KKR and Blackstone are waking up to a New Years’ headache. Last year, they looked to have largely prevailed against a landmark case, Mayberry v. KKR, when the Kentucky Supreme Court ordered that the original case be dismissed as a result of later case law, particularly a US Supreme Court case, that limited the grounds for bringing pension-related action. But a flurry of end-of-year filings suggests that the underlying bad conduct is still very much in the crosshairs.
In 2017, eight plaintiffs filed a derivative lawsuit on behalf of the spectacularly underfunded and incompetently/corruptly run Kentucky Retirement Systems, the public pension fund for the State of Kentucky (see former board member Chris Tobe’s Kentucky Fried Pensions for lurid details). The filings alleged breach of fiduciary duty and other abuses by three hedge funds operators, KKR/Prisma, Blackstone, and PAAMCO, in the sale and management of customized hedge funds with too-cute names like Daniel Boone. The fund managers had promised the impossible, high returns with low risk, when KKR’s and Blackstone’s SEC filings correctly depicted the very same offerings as high risk. Not surprisingly, the hedge funds markedly underperformed investing in stocks, leaving the pension funds’ beneficiaries in a worse position than had it gone with traditional strategies. Because Kentucky has strong statutory fiduciary duty standards and the conduct outlined in the initial filings looked egregious, the case was primed to shake up the public pension world.
Even though, in a surprise move over the summer, the Kentucky Attorney General, who had refused to join the case all these years, decided to intervene after the Supreme Court ordered that the complaint be dismissed. Even though that filing cribbed heavily from the original Mayberry v. KKR submissions, that wasn’t as big a negative for KKR and Blackstone as it might appear.
KKR and Blackstone are both loyal Republican donors. Attorney General Daniel Cameron is a protege of Mitch McConnell. Politically-connected contacts in Kentucky speculate that the Cameron intervention is a shakedown, with the anticipated resolution “cost of doing business” settlements in return for dark money donations. Plus Cameron needed to generate some favorable press after acting too obviously in favor of the cops in the Breonna Taylor shooting. Note also that while any monies recovered in the derivative suit would go to the pension fund, any settlement in the Attorney General action would go to the state’s general fund, with it an open question how much if any would wind up shoring up pensions.
The lawyers representing the original plaintiffs also filed a Second Amended Complaint to cure the standing defects that the Kentucky Supreme Court used to dismiss the complaint. The 50,000 foot version of the plaintiffs’ argument was that there is ample case law substantiating that plaintiffs can amend their cases to remedy deficiencies that result due to unfavorable but relevant precedents that are set after they launched their case. The big development here had been the afore-mentioned Supreme Court decision, Thole v. US Bank. The US Supreme Court had ruled that a pension loss had to be particularlized, as in the plaintiffs had to have suffered an actual loss. The Kentucky Supreme Court ordered that Mayberry v. KKR be dismissed because the pensions were as of now still being paid in full and even if the pension assets were fully depleted, the State of Kentucky had made a “solemn promise” to honor the pension commitments. The response in the Second Amended Complaint was to eliminate three of the original plaintiffs and add three new ones and refocus the argument on benefits paid out of the pension fund which were not subject to state support and ones that the beneficiaries had paid for from their wages: the cost-of-living adjustments, the health benefits, and the “hybrid” plans for employees that started after July 2014.1
As a matter of process, the original trial court had to implement the Kentucky Supreme Court order to dismiss the complaint, which also meant they had to consider the Second Amended Complaint and rule on the Attorney General intervention. It was no surprise that Judge Philip Shepherd approved the Attorney General intervention. What was less obvious, as you can see from his order below, is that he also denied a request to file the Second Amended Complaint.
If you look at the discussion in the Order, it appears to be pretty firm on the notion that the original complaint is kaput. Starting on page 9:
The Overstreet opinion itself prevents the Original Plaintiffs from continuing in this case….
Further, federal caselaw lends support to the idea that it is not beyond the discretion of this
Court to disallow the Original Plaintiffs from adding additional plaintiffs or adding additional
claims through amendment to ensure that at least some plaintiff in this action has constitutional
standing to bring this suit….
As for the Original Plaintiffs’ request to amend their complaint to state additional claims,
the United States Court of Appeals for the Eleventh Circuit declined similar amendment in Canon
Latin America, Inc. v. Lantech (CR), S.A. There, the plaintiff sought to reopen a case following
dismissal on remand to the district court and amend their complaint to include additional claims
not included in either their original or first amended complaint. Canon Latin America, Inc. v.
Lantech (CR), S.A., 382 Fed.Appx. 797, 798-99 (11th Cir. 2010). The Eleventh Circuit held that it
was not an abuse of discretion for the district court to deny the plaintiff’s motion to amend its
complaint where the claim it sought to amend was not pled at the outset and did not include the
claim in its amended complaint.
However, the language is a bit defensive: “not an abuse of discretion” says this is a judgement call.
Nevertheless, one attorney privately expressed the view that the entire order was not as dire as it seemed, and our Dave in Santa Cruz agreed:
In regard to the Kentucky Retirement System litigation, I agree with the lawyer who thinks that Judge Shepherd left the door wide open for the plaintiffs and causes of action that the original plaintiffs attempted to add via an amendment to the original complaint, to file a complaint of their own — the statute of limitations being tolled in the interim.
Procedurally, what I do not understand is why the plaintiffs’ attorneys are back with yet another amendment, rather than filing a new compliant. The original complaint was dismissed without prejudice. Judge Shepherd’s objections to the Second Amended Complaint were entirely about using amendments and the addition of new plaintiffs to cure the standing deficiencies. Perhaps I am being dense, but I don’t see how a better-argued version of the Second Amended Complaint solves that problem. Did the plaintiff’s counsel want to assure that their pleadings stayed in Judge Shepherd’s court?
This new complaint focuses on this language in Judge Shepherd’s order:
Kentucky law has long recognized that “there is no wrong without a remedy”….
With that in mind, the Court notes that while the Original Plaintiffs lack standing to
pursue their claims by being members of defined benefit plans, each iteration of their Complaint
contains allegations of severe misconduct and breaches of fiduciary duties of Defendants related
to management of KRS assets. The Kentucky Supreme Court observed as much in Overstreet,
recognizing that “Plaintiffs allege significant misconduct.” Overstreet, 603 S.W.3d at 266.
Fiduciary duties exist in all circumstances where there is a “special confidence reposed in one who
in equity and good conscience is bound to act in good faith and with due regard to the interests of
the one reposing confidence.”Steelvest, Inc. v. Scansteel Service Center, Inc. 807 S.W.2d 476, 485
(Ky. 1991) (quoting Security Trust Co. v. Wilson, 210 S.W.2d 336, 338 (Ky. 1948)).
Serious breaches of fiduciary duties have been alleged in this case, and the Court believes
that statute, case law, the Civil Rules, as well as principles of equity and public interest, require that the factual allegations in this case—and the defenses asserted by all Defendants—should be adjudicated on the merits and not dismissed on a legal technicality.
But the very next sentence indicates that all of the “factual allegations” in the case (meaning the original case) are now being properly handled by the Attorney General:
Because the Attorney General is empowered by statute, the Civil Rules, and the decision of the Kentucky Supreme Court in this case, to intervene in suits such as these, the Court finds that the Attorney General must be allowed to take over this case and pursue these claims on their merits.
The latest complaint then argues with more particularity why the particular damages suffered by the various plaintiffs result from the defendants’ actions and also fall outside the state’s solemn promise. In other words, there are presently wrongs with no remedy, since they are not part of the Attorney General’s case. All well and good, but (and I may have missed it in this 200+ page filing), I don’t see how the plaintiffs can overcome Judge Shepherd’s firm rebuff of amending the original complaint to incorporate additional grounds for damage and new plaintiffs. And I also wonder if the Attorney General was worried about an end run by the original legal team, why he can’t simply add their matters to his complaint.
In other words, I’d much rather be wrong. Having the attorneys who conceptualized this case, did such blockbuster research, and have developed a deep understanding of the tricks the defendants used carry the litigation forward is the only way to get to serious discovery, which in turn would pressure the defendants into coughing up enough dough to remedy the damage done. Discovery is a particularly potent weapon in this case because the findings would show how easily pension funds are fleeced and how private equity and hedge fund managers have no inhibitions about exploiting them. And the evidence would also lower the cost of launching other cases. So I hope their reading of Judge Shepherd is better than mine.
00 Mayberry v. KKR December 28 2020 order
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.
00 2020-12-31 Proposed Third Amended Complaint