A short update on the Mayberry v. KKR, a pathbreaking public pension suit targeting customized hedge funds designed for the sitting duck Kentucky Retirement Systems by Blackstone, KKR, and PAACO. The litigation is on track to becoming a Jarndyce v Jarndyce level case study in the (mis)use of procedure to delay a case. As we recapped right after the new year:
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.
As we’ll unpack a bit more, the suit wound up at the Kentucky Supreme Court before discovery got underway. The Kentucky Supreme Court dismissed the original case without prejudice due to post-filing appellate and US Supreme Court rulings that narrowed the grounds on which pension fund beneficiaries in certain states could file cases.1
In a surprise move, the Kentucky Attorney General, Daniel Cameron, filed to intervene in the case even though the Attorney General had not joined the case earlier. The plaintiffs then filed a Second Amended Complaint which sought to address the standing issue by replacing three of the original plaintiffs with three different pensioners who had suffered “particularized injury” and didn’t have a state guarantee to make them whole. 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 next episode in this long-running drama was that the trial judge, Philip Shepherd (recall that the Supreme Court had instructed the trial judge to dismiss the complaint) approved the Attorney General’s motion to intervene and denied the plaintiffs’ motion to file a Second Amended Complaint. The wording of the denial was strained.2 However, the judge did exhibit some unhappiness that the case had been filed in 2017 and here it was, end of 2020, and it had not advanced substantively.
The reason sand-in-the-gears strategies are popular isn’t just to run up plaintiffs’ legal bill. In litigation, delay usually favors the defendant. Memories fade, lowering the ability of witnesses to make statements with confidence. That in turn makes it harder for the plaintiffs to surmount the required standard of evidence.
However, it is likely that when Mayberry v. KKR gets out of stall, which will hopefully happen in the next couple of months, the loss of time won’t be as detrimental to the plaintiffs as is typical. The plaintiffs have already been able to provide substantial evidence of misconduct in their filings; getting access to e-mails and other records will almost certainly provide more proof. And since the key allegation is breach of fiduciary duty, there’s no need to show intent.
As we explained a couple of weeks ago when the plaintiffs then filed a Third Amended Complaint:
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 specific 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.
I neglected to add that one reason for trying another amendment as opposed to a new filing would be to assure that Shepherd remained the trial judge. New cases are assigned randomly to judges and the other judge in Frankfort is pro-corporate. However, the Attorney General’s Motion to Intervene was assigned to Shepherd’s colleague, and he bounced it over to Shepherd, so that risk looks to no longer be operative.
And I lacked the imagination to anticipate that the plaintiffs would go the belt-and-suspenders route and also file a petition on behalf of the so-called Tier 3 plaintiffs (the ones who had started employment after 2014 and were in a “hybrid” plan where they had mandatory contributions deducted from their paychecks and did not have a state guarantee). We’ve embedded that document at the end of the post, since it recites the procedural history and the allegations of misconduct. You can find the other major pleadings in this litigation here.
Judge Shepherd held what was essentially a scheduling conference via Zoom on January 11 and issued an order commemorating his instructions as an order on January 12, which we have embedded below.
Shepherd said he can’t decide how to rule on the Tier 3 plaintiff filings until he knows “the nature and scope of the claims that will be asserted by the OAG.” So Shepherd gave the Attorney General, until February 1, to file its Amended Intervening Complaint and gave the Tier 3 Plaintiffs or “any other persons who may seek to intervene” a deadline of February 11. A hearing is set for February 22.
The last thing Attorney General Cameron wants is for the another group of plaintiffs with Michelle Lerach, a very formidable attorney, and her disbarred but feared husband Bill Lerach (who can still act as a consultant/researcher) doing discovery. The point of Cameron’s intervention was to generate some positive headlines while he was getting heat for being too obviously pro-cop on the Brionna Taylor shooting, while making sure loyal Republican donors Henry Kravis and Steve Schwarzman paid only “cost of doing business” level fines to settle the case quickly. Cameron is therefore almost certain to draft his filing so as to cover all the relevant groups of plaintiffs: taxpayers and pension beneficiaries, and will argue that the pension beneficiaries interests are sufficiently aligned so as to make representing all of them feasible and cost/time efficient.
The Lerach group attorneys are likely to counter that the Attorney General can’t ride so many horses at once, for instance, that there are large enough differences of interest between beneficiaries that have a state of Kentucky “solemn promise” versus the ones with no government support as to render it infeasible for one counsel to represent both groups properly.
So it has taken a very long time but hopefully Mayberry v. KKR is about to get out of neutral.
1 These rulings would not affect cases filed in California, for instance, because California has not adopted Federal Article III standing rules, while Kentucky has.
2 The plaintiffs had cited considerable precedent supporting their contention that it would be proper for them to file an amended complaint. Judge Shepherd didn’t dispute the relevance of their precedent.00 KRS Tier 3 Plaintiffs filing
00 KRS Jan 12 Order