bona fides with Kentucky cops? Recall lead plaintiff Mayberry is an officer. Have the Republicans decided they need to bolster their populist credentials? Recall that the Trump Administration filed an amicus brief in favor of the plaintiffs, as in the lowly pension beneficiaries, in Thole v. US Bank.

Is this revenge? Has Schwarzman or Kravis crossed McConnell? Or has the famously sure-footed and ruthless McConnell miscalculated due to not adequately understanding the terrain? There’s some sort of dark matter exerting force on this equation. It will likely become evident in due course.


1 We pointed out that the plaintiffs in fact made three independent arguments regarding standing, and the Kentucky Supreme Court, relying on Thole, addressed only one, that the plaintiffs lacked Federal “Article III” standing because their losses had not yet actualized. Since Kentucky is one of the minority of states that uses Article III in state law matters, the Kentucky Supreme Court could have reached the same conclusion without Thole, but they risked with Thole in play that the US Supremes might reach the opposite conclusion, that what amounted to a mark to market loss might do. We pointed out that the Kentucky Supreme Court handwaved away the second standing argument and simply ignored the third.

2 In light of the oddity of Mitch McConnell’s protege going after some of McConnell’s biggest meal tickets, it does not appear that the Attorney General and the original plaintiffs have the same interests, although the legal pretense is the AG is above those considerations. Nevertheless, this does raise the question of whether the Attorney General is as motivated as the original plaintiffs to go the distance on this case. That means I wonder how the same legal team could represent both even if Kentucky were willing. Having said that, the key attorneys are not part of the same firm, so conceivably the original team could divide up the representation.

00 Mayberry + Commonwealth of KY v. KKR
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  1. The Rev Kev

    The economy of the United States is under the hammer and Trump has already told the States to ‘Drop Dead’ as far as Federal financial aid is concerned – which of course would include Kentucky. So perhaps the real background reason for this legal action is that Kentucky finances are a train wreck and they can no longer tolerate the luxury of having the dead albatross of the Kentucky Retirement System around their necks any more. Corruption can be fun in good times for some people but Kentucky will be looking to stop any unnecessary hemorrhaging of funds that they can. And an underfunded Kentucky Retirement System would be at the top of the list.The possibility of clawing back money from some of these private equity funds plus some may help their financial position so perhaps this is at the heart of this legal action, loyalties be damned.

  2. Susan the other

    As if I weren’t confused enough already. That dark matter could be a flock of chickens coming home to KY. How can Mitch be such a financial nazi with other states’ retirement deficits if his own just got taken to the cleaners by private equity and hedge funds? Fun-nee. And this debacle gets him from both sides because if he is the senator from corporate America it makes corporate America look almost as bad because their stocks are being bought up by the funds at inflated prices because of the Fed and our national policy of maintaining prices – but then the funds must always be looking for new money from state retirement funds to buy more stock ad infinitum. Also to keep prices up. But it simply can’t work because the economy has gone terminal. If Mitch doesn’t do something right now Kentucky will be plucked and processed regardless of the growing awareness of how this whole scam has been working. That might explain why he now laughs nervously when people ask him why he hasn’t passed the CARES act. About the only thing that can save our need for an 8% return is a new clean source of cheap energy and dedicated resource conservation. I’m sure Mitch is in way over his head.

    1. flora

      And Mitch is the guy who said essentially he wasn’t for sending anymore bailout funding to state govts during the pandemic because he didn’t want the funds used to bailout pensions in CA and Ill and NY. Nevermind huge increases in unemployment and Medicaid costs draining state budgets. So he didn’t want to send more money to any of the states. The prospect of bankrupting public pensions had been a dream of the right-wing of the national GOP for a long time. (I’m waiting for the “we have to cut SS and Medicare because we’ve already taken on too much national debt in this crisis”. /heh)

      1. Stan Sexton

        If you saw the corruption and excessively high pensions of CALPERS, you’d see that there are lots of Calif citizens that are tired of being taxed to death so Curtis Ishii can get his over $418,600 annual CALPERS pension. We are hoping that Calif goes BK so they can control the pension Monster. No bail-outs!

        1. ambrit

          OK bud. The solution to that one is dead simple; a cap on annual pension amounts.
          Want to “save” Social Security? Remove the cap on income taxed. Right now, anything “earned” above $137,700 is exempt from Social Security taxes. Imagine how much just the annual incomes of the Silicon Valley head honchos could supply if fully taxed?
          What this calls for is a return to good, old fashioned Republican income tax rates, such as those used during the Eisenhower Administration.
          Another ‘low hanging fruit’ cost savings to be found are the military officer pensions. No General is worth his or her full pension as seen recently. Also, in true neo-liberal fashion, military retirees can collect both their military pension and Social Security. I well remember all the military retirees who worked at the Post Office as Rural Mail Delivery. They could afford to invest in the equipment Rurals had to supply themselves, (the delivery vehicle, reimbursed through mileage,) plus the very irregular pay you had to endure while one waited for a ‘Regular’ Carrier to opt out or, often, die. One reason I didn’t make it was that I was not guaranteed a set minimum income as a Rural Sub. Some months, I had to scrabble side jobs just to pay the basic bills. The military retirees had that pension coming in and so did not have to worry too much about the vagaries of Rural Sub pay.

  3. Pension Guy

    It really is difficult to figure out exactly what’s happening in Kentucky. The Commonwealth has some of the strongest legal protections for public pensions of any State in the country, courtesy of the “inviolable contract” language in the statutes creating the systems and the constitutional prohibition against impairing contracts. The Supreme Court decision relied on that language to reach its decision and possibly went a bit too far in concluding that the full faith and credit of the Commonwealth is the ultimate backup if the plans go bust. That part of the ruling calls into question the constitutional prerogative of the General Assembly to set levels of taxation, raise money, and spend that money. The KERS Non-Hazardous pension plan is absolutely the worst funded public plan in the country and very close to insolvent. [Yves has written about this paper.] Overall, I would bet that the Mayberry case gets settled after the election.

  4. L

    This may just be a guess from miles off but perhaps Cameron has seen the writing on the wall in terms of politics and has now decided that his political future lies in getting a little daylight between himself and Wall St. They are after all persona non-grata for Republican voters and his ability to survive what is to come may have to depend on something other than Mitch.

    1. Ejf

      I was thinking the same. Maybe Louisville city/cop retirement $$ have to look salvageable, at least.

  5. flora

    If this suit is on the up-and-up then hooray for the Kentucky AG. I hope the SC takes the case. I hope Kentucky wins. (Look out CalPERS) McConnell is looking awfully old all of a sudden.

    If this isn’t on the up-and-up then all sorts of things come to mind: bringing a case in hopes of burnishing the AG’s political sheen in Kentucky, bringing a case hoping to lose in order to answer in PE’s favor the question of whether state pension funds can sue PE. That would be the ultimate win for PE. I have no idea what’s going on. Hope it’s on the up-and-up and the AG is serious about winning for all the reasons cited in suit. I think the AG is serious about winning however court cases don’t have guaranteed outcomes.

    Thanks for this post. Thanks for your continued reporting on pensions and PE.

    1. Yves Smith Post author

      The SC should not need to take this case. It’s pretty hard to argue the AG does not have standing. The case should therefore proceed to discovery unless the defendants manage to come up with a new obstructionist Motion to Dismiss, but they threw everything at the wall last time and lost on all issues except standing on appeal.

      The defendants do not want discovery. They will be highly motivated to settle. IMHO, the way to get the maximum settlement would nevertheless be to do some discovery to show that the plaintiffs aren’t about to settle cheaply and will go the distance if they have to.

    2. StuckinKY

      Don’t count McConnell out. He is a cunning old bastard and expert at 12-dimensional politics. Recently he was making the rounds at hospitals and other spots around KY acting like a kind and gentle old fuddy duddy… don’t fall for it. He’s facing an actual race this year and he has to hide his bloody fangs and claws to keep GOP women on his side.
      Perhaps Schwarzman or Kravis haven’t been keeping up with the checks to “McConnell 2020”; or he and Cameron (no halo on this guy either) will drop the suit (or slow walk it) until after our Honorable Senator wins in November — dropping it now could raise more questions than either gentleman would care to address.

  6. Mr. Grumpy

    As a resident of the state with the worst pair of senators, this appears to be part of a plan to position Cameron to run for governor in 2023. I think Mitch sees him as his legacy. As a black man with all the right conservative views he’ll be supported way beyond his abilities by the moneyed power brokers. He’s their best in-state chance for another political dynasty like Mitch’s. This is no lose for his political prospects. He and the party are already taking our Dem gov to court over every covid-19 executive order despite quite a few Republican governors doing the exact same things without a peep of complaint from their party bosses.

    1. orlbucfan

      I disagree. Florida has “the worst pair of senators….” And both have POTUS ambitions.

  7. David in Santa Cruz

    Terrific summary.

    Why did Cameron intervene? You just have to look at the polling numbers: Amy McGrath is in a dead heat with Mitch McConnell for his Senate seat. McConnell has told state pension funds to drop dead.

    Does anybody think for a minute that the law enforcement unions in Kentucky have the slightest interest in endorsing somebody who wants to send their pensions down the tubes? The only reason to be a cop is the pension (if you survive the divorces and injuries to collect it). Jeff Mayberry, the lead plaintiff, is a retired Kentucky State Trooper.

    Cameron’s intervention looks like a nakedly political move that probably won’t survive the November election, similar to the Jerry Brown civil lawsuit against CalPERS “placement agent” Al Villalobos that went nowhere and only ended when the Feds stepped-in with a criminal prosecution and Villalobos blew his brains out. Still, it’s alive!

    1. Yves Smith Post author

      That isn’t what FiveThirtyEight or CNN say.

      FiveThirtyEight, updated yesterday, has McConnell up 22% based on a mid-July poll:

      CNN also depicts McGrath as having virtually no chance of beating McConnell, but she’s still useful to Team Dem to force him to spend more time and $ in Kentucky (she has raised a huge amount of out of state money) and impair his ability to support/raise money for other Republicans:

      1. David in Santa Cruz

        Please explain the swing between Spry and GHY (which I was referencing). Those are big deltas! +4 vs. +22

        I still think McConnell was Kryptonite to cops and public workers. Did this filing shake them loose?

        1. Yves Smith Post author

          A Data for Progress/Civiqs poll in June showed a similar margin for McConnell in June. Data for Progress is 1. competent and 2. Any bias would tend to be center-left.

          I see comments on Google about GHY polls in other states showing a pro-Biden bias.

          I can’t find the poll you are citing. An RMG poll showed McGrath ahead of McConnell, but that was mid-May. But it looks awfully close to a push poll. I haven’t seen the instrument, but summaries describe how voter responses changed when they were told of McGrath’s v. McConnell’s positions on term limits. Plus McGrath likely got a bump when she beat back Booker.

  8. KLG

    Former citizen of the Commonwealth here. Cameron sees his political future in this gambit, and he might not need Ol’ Mitch now. Young Mr. Booker could have rattled The Turtle’s cage, using Mitch’s own home base of Louisville as the foundation. Ms. McGrath, not so much, despite bragging about her “herosim” from the cockpit of her jet fighter. She may come out ahead in Lexington by a decent margin and maybe a few counties in coal country that remain obstreperous regarding Republicans in general and McConnell in particular. Louisville by a narrower margin? That’s about it.

    As for rattling cages, if KKR et al. get rattled, Ha! Maybe there is an arc of justice in the universe.

    1. Yves Smith Post author

      McConnell is the second most powerful Republican after Trump. I can’t see Cameron being able to defy him, particularly since McConnell will still almost certainly be in office when Cameron runs for his next post (either AG again or the Governor’s post for which he is apparently being groomed). And alienating private equity, the single biggest source of funding for both parties, isn’t a long-term career advancing move either.

      1. KLG

        All good points. But things change. McConnell is very long in the tooth, and people in Kentucky are beginning to tire of him, especially as they discern his true colors: He hates all of them who work for a living! Cameron has attributes that distinguish him from the run of the mill Kentucky politician and these may come with advantages previously not in operation.

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