As many reader know, the Mayberry v. KKR, Kentucky public pension suit over alleged abuses by hedge fund managers KKR/Prisma, Blackstone, and Prisma, was rescued from the dead.
Mayberry v. KKR looked dead parrot level dead when the Kentucky Supreme Court ruled that its eight plaintiffs did not have standing to act as plaintiffs even in a derivative suit because they had not suffered an “injury in fact,” as required by “Article III” standing rules. Kentucky, unlike most states, has adopted Federal “Article III” standing provisions.
The US Supreme Court had just ruled in an ERISA case, Thole v. US Bank, that the plaintiffs did not have standing because they had not suffered a loss, which is what the Supremes decided was the basis for determining injury. Note that ironically, the Trump Solicitor General had submitted an amicus brief in favor of the plaintiffs, arguing that a loss did not necessarily have to be realized to meet the Article III threshold, so the Supreme Court decision was hardly a given.
Even though anyone with an operating brain cell knows that the Kentucky Retirement System beneficiaries have pension haircuts in their future thanks to the 13% funded status of the system, the Kentucky Supreme Court ruled they had to pound sand because they had not yet suffered any losses. Oh, and the state, which has yet to show any seriousness about plugging this monster hole, was legally obligated to Do Something, so the plaintiffs should not worry about not getting paid. That check surely will be in the mail.
The Kentucky Supreme Court ordered that the original complaint be dismissed for lack of standing based on Thole, and that the claims made by the beneficiaries as taxpayers be dismissed because only the Attorney General could sue when the state was the real party at interest. The Supreme Court spilled some ink on the fact that the Attorney General was aware of Mayberry v. KKR and had done nothing.
KKR and Blackstone, who presumably thought they were in the clear, have suffered a serious reversal of fortune. As we discussed, the Attorney General filed a Motion to Intervene, an unprecedented move.
Then Michelle Lerach, one of the two original co-counsels, filed a Second Amended Complaint on behalf of a reconstituted “Mayberry Eight”. Three of the original plaintiffs were replaced by three new plaintiffs, all hired after January 2014 and hence “Tier 3” beneficiaries in the Kentucky Retirement Systems plans. As we explained late last month:
….the Supreme Court ruling instructed the trial court to dismiss the case, which by implication was without prejudice. The loss on standing issues was based entirely on court decisions made after the initial complaint was filed and amended.
Parties to litigation are permitted to re-file their cases; as the filing below notes, for instance, “….ample federal authority exists for the proposition that a plaintiff is entitled to amend his complaint to comply with intervening change in the law.”…
The Supreme Court did not hear new arguments from the plaintiffs; it made its ruling based on their so-called First Amended Complaint. It didn’t consider supplemental filings and evidence submitted at the trial court even though those were part of the record. The filing stays just short of grumbling that an argument presented in supplemental filings cited by the trial court judge, Philip Shepherd in his favorable ruling on standing, were not considered by the Kentucky Supreme Court by virtue of considering only the First Amended Complaint
The filing below describes how the plaintiffs were harmed in tangible ways. It also differentiates between the initial plaintiffs, all hired before 2014, who were “Tier 1” or “Tier 2” beneficiaries and together represent roughly 80% of all KRS beneficiaries and later “Tier 3” beneficiaries.
Tier 1 and Tier 2 beneficiaries were stripped of their Cost of Living Adjustments (COLAs) in 2013 which were never part of the state’s “inviolate contract” yet were a benefit the employees were supposed to receive when they had 5% to 9% deducted from their pay. The filing contends that theses individual plaintiffs each lost between $2,000 and $40,000 and collectively, the Tier 1 and Tier 2 beneficiaries, using conservative estimates, have lost over $200 million.
The new filing also removed some of the original plaintiffs (only five of the original Mayberry eight remain) and added three, all of whom are “Tier 3 beneficiaries” hired after January 1, 2014. They do not have a defined benefit pension and their pensions are not backed by the state (they are a hybrid “cash balance” plan where individuals make contributions as in a defined contribution plan, but eventual payouts are based on how the pooled monies perform). The Second Amended Complaint contends they were harmed because even though the plan did show positive returns from 2014 to present, they were diminished due to the high fees and misrepresented performance of the defendant’s products and that more specifically, KRS added to rather than exited hedge funds, as most of its peers did, due to self-serving actions of a KKR staffer who was tasked to work at KRS and deliberately not supervised (juicy new details include an “earn out” contract).
Finally, all beneficiaries were damaged by the fact that their annual deductions also fund health and life insurance plans that are not state backed, are deeply underfunded, and were invested in part in the dodgy hedge fund vehicles.
The Second Amended Complaint also argued that the plaintiffs have standing to pursue a derivative case against the defendants, a topic the Kentucky Supreme Court appears not to have addressed squarely.
Needless to say, these filings elicited outraged responses, which has in turn engendered more legal submissions (you can see the documents here).
We’ve embedded the Attorney General’s terse reply at the end of this post, which gives you an idea of the ratio of puffery to substance in some of the filings. For instance, the objection by the Blackstone defendants banged on about how the Attorney General’s motion was untimely. In addition to discussing the various legal reasons why that wasn’t so, the Attorney General noted (emphasis original):
While the Defendants argue that the Commonwealth’s motion is untimely because they have been litigating this case for two and a half years, the duration of this litigation to date is not the only factor to be considered. There has been a great deal of procedural posturing concerning motions for protective orders, but it appears from the Court’s record in this action that there has been little substantive discovery taken to date beyond some initial document requests. No depositions have been taken. The long, arduous path this litigation has taken has all been a result ofthe Plaintiffs’ novel theory of standing (which the Supreme Court has rejected) and the Defendants’ motions to dismiss attacking the Plaintiffs’ debunked theory. To date, as far as the Commonwealth can tell from the record, there havebeen no summary judgment motions directed to the merits of the claims asserted by the Plaintiffs, and now, by the Commonwealth. Despite the longevity of this case, it has not advanced so far on the substance of the claims that the Defendants would be prejudiced by the Commonwealth’s intervention.
The sniping at the plaintiffs’ attorneys may seem odd since the Attorney General’s Motion to Intervene made no attempt to hide being completely depending on their filings. It not only hoisted and closely replicated their arguments, but it even copied their framing, for instance, calling KKR/Prisma, Blackstone and PAAMCO the “Hedge Fund Sellers.”
The Attorney General’s original filing made clear that he intends to pursue fiduciary duty claims as well as taxpayer claims:
The Commonwealth of Kentucky, as the Intervenening Plainitff, brings this action, seeking compensatory and punitive damages and states as follows. The relief sought includes (i)damages for the losses incurred by the Commonwealth as a result of breaches of fiduciary and otherduties, including unsuitable investments, the loss of trust assets, the loss of prudent investment opportunities and positive investment returns; (ii)disgorgement of fees from the sellers of unsuitable hedge fund products, investment, actuarial and fiduciary advisors and the annual report certifier; and (iii) the greatly increased costs to the taxpayers of restoring KRS and its Pension Plans to properly funded status, after years of concealment of the true financial condition of KRS and the waste of its funds. The action alleges Defendants’ individual breaches of duty,their participation in a joint enterprise and their knowing aiding and abetting of one another while participating in a scheme, civil conspiracy, and concerted course of conduct in violationof Kentucky law. Because of the wanton nature of the misconduct of certain defendants, punitive damages are sought from them.
That is less straightforward than it might appear.
Plaintiffs’ co-lead counsel Michelle Lerach filed a motion for the plaintiffs supporting the Attorney General and also asking that the court permit the Attorney General to proceed with his claims for the state, along with the claims made by the Mayberry plaintiffs on behalf of the pension beneficiaries, and derivatively, for the Kentucky Retirement System.
Normally, a layperson would assume that an Attorney General would trump any private plaintiffs. However, there are complicating considerations. As both the Lerach group and even some of the defendants have argued, the claims about losses to Kentucky Retirement Systems are contingent assets of the System. The Attorney General cannot properly represent the beneficiaries or Kentucky Retirement Systems derivatively because any judgment he wins goes into the Kentucky general fund, which creates a conflict of interest. He cannot contribute any recovery or damages to the Kentucky Retirement Systems. Any monies garnered by the Attorney General are distributed by the legislature in its budgeting process.
Another wee problem is that the Attorney General (admittedly in the prior regime) said it lacked the expertise to pursue the case, as you can see in the second embedded document at the end of this post. Of course, they could hire an outside firm and cut a deal for a contingent recovery, but the expense and hours outlay on a case like this would be very large and any winnings would be well down the road. There are perilously few firms that have the skills, the risk appetite, and the staying power.
Lerach then filed a “Motion for Appointment of Lead Plaintiff, Lead Counsel and Liaison Counsel” to the effect that the Lerach group be put in charge of the plaintiff’s actions, since former lead counsel Anne Oldfather had been missing from action in the heavy lifting to revive the case, and was also not representing the three new “Tier 3” plaintiffs who helped bolster the new standing arguments. The “Oldfather group” responded, and observes are unsure as to whether she is acting on her own behalf or as a stalking horse for the Attorney General.
An even later Lerach filing points out that five of the original eight Mayberry clients have dismissed Oldfather as their counsel. It also provides a blistering, detailed account of how Oldfather has not only been a free rider on the heavy lifting done by the Learch group (particularly Michelle Lerach’s husband, the formidable if disbarred Bill Lerach, who is still phenomenally effective as an investigator and strategist) but also actively tried to sandbag avenues of research that exposed an additional big ticket, damaging claim: that KKR had schemed, and had a considerable amount of success, in trying to take over the investment decisions of Kentucky Retirement Systems. This charge is troublingly similar to the way Mike Milken took over the investment of zombie thrifts, faxing them the daily lists of the junk bonds Drexel bought for them with no formal approval or participation on the thrift side.
In other words, a big power struggle is underway as to who get to represent the various plaintiffs on what matters. And if I understand the law correctly, the court makes that determination.
Judge Philip Stephens is hearing the case tomorrow and is limiting the scope to the Attorney General intervention. The media alert also stated:
Judge Shepherd has also requested that the parties responding to the Attorney General’s Motion to attempt to coordinate your responses and decided amongst yourselves who will present, and to notify the Court after deciding who is planning to speak during the Zoom session.
The hearing is public via Zoom and I intend to listen in, but I’m a terrible typist and really rely on reading transcripts, so I am not sure my impressions will be post worthy, even before you get the fact that judges don’t always rule the way one would guess given their line of questioning.
The part that is not clear about the scope of Monday’s hearing is if it will simply be about whether the court will allow the Attorney General’s intervention to proceed (which seems very likely) or whether it will also consider arguments on the scope of his intervention (as in does he take over the entire case or not)
Let the fireworks begin!00 AG-reply-in-support-mot-to-intervene
00 Attorney General letter